Four Oaks 2005 10-K/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission File Number 000-22787

FOUR OAKS FINCORP, INC.

(Exact name of registrant as specified in its charter)

North Carolina

56-2028446

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification Number)

6114 U.S. 301 South

Four Oaks, North Carolina

27524

(Address of principal executive offices)

(Zip Code)


	(919) 963-2177
	Registrant’s telephone number, including area code:

Securities registered under Section 12(b) of the Act: NONE

Securities registered under Section 12(g) of the Act:

Common Stock, par value $1.00 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨

No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨

No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: SYES £NO

Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. S

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer £

Accelerated filer £

Non-accelerated filer S

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): £YES SNO

72,548,403

(Aggregate value of voting and non-voting common equity held by non-affiliates of the registrant based on the price at which the registrant’s Common Stock, par value $1.00 per share was sold on June 30, 2005)

4,408,027

(Number of shares of Common Stock, par value $1.00 per share, outstanding as of March 15, 2006)

Documents Incorporated by Reference

(1) Proxy Statement for the 2006 Annual Meeting of Shareholders to be held April 24, 2006

Where Incorporated

Part III

Explanatory Note

Four Oaks Fincorp, Inc. (the “company”) is filing this Amendment No. 1 to Form 10-K for the year ended December 31, 2005 and will file an amendment to Form 10-Q for the period ended March 31, 2006, to amend and restate financial statements and other financial information filed with the Securities and Exchange Commission (“SEC”). These amendments are being filed to correct errors in the originally filed Form 10-K and Form 10-Q related to the company’s derivative accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).

Since late in 2003, the company has entered into interest rate swap agreements to hedge the interest rate risk inherent in certain of its brokered certificates of deposit. From inception, the company has applied a method of fair value hedge accounting under SFAS No. 133 (the "short-cut” method) that is appropriate if the hedging transactions are perfectly effective. However, after further examination in light of recent developments and discussions with its independent registered public accounting firm, Dixon Hughes PLLC, the company and its Audit Committee concluded that the swap transactions did not qualify for the “short-cut” method and documentation regarding these transactions did not meet the technical requirements of SFAS No. 133. Therefore, any fluctuations in the market value of these interest rate risk management derivatives should have been recorded through the company’s income statement. There is no effect on the company’s cash flows from these revisions. Although these swaps have performed as expected, by providing an economic hedge against interest rate risk, the company determined that it did not have adequate documentation at the inception of the interest rate swap agreements to qualify for hedge accounting treatment under SFAS No. 133.

Except as otherwise specifically noted, all information contained herein is as of December 31, 2005 and does not reflect any events or changes that have occurred subsequent to that date. We are not required to update and we have not updated any forward-looking statements previously included in the Form 10-K filed on March 30, 2006.

The impact of this non-cash restatement (in thousands) on net income is summarized below.


	Year Ended December 31, 2005		Three Months Ended March 31, 2005		Three Months Ended June 30, 2005		Three Months Ended September 30, 2005		Three Months Ended December 31, 2005

Interest Expense	$	166	$	92	$	72	$	28	$	(26)
Net interest income		(166)		(92)		(72)		(28)		26

Net interest income after provision for loan losses		(166)		(92)		(72)		(28)		26

Gain (loss) on hedges, net		(397)		(289)		433		(379)		(162)
Total non-interest income		(397)		(289)		433		(379)		(162)

Income before income taxes		(563)		(381)		361		(407)		(136)
Provision for income taxes		(217)		(147)		139		(157)		(52)

Net Income	$	(346)	$	(234)	$	222	$	(250)	$	(84)

Net income per shares
Basic	$	(0.08)	$	(0.05)	$	0.05	$	(0.06)	$	(0.02)
Diluted	$	(0.08)	$	(0.05)	$	0.05	$	(0.06)	$	(0.02)

This Amendment No. 1 on Form 10/K-A to the Annual Report for the fiscal year end December 31, 2005 amends Items 1 and 1A of Part I, and Items 6, 7, 7A and 8 of Part II. For additional information on the restatement see Note A – Restatement of Previously Issued Financial Statements, in the Notes to Consolidated Financial Statements. The remaining Items contained within this Amendment No. 1 to Annual Report on Form 10-K/A consist of all other Items originally contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 30, 2006. This Form 10-K/A does not reflect events occurring after the filing of the original Form 10-K, nor modify or update those disclosures in any way other than as required to reflect the effects of the restatement.

The company has not amended its Quarterly Reports on Form 10-Q for the periods affected by the restatement adjustments prior to December 31, 2005, and accordingly the financial statements and related financial information contained in such reports should not be relied upon.

Forward Looking Information

Information set forth in this Annual Report on Form 10-K under the caption “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial position to differ materially. Such forward looking statements can be identified by the use of forward looking terminology, such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereof or comparable terminology.

We caution that any such forward looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward looking statements, including, without limitation, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates on the level and composition of deposits, the effects of competition from other financial institutions, the failure of assumptions underlying the establishment of the allowance for possible loan losses and the low trading volume of our common stock and the risks discussed in Item 1A. Risk Factors below.

PART I

Item 1 - Business.

Four Oaks Bank & Trust Company (referred to herein as the “bank”) was incorporated under the laws of the State of North Carolina in 1912. On February 5, 1997, the bank formed Four Oaks Fincorp, Inc. (referred to herein as the “company;” references herein to “we,” “us” and “our” refer to the company and its consolidated subsidiaries, unless the context otherwise requires) for the purpose of serving as a holding company for the bank. The company has no significant assets other than cash, the capital stock of the bank and its membership interest in Four Oaks Mortgage Services, L.L.C., as well as, $668,000 in securities available for sale. Our corporate offices and banking offices are located in eastern North Carolina in the counties of Johnston (our corporate headquarters), Wake, Sampson, Lee and Duplin counties.

As of December 31, 2005, we had assets of $522.9 million, net loans outstanding of $392.1 million and deposits of $398.3 million. We have enjoyed considerable growth over the past five (5) years as evidenced by a 102.4% increase in assets, a 104.5% increase in net loans outstanding, and an 83.8% increase in deposits since December 31, 2000. We had net income of $5.0 million and $4.4 million and basic earnings per share of $1.15 and $1.03 for the years ended December 31, 2005 and 2004, respectively. Net income of $2.9 million and basic earnings per share of $.70 were recorded for the year ended December 31, 2003.

The bank continues to remain a community-focused bank engaging in general commercial banking business to the communities we serve in Johnston, Wake, Sampson, Lee and Duplin counties of North Carolina. The bank provides a full range of banking services, including such services as checking accounts; savings accounts; individual retirement accounts; NOW accounts; money market accounts; certificates of deposit; a student checking and savings program; loans for businesses, agriculture, real estate, personal uses, home improvement and automobiles; mortgage loans; equity lines of credit; credit cards; safe deposit boxes; electronic funds transfer services, including wire transfers; internet banking and bill pay services; telephone banking; cashier’s checks; traveler’s checks; and free notary services to all bank customers. The bank also provides financial services, offering a complete line of insurance and investment services, including financial strategies, mutual funds, annuities, insurance, stock brokerage, IRAs, discount brokerage services, employee benefit plans, 401(k)’s and simplified employee pension plans. In addition, the bank provides its customers access to automated teller machines (“ATMs) through its own ATMs throughout its communities served as well as access to worldwide ATMs for cash withdrawals through the services of the Star, Cirrus, or Visa networks by using ATM or Visa check cards. The Visa check cards may also be used at merchant locations worldwide through the Star, Cirrus, or Visa networks. In 2003, the bank began issuing stored value cards which are marketed by independent sales organizations and provide access to funds through the Visa, Plus, Interlink, Mastercard, Maestro, Cirrus, and Star networks. At present, the bank does not provide the services of a trust department.

The bank maintains a website at www.fouroaksbank.com where our periodic reports on Form 10-Q and 10-K and our current reports on Form 8-K are available under “Investor Relations.” The company is registered as a bank holding company with the Federal Reserve System. The bank is a state-chartered member of the Federal Reserve System and the Federal Deposit Insurance Corporation (the “FDIC”) insures its deposits up to applicable limits. Our corporate offices are located at 6114 US

301 South, Four Oaks, North Carolina, 27524. Our common stock is traded on the OTC Bulletin Board under the symbol “FOFN.”

Our market area is concentrated in the eastern North Carolina counties of Johnston, Wake, Sampson, Lee and Duplin. Johnston County is contiguous to Wake, Wayne, Wilson, Harnett, Sampson and Nash counties. Wake County is contiguous to Johnston, Durham, Harnett, Nash, Franklin, Granville and Chatham counties. Sampson County is contiguous to Duplin, Pender, Bladen, Harnett, Cumberland, Johnston, and Wayne counties. Lee County is contiguous to Chatham, Moore and Harnett counties. Duplin County is contiguous to Pender, Sampson, Wayne, Lenoir, Jones and Onslow counties.

From its headquarters located in Four Oaks and its twelve locations in Four Oaks, Clayton, Smithfield, Garner, Benson, Fuquay-Varina, Wallace, Holly Springs, Harrells and a loan production office in Sanford, the bank serves a major portion of Johnston County, part of Wake, Harnett, Duplin, Sampson and Lee counties. In addition, in January 2006, the bank opened a loan production office in Zebulon, located in Wake County. Johnston County has a diverse economy and is not dependent on any one particular industry. The leading industries in the area include retail trade, manufacturing, pharmaceuticals, government, services, construction, wholesale trade and agriculture. The population for Johnston County in 2004 was estimated in excess of 141,000. As of June 2005, the bank ranked second in deposit market share for Johnston County at 25%.

The bank is a community bank engaged in general commercial banking business. In Four Oaks, the main office is located at 6144 US 301 South and an additional branch is located at 111 North Main Street. The bank also operates North Carolina branch offices in Clayton at 102 East Main Street, two in Smithfield at 128 North Second Street, and 403 South Brightleaf Boulevard, one in Garner at 200 Glen Road, one in Benson at 200 East Church Street, one in Fuquay-Varina at 325 North Judd Parkway Northeast, one in Wallace at 406 East Main Street, one in Holly Springs at 101 Avent Ferry Road, and one in Harrells at 590 Tomahawk Highway. In addition, the bank has a loan production office at 1100 South Horner Boulevard, Sanford, North Carolina. The bank plans to transition the Sanford loan production office to a full service banking office by mid-year 2006. In January 2006, the bank opened a loan production office in Zebulon, North Carolina which it plans to expand to a full service office in March 2006.

The majority of the bank’s customers are individuals and small to medium-size businesses located in Johnston, Wake, Sampson, Lee and Duplin counties and surrounding areas. The deposits and loans are well diversified with no material concentration in a single industry or group of related industries. There are no seasonal factors that would have any material adverse effect on the bank’s business, and the bank does not rely on foreign sources of funds or income.

In an effort to offer a more diversified and competitive product line to better serve our customers and community, in 2003 we discontinued our provision of secondary market-type mortgages through the bank and, through a joint venture with Centex Corporation, formed Four Oaks Mortgage Company, L.P. Since 2003, Four Oaks Mortgage Company, L.P. has provided secondary market-type mortgages and has been the vehicle through which all of our mortgage business is run. Four Oaks Mortgage Company, L.P. is owned 49.99% by our wholly-owned subsidiary, Four Oaks Mortgage Services, L.L.C., and 50.01% by its general partner, CTX Mortgage Ventures, LLC, a wholly-owned indirect subsidiary of Centex Corporation.

Amounts spent on research activities relating to the development or improvement of services have been immaterial over the past two years. At December 31, 2005, the bank employed 135 full time equivalent employees. Our employees are extremely important to our continued success and the bank considers its relationship with its employees to be good. Management continually seeks ways to improve upon their benefits and well being.

The following table sets forth certain of our financial data and ratios for the years ended December 31, 2005, 2004 and 2003. This information should be read in conjunction with and is qualified in its entirety by reference to the more detailed audited financial statements and notes thereto included in this report:


	2005		2004		2003
	(As Restated)
	(See Note A)
	(In thousands, except ratios)

Net income	$	5,003	$	4,375	$	2,918
Average equity capital accounts	$	39,613	$	35,135	$	32,341
Ratio of net income to average equity capital accounts		12.63 %		12.45 %		9.02 %
Average daily total deposits	$	355,214	$	295,524	$	255,038
Ratio of net income to average daily total deposits		1.41 %		1.48 %		1.14 %


Average daily loans (gross)	$	351,103	$	298,783	$	249,240
Ratio of average daily loans to average daily total deposits		98.84 %		101.10 %		97.73 %

Competition

Commercial banking in North Carolina is extremely competitive due in large part to statewide branching. As a result, many commercial banks have branches located in several communities. The bank competes in its market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions. At June 2005, we operated branches in Johnston, Wake, Sampson, Duplin, Harnett and Lee counties, North Carolina. At that time in Johnston County, North Carolina, the bank’s primary market, there were a total of approximately $1.1 billion in deposits and 36 branches represented by the top ten financial institutions in the county based on deposit share, all commercial banks. The bank operated six of the 36 branches with deposits of $270.4 million, placing the bank second in the top ten based on deposit share. Many of the bank’s competitors have broader geographic markets and higher lending limits than those of the bank and are also able to provide more services and make greater use of media advertising. Therefore, in our market area, the bank has significant competition for deposits and loans from other depository institutions. Other financial institutions such as credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit with varying degrees of regulatory restrictions also compete in our market area. Additionally, credit unions have been permitted to expand their membership criteria and expand their loan services to include traditional bank services such as commercial lending creating a greater competitive disadvantage to tax-paying financial institutions.

The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of the bank’s competitors. See “Holding Company Regulation” below for a description of this legislation. In addition, as a result of interstate banking, out-of-state commercial banks may acquire North Carolina banks and heighten the competition among banks in North Carolina.

Although the competition in its market areas is expected to continue to be significant, the bank believes that it has certain competitive advantages that distinguish it from its competition. The bank believes that its primary competitive advantages are its strong local identity, its affiliation with the community and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. The bank offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. The bank offers many personalized services and attracts and retains customers by being responsive and sensitive to their individualized needs. The bank also relies on goodwill and referrals from our shareholders and the bank’s satisfied customers, as well as traditional media, to attract new customers. To enhance a positive image in the community, the bank supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.

Governmental Regulation

Holding companies, banks and many of their non-bank affiliates are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules and regulations affecting us and the bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the company or bank. Supervision, regulation and examination of the company and the bank by bank regulatory agencies is intended primarily for the protection of the bank’s depositors rather than the company’s shareholders.

Holding Company Regulation

General. Four Oaks Fincorp, Inc. is a holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 (the “BHCA”). As such, we are subject to the supervision, examination and reporting requirements contained in the BHCA and the regulation of the Federal Reserve. The bank is also subject to the BHCA. The BHCA requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the bank holding company, (iii) acquiring all or substantially all of the assets of any bank or (iv) merging or consolidating with any other bank holding company.

The BHCA generally prohibits a bank holding company, with certain exceptions, from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking, or managing or controlling banks, as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. For example, banking, operating a thrift institution, extending credit or servicing loans, leasing real or personal property, providing securities brokerage services, providing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities.

Pursuant to delegated authority, the Federal Reserve Bank of Richmond has authority to approve certain activities of holding companies within its district, including us, provided the nature of the activity has been approved by the Federal Reserve. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it believes that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

Financial Holding Companies. The Gramm-Leach-Bliley Modernization Act of 1999 (the “GLB”), which was enacted on November 12, 1999, allows bank holding companies that meet certain new regulatory standards regarding management, capital and the Community Reinvestment Act, to engage in a broader range of non-banking activities than previously permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; allows insurers and other financial services companies to acquire banks; removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

At the present time, we have elected to remain a bank holding company, and therefore we remain subject to the same regulatory framework as before the enactment of the GLB. However, the financial holding company structure created by the GLB permits insurance companies or securities firms operating under the financial holding company structure to acquire us, and, if we elect to become a financial holding company in the future, we could acquire insurance companies or securities firms.

In addition to creating the more flexible financial holding company structure, the GLB introduced several additional customer privacy protections that will apply to us and the bank. The GLB’s privacy provisions require financial institutions to, among other things, (i) establish and annually disclose a privacy policy, (ii) give consumers the right to opt out of disclosures to nonaffiliated third parties, with certain exceptions, (iii) refuse to disclose consumer account information to third-party marketers and (iv) follow regulatory standards to protect the security and confidentiality of consumer information.

Pursuant to the GLB’s rulemaking provisions, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision adopted regulations, establishing standards for safeguarding customer information. Such regulations provide financial institutions guidance in

establishing and implementing administrative, technical and physical safeguards to protect the security, confidentiality and integrity of customer information.

Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “IBBEA”) permits interstate acquisitions of banks and bank holding companies without geographic limitation, subject to any state requirement that the bank has been organized for a minimum period of time, not to exceed five (5) years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than ten percent (10%) of the total amount of deposits of insured depository institutions in the U.S. and no more than thirty percent (30%) of such deposits in any state (or such lesser or greater amount set by state law).

In addition, the IBBEA permits a bank to merge with a bank in another state as long as neither of the states has opted out of the IBBEA prior to May 31, 1997. In 1995, the state of North Carolina “opted in” to such legislation. In addition, a bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo interstate branching. As a result of North Carolina having opted-in, unrestricted interstate de novo branching is permitted in North Carolina.

Additional Restrictions and Oversight. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities thereof and the acceptance of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. An example of a prohibited tie-in would be any arrangement that would condition the provision or cost of services on a customer obtaining additional services from the bank holding company or any of its other subsidiaries.

The Federal Reserve may issue cease and desist orders against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve also regulates certain debt obligations, changes in control of bank holding companies and capital requirements.

Under the provisions of the North Carolina law, we are registered with and subject to supervision by the North Carolina Commissioner of Banks.

Capital Requirements. The Federal Reserve has established risk-based capital guidelines for bank holding companies and state member banks. The minimum standard for the ratio of capital to risk-weighted assets (including certain off balance sheet obligations, such as standby letters of credit) is eight percent (8%). At least half of this capital must consist of common equity, retained earnings and a limited amount of perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill items and certain other items (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of mandatory convertible debt securities and a limited amount of other preferred stock, subordinated debt and loan loss reserves.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets less certain amounts (“Leverage Ratio”) equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a Leverage Ratio of between four percent and five percent.

The guidelines also provide that bank holding companies experiencing significant growth, whether through internal expansion or acquisitions, will be expected to maintain strong capital ratios substantially above the minimum supervisory levels without significant reliance on intangible assets. The same heightened requirements apply to bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as to other banking institutions if warranted by particular circumstances or the institution's risk profile. Furthermore, the guidelines indicate that the Federal Reserve will continue to consider a “tangible Tier 1 Leverage Ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised us of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable to us.

As of December 31, 2005, we had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 10.31%, 11.52% and 8.59%, respectively, all in excess of the minimum requirements to be considered well-capitalized under prompt corrective action provisions.

Dividends. During 2005, we paid cash dividends of $.30 per share of our common stock, a 15.4% increase over 2004. North Carolina banking law requires that dividends be paid out of retained earnings as determined pursuant to North Carolina General Statues Section 53-87. At present, the company has sufficient cash from its operations to pay cash dividends on its common stock. In the past, we have received cash dividends from our bank and may continue to do so from time to time in the future as necessary for cash flow purposes. Also, applicable banking law contains additional limitations and restrictions on the payment of dividends by a bank holding company. Accordingly, shareholders receive dividends from us only to the extent that funds are available from our operations or the bank. In addition, the Federal Reserve generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.

USA Patriot Act of 2001. Title III of the USA Patriot Act of 2001 contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The anti-money laundering provisions of IMLAFA impose affirmative obligations on a broad range of financial institutions, including banks, brokers, and dealers. Among other requirements, IMLAFA requires all financial institutions to establish anti-money laundering programs that include, at minimum, internal policies, procedures, and controls; specific designation of an anti-money laundering compliance officer; ongoing employee training programs; and an independent audit function to test the anti-money laundering program. IMLAFA requires financial institutions that establish, maintain, administer, or manage private banking accounts for non-United States persons or their representatives to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. Additionally, IMLAFA provides for the Department of Treasury to issue minimum standards with respect to customer identification at the time new accounts are opened. As of the date of this filing, we believe that IMLAFA has not had a material impact on the bank’s operations. The bank has established policies and procedures to ensure compliance with the IMLAFA, which are overseen by an Anti-Money Laundering Officer who was appointed by our Board of Directors.

Bank Regulation

The bank is subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and is supervised and examined by the North Carolina Commissioner of Banks and the Federal Reserve. The Federal Reserve and the North Carolina Commissioner of Banks regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment of branches, mergers, consolidations, and other similar corporate actions, and to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The Federal Reserve and the North Carolina Commissioner of Banks regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, issuances of securities, capital adequacy, loss reserves, and compliance with the Community Reinvestment Act of 1977 (the “CRA”) as well as other laws and regulations. Interest and certain other charges collected and contracted for by banks are also subject to state usury laws and certain federal laws concerning interest rates.

The deposit accounts of the bank are insured by the Bank Insurance Fund (the “BIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to a maximum of one hundred thousand dollars ($100,000) per insured depositor. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies, and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer or employee of such bank for the violation of applicable laws and regulations, breaches of fiduciary duties or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.

Under the North Carolina Business Corporation Act, we may not pay a dividend or distribution, if after giving it effect we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than our liabilities. All dividends paid by the bank are paid to us, the sole shareholder of the bank. In general, our ability to pay cash dividends is dependent in part upon the amount of dividends paid to us by the bank. The ability of the bank to pay dividends to us is subject to statutory and regulatory restrictions on the payment of cash dividends, including the requirement under the North Carolina banking laws that cash dividends be paid only out of undivided profits and only if the bank has surplus of a specified level. The Federal Reserve also imposes limits on the bank's payment of dividends. The amount of future dividends paid to us by the bank will in general be a function of the profitability of the bank, which cannot be accurately estimated or assured. We expect the bank will continue to pay us dividends in the foreseeable future from time to time as needed to pay cash dividends to our shareholders.

Like us, the bank is required by federal regulations to maintain certain minimum capital levels. The levels required of the bank are the same as those required of us. At December 31, 2005, the bank had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 9.19%, 10.40% and 7.66%, respectively, in excess of the minimum requirements to be considered well-capitalized under prompt corrective action provisions.

The bank is subject to insurance assessments imposed by the FDIC, including a risk-based assessment schedule providing for annual assessment rates ranging from 0% to .27% of an institution's average assessment base, applicable to institutions insured by both the BIF and the Savings Association Insurance Fund (“SAIF”). The actual assessment to be paid by each insured institution is based on the institution's assessment risk classification, which focuses on whether the institution is considered “well capitalized,” “adequately capitalized” or “under capitalized,” as such terms are defined in the applicable federal regulations. Within each of these three risk classifications, each institution will be assigned to one of three subgroups based on supervisory risk factors. In particular, regulators will assess supervisory risk based on whether the institution is financially sound with only a few minor weaknesses (Subgroup A), whether it has weaknesses which, if not corrected, could result in an increased risk of loss to the BIF (Subgroup B) or whether such weaknesses pose a substantial probability of loss to the BIF unless effective corrective action is taken (Subgroup C). The FDIC also is authorized to impose one or more special assessments in an amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Treasury Department and, beginning in 1997, all banks are required to pay additional annual assessments as set by the Financing Corporation, which was established by the Competitive Equality Banking Act of 1987.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) provides for, among other things, (i) publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.

A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “under capitalized,” “significantly undercapitalized,” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution.

Banks are also subject to the CRA, which requires the appropriate federal bank regulatory agency, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate-income neighborhoods. Each institution is assigned one of the following four ratings of its record in meeting community credit needs: “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.

In addition, the GLB’s “CRA Sunshine Requirements” call for financial institutions to disclose publicly certain written agreements made in fulfillment of the CRA. Banks that are parties to such agreements also must report to federal regulators the amount and use of any funds expended under such agreements on an annual basis, along with such other information as regulators may require. This annual reporting requirement is effective for any agreements made after May 12, 2000.

Monetary Policy and Economic Controls

Both the company and the bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve Board, whose actions directly affect the money supply which, in turn, affects banks’ lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve Board regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.

Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks have eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates has generally increased banks’ cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, or loan demand on our business and earnings or those of the bank. As a result, banks, including the bank, face a significant challenge to maintain acceptable net interest margins.

Our Executive Officers

The following table sets forth certain information with respect to our executive officers:


Name	Age	Year first employed	Positions and offices with Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company and business experience during past five (5) years

Ayden R. Lee, Jr.	57	1980	Chief Executive Officer, President and Director of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company

Clifton L. Painter	56	1986	Senior Executive Vice President, Chief Operating Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company

Nancy S. Wise	50	1991	Executive Vice President, Chief Financial Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company. Previously, Senior Vice President, Chief Financial Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company

W. Leon Hiatt, III	38	1994	Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Chief Administrative Officer of Four Oaks Bank & Trust Company. Previously, Senior Vice President Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Loan Administrator of Four Oaks Bank & Trust Company.

Jeff D. Pope	49	1991	Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Branch Administrator of Four Oaks Bank & Trust Company. Previously, Senior Vice President, Loan Officer and Regional/Branch Administrator Four Oaks Bank and Trust Company

Item 1A.

Risk Factors

The Company’s Recently Announced Restatement of Financial Statements for the Quarter Ended March 31, 2006 is Not Complete and Subject to a Final Review by Management and Its Audit Committee and Review by Its Independent Registered Public Accountants

As described above, on August 1, 2006, we announced our intention to restate our audited financial statements for the fiscal year ended December 31, 2005 and for the quarter ended March 31, 2006 to amend the accounting for certain derivative transactions relating to interest rate swap agreements on our brokered certificates of deposit under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Although this Annual Report on Form 10-K/A (Amendment No. 1) contains a completed restatement of our financial statements for the year ended December 31, 2005, the restatement for the quarter ended March 31, 2006 is not yet complete. Therefore, the expected overall impact of the restatement is preliminary and subject to a final review by the Company’s management and its Audit Committee and the review by its independent registered public accountants. There can be no assurance that these final reviews will not result in any significant change to the preliminary impact of the restatement.

Our Results Are Impacted by the Economic Conditions of Our Principal Operating Regions

The majority of our customers are individuals and small to medium-size businesses located in North Carolina’s Johnston, Wake, Duplin, Sampson and Lee Counties and surrounding areas. As a result of this geographic concentration, our results may correlate to the economic conditions in these areas. Declines in these markets’ economic conditions may adversely affect the quality of our loan portfolio and the demand for our products and services, and accordingly, our results of operations.

We Are Exposed to Risks in Connection with the Loans We Make

A significant source of risk for us arises from the possibility that loan losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. Our policy dictates that we maintain an allowance for loan losses. The amount of the allowance is based on management’s evaluation of our loan portfolio, the financial condition of the borrowers, current economic conditions, past and expected loan loss experience, and other factors management deems appropriate. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect our results of operations.

We Compete with Larger Companies for Business

Commercial banking in North Carolina is extremely competitive due in large part to statewide branching. The bank competes in the North Carolina market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of these competitors have broader geographic markets, higher lending limits, more services, and more media advertising. We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition.

We Are Exposed to Certain Market Risks

Like most financial institutions, our most significant market risk exposure is the risk of economic loss resulting from adverse changes in market price and interest rates. Our market risk stems primarily from interest rate risk inherent in our lending and deposit-taking activities. Our policy dictates that we maintain derivative financial instruments, such as interest rate swap agreements, to manage such risk.

To manage the risk of potentially decreasing interest rates for our variable rate loan portfolio, we use an interest rate swap agreement whereby we contract to receive fixed rate payments and in turn, we agree to make variable interest payments for a defined time period. In addition, we used fixed rate time deposits, such as certificates of deposits, for use in our lending and investment activities. If the interest rates decline, we face the risk of being committed to pay a fixed rated that is higher than the fair value rate of such deposits. To manage this risk, we use interest rate swaps whereby we contract to make a series of floating rate payments in exchange for receiving a series of fixed rate payments.

Because the value of derivative contracts is tied to an independent instrument, index or reference rate, the contracts are written in abstract amounts that only provide the basis for calculating payments between counterparties, i.e., notional amounts. Credit risk arises when amounts receivable from the counterparty exceed amounts payable, or when the counterparty fails to pay. The counterparties to these contracts are primarily large commercial banks and investment banks. We control our risk of loss on derivative contracts by subjecting each contracting counterparty to credit reviews and approvals similar to those used in making loans and other extensions of credit, and we continuously monitor these agreements. Other risks include the effect on fixed rate positions during periods of changing interest rates, e.g., when interest rates fall, the notional amounts decrease more rapidly, whereas when interest rates rise, the notional amounts decrease more slowly.

Technological Advances

The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors, however, have substantially greater resources to invest in technological improvements.

Compliance with Changing Laws, Regulations and Standards May Result in Additional Risks and Expenses

We are subject to changing laws, regulations and standards, including the Bank Holding Company Act of 1956, the Gramm-Leach-Bliley Modernization Act of 1999, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the USA Patriot Act of 2001, the Federal Deposit Insurance Corporation Improvement Act of 1991, the Community Reinvestment Act of 1977, the North Carolina Business Corporation Act, the Sarbanes-Oxley Act of 2002 and new SEC regulations to name a few.

The Sarbanes-Oxley Act and new SEC regulations, in particular, are creating uncertainty for companies such as ours because they are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time and attention. Specifically, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding management’s required assessment of our internal control over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. Further, the members of our Board of Directors, members of the Audit or Compensation committees, our Chief Executive Officer, our Chief Financial Officer and certain other of our executive officers could face an increased risk of personal liability in connection with the performance of their duties. In addition, it may become more difficult and more expensive to obtain director and officer liability insurance. As a result, our ability to attract and retain executive officers and qualified Board and committee members could be more difficult.

Government Regulations May Prevent or Impair Our Ability to Pay Dividends, Engage in Acquisitions or Operate in Other Ways

Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. We are subject to supervision and a periodic examination by the Federal Reserve Bank and the North Carolina State Banking Commission. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to you, our investors, by restricting certain of our activities, such as:

The payment of dividends to our shareholders;

Possible mergers with or acquisitions of or by other institutions;

Our desired investments;

Loans and interest rates on loans;

Interest rates paid on deposits;

The possible expansion of branch offices; and/or

Our ability to provide securities or trust services.

We also are subject to capitalization guidelines set forth in federal legislation, and could be subject to enforcement actions to the extent that we are found by regulatory examiners to be undercapitalized. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulators or the effect that such changes may have on our future business and earnings prospects. The cost of compliance with regulatory requirements including those imposed by the SEC may adversely affect our ability to operate profitably.

We Depend Heavily on our Key Management Personnel

Our success depends in part on our ability to retain key executives and to attract and retain additional qualified management personnel who have experience both in sophisticated banking matters and in operating a small to mid-size bank. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require. We expect to effectively compete in this area by offering competitive financial packages that include incentive-based compensation.

Item 1B – Unresolved Staff Comments.

Not applicable.

Item 2 - Properties.

The bank owns its main office, which is located at 6144 US 301 South, Four Oaks, North Carolina. The main office, which was constructed by the bank in 1985, is a 12,000 square foot facility on 1.64 acres of land. The bank leases a limited-service facility in downtown Four Oaks located at 111 North Main Street from M.S. Canaday, who is one of our directors as well as a director of the bank. Under the terms of the lease, which the bank believes to be arms-length, the bank paid $938 per month in rent in 2005. The lease is month-to-month and we review its terms on an annual basis. The bank also leases a branch office located at 101 Avent Ferry Road, Holly Springs, North Carolina. Under the terms of the lease, the bank will pay $2,508 per month for a period of five years ending April 1, 2008. The bank’s Harrells office located at 590 Tomahawk Highway, Harrells, North Carolina is under a lease with terms specifying the bank will pay $600 each month for the period beginning January 1, 2006 and ending December 31, 2009. In addition, the bank has entered into a yearly lease with an annual option to renew on its Sanford office located at 1100 South Horner Boulevard, Sanford, North Carolina. Under the terms of the lease, the bank will pay $1,300 each month. Late in December 2005, the bank signed a yearly lease with an annual option to renew for its new Zebulon office located at 130 North Arendell Avenue, Zebulon, North Carolina for $1,000 per month beginning January 1, 2006. The bank owns a 5,000 square foot facility renovated in 1992 on 1.15 acres of land located at 5987 US 301 South, Four Oaks, North Carolina which houses its training center. The bank also owns a 15,000 square foot facility built in 2000 located at 6114 US 301 South, Four Oaks, North Carolina, which houses its administrative offices, data operations, loan operations and wide area network central link. In addition, the bank owns the following:


Location	Year Built	Present Function	Square Feet

102 East Main Street Clayton, North Carolina	1986	Branch Office	4,700

200 East Church Street Benson, North Carolina	1987	Branch Office	2,000

128 North Second Street Smithfield, North Carolina	1991	Branch Office	5,000

403 South Brightleaf Boulevard Smithfield, North Carolina	1995	Limited-Service Facility	720

200 Glen Road Garner, North Carolina	1996	Branch Office	3,600

325 North Judd Parkway Northeast Fuquay-Varina, North Carolina	2002	Branch Office	8,900

406 East Main Street Wallace, North Carolina	2003	Branch Office (modular)	2,800

Management believes each of the properties referenced above is adequately covered by insurance. In addition to the above locations, we have 14 ATMs located inside Food Lion grocery stores in the cities and towns of Clayton, Benson, Sanford, Wallace, Fuquay-Varina, Holly Springs, Garner, Zebulon and Wendell, North Carolina. The net book value for our properties, including land, buildings, and furniture and equipment was $9.7 million at December 31, 2005. Additional information disclosed in Note E “Bank Premises and Equipment” to our consolidated financial statements presented under Item 8 of Part III of this Form 10-K.

Item 3 - Legal Proceedings.

We are not involved in any material legal proceedings at the present time.

Item 4 - Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5 - Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common stock trades on the OTC Bulletin Board under the symbol “FOFN.” The range of high and low bid prices of our common stock for each quarter during the two most recent fiscal years, as published by the OTC Bulletin Board, is as follows (prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions):


	Fiscal Year Ended December 31,
	2004		2005
	High	Low	High	Low

First quarter	$ 16.64	$ 13.44	$ 19.20	$ 17.60
Second quarter	15.68	14.08	23.20	18.64
Third quarter	14.72	14.08	24.00	19.80
Fourth quarter	20.00	14.88	25.00	19.80

As of March 15, 2006, the approximate number of holders of record of our common stock was 1,400. We have no other class of equity securities. The bank’s ability to declare a dividend to us and the company’s ability to pay dividends are subject to the restrictions of the North Carolina Business Corporation Act. There also are state banking laws that require a surplus of at least 50% of paid-in capital stock be maintained in order for the bank to declare a dividend to the company. Subject to the legal availability of funds to pay dividends, cash dividends paid by us in 2005 and 2004, after giving effect to the 5-for-4 stock splits during 2005 and 2004, were $.30 and $.26 per share, respectively.

We did not sell any securities in 2005 that were not registered under the Securities Act of 1933 as amended. We did not make any purchases of our equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended during the fourth quarter of 2005.

Item 6 - Selected Financial Data

The following table sets forth our historical consolidated financial data for the periods indicated. The selected historical annual consolidated statement of operations and balance sheet data as of and for each of the five fiscal years presented are derived from, and are qualified in their entirety by, our consolidated financial statements. Historical results are not necessarily indicative of the results to be expected in the future. The selected financial data in the following tables have been restated to reflect adjustments to the company’s consolidated financial statements and other information contained in the Annual Report on Form 10-K for the year ended December 31, 2005 originally filed with the SEC on March 30, 2006. You should read the following data together with “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes appearing in “Item 8. Financial Statements.” (Dollars in thousands, except per share data).


		As of and for the Year Ended December 31,
		2005	2004		2003	2002	2001
		(As Restated, (See Note A)
		(As Restated, (See Note A)
Operating Data:
	Total interest income	$ 29,404	$ 21,748		$ 18,943	$ 19,785	$ 21,462
	Total interest expense	9,983	5,811		5,922	7,640	10,167
	Net interest income	19,421	15,937		13,021	12,145	11,295
	Provision for loan losses	1,403	1,596		1,373	1,248	834
	Net interest income after provision for loan losses	18,018	14,341		11,648	10,897	10,461
	Noninterest income	3,077	3,849		3,470	2,810	2,284
	Noninterest expense	13,354	11,507		10,588	9,485	8,834
	Income before income taxes	7,741	6,683		4,530	4,222	3,911
	Provision for income taxes	2,738	2,308		1,612	1,306	1,255
	Net income	$ 5,003	$ 4,375		$ 2,918	$ 2,916	$ 2,656

Per Share Data:
	Earnings per share - basic	$ 1.15	$ 1.03		$ 0.70	$ 0.70	$ 0.65
	Earnings per share - diluted	1.14	1.02		0.69	0.70	0.65
	Cash dividends declared	0.30	0.26		0.23	0.21	0.18
	Market price
	High	25.00	20.00		16.64	12.03	12.80
	Low	17.60	13.44		11.26	10.50	9.22
	Close	22.61	17.60		13.44	12.03	10.45
	Book value	9.58	8.68		7.86	7.45	6.81

	Weighted average shares outstanding
	Basic	4,343,326	4,246,681		4,195,088	4,157,450	4,083,146
	Diluted	4,375,505	4,270,850		4,210,052	4,171,083	4,104,604

Selected Year-End Balance Sheet Data:
	Total assets	$ 522,872	$ 398,500		$ 341,721	$ 318,289	$ 299,970
	Loans	397,094	312,815		272,623	229,570	209,822
	Allowance for loan losses	4,965	4,055		3,430	2,860	2,650
	Deposits	398,341	315,307		272,918	250,573	235,604
	Borrowings	74,140	43,160		33,160	33,160	33,173
	Shareholders' equity	41,612	37,295		32,880	31,193	28,025

Selected Average Balances:
	Total assets	$ 449,462	$ 376,422		$ 324,222	$ 308,334	$ 274,054
	Loans	351,103	298,783	249,240		216,620	202,500
	Total interest-earning assets	419,307	349,596	300,672		290,294	256,476
	Deposits	355,214	295,524	255,038		242,878	226,476
	Total interest-bearing liabilities	340,798	282,743	244,024		236,661	208,381
	Shareholders' Equity	39,613	35,135	32,341		29,931	27,306

Selected Performance Ratios:
	Return on average assets	1.11%	1.16%	0.90%		0.95%	0.97%
	Return on average equity	12.63%	12.45%	9.02%		9.74%	9.73%
	Net interest spread	4.08%	4.16%	3.87%		3.59%	3.49%
	Net interest margin	4.63%	4.56%	4.33%		4.18%	4.40%
	Non-interest income to total revenue	13.68%	19.45%	21.04%		18.79%	16.82%
	Non-interest income to average assets	0.68%	1.02%	1.07%		0.91%	0.83%
	Non-interest expense to average assets	2.97%	3.06%	3.27%		3.08%	3.22%
	Efficiency ratio	55.31%	58.58%	66.15%		64.14%	64.68%
	Dividend payout ratio	24.39%	24.81%	33.33%		29.55%	31.50%
Asset Quality Ratios:
	Nonperforming loans to period-end loans	0.25%	0.30%	0.39%		0.67%	0.97%
	Allowance for loan losses to period-end loans	1.25%	1.30%	1.26%		1.25%	1.26%
	Allowance for loan losses to nonperforming loans	497.99%	429.56%	323.89%		186.08%	129.65%
	Nonperforming assets to total assets	0.25%	0.39%	0.52%		0.65%	0.78%
	Net loan charge-offs to average loans	0.14%	0.32%	0.32%		0.48%	0.47%



		As of and for the Year Ended December 31,
		2005	2004	2003	2002	2001
		(As Restated,
		See Note A)
Capital Ratios:
	Total risk-based capital - Bank	10.40%	11.80%	12.30%	14.00%	14.10%
	Tier 1 risk-based capital - Bank	9.19%	10.60%	11.10%	12.80%	13.90%
	Leverage ratio - Bank	7.66%	8.60%	9.00%	9.70%	9.50%
	Equity to assets ratio	7.96%	9.36%	9.62%	9.80%	9.34%
	Equity to assets ratio (averages)	8.81%	9.33%	9.97%	9.71%	9.96%
	Average interest-earning assets to average total assets	93.29%	92.87%	92.74%	94.15%	93.59%
	Average loans to average total deposits	98.84%	101.10%	97.73%	89.19%	89.41%
	Average interest-bearing liabilities to average interest - earning assets	81.28%	80.88%	81.16%	81.52%	81.25%

Other Data:
	Number of banking offices	12	10	10	9	8
	Number of full time equivalent employees	135	131	126	122	112

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

On August 1, 2006, management and the Audit Committee of the Board of Directors of the company concluded that the company’s financial statements for the quarter ended March 31, 2006 and the year ended December 31, 2005 and the related quarterly periods must be restated, and that previously issued financial statements should no longer be relied upon, as a result of accounting treatment related to its interest rate swaps associated with brokered certificates of deposit.

As a result, the financial statements for all affected periods through December 31, 2005 reflect a cumulative charge of approximately $346,000 to account for the interest rate derivative agreements as if hedge accounting was never applied.

The primary effect of this change in accounting treatment is the inclusion in net income of any increases or decreases in the fair value of interest rate swap agreements previously designated as hedges under SFAS No. 133. This is because fair value hedge accounting under SFAS No. 133 allows a company to record the change in fair value of the hedged item (in this case, brokered certificates of deposit) as an adjustment to income as an offset to the fair value adjustment on the related interest rate swap. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the brokered certificates of deposit. Additionally, the net cash settlement payments received during each of the above periods for these interest rate swaps were reclassified from interest expense on brokered certificates of deposit to non-interest income. The broker fee has been recognized as a deferred financing cost and is amortized to interest expense over the life of the related certificates of deposit.

The following is a restated summary of the results of operations for each quarter of 2005.


	2005
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter

	As Previously Reported	As Restated	As Previously Reported	As Restated	As Previously Reported	As Restated	As Previously Reported	As Restated

Interest and dividend income	6,223	6,223	6,908	6,908	7,766	7,766	8,507	8,507
Interest expense	1,805	1,897	2,153	2,225	2,696	2,724	3,163	3,137

Net interest income	4,418	4,326	4,755	4,683	5,070	5,042	5,344	5,370

Provision for loan losses	187	187	191	191	498	498	527	527

Net interest income after provision for loan losses	4,231	4,139	4,564	4,492	4,572	4,544	4,817	4,843

Non-interest income:
Service charges on deposit accounts	428	428	476	476	488	488	483	383
Other service charges, commission and fees	264	264	286	286	385	385	300	300
Gains (losses) on sale of investment securities	(54)	(54)	(59)	(59)	(66)	(66)	(207)	(207)
Gains (losses) on sale of loans	(2)	(2)	52	52	3	3	8	8
Merchant Fees	83	83	86	86	130	130	90	90
Gains (losses) on hedges, net	-	(289)	-	433	-	(379)	-	(162)
Income from bank-owned life insurance	43	43	41	41	170	170	46	46

Total non-interest income	762	473	882	1,315	1,110	731	720	558

Non-interest expenses:
Salaries	1,426	1,426	1,505	1,505	1,560	1,560	1,542	1,542
Employee benefits	314	314	310	310	354	354	328	328
Occupancy expenses	142	142	131	131	134	134	142	142
Equipment expenses	334	334	329	329	328	328	322	322
Professional and consulting fees	222	222	305	305	230	230	208	208
Other taxes and licenses	63	63	71	71	63	63	51	51
Merchant processing expenses	75	75	86	86	99	99	81	81
Other operating expenses	619	619	671	671	590	590	719	719

Total-non-interest taxes	3,195	3,195	3,408	3,408	3,358	3,358	3,393	3,393

Income before income taxes	1,798	1,417	2,038	2,399	2,324	1,917	2,144	2,008

Provision for income taxes	622	475	721	860	857	700	755	703

Net income	$ 1,176	$ 942	$ 1,317	$ 1,539	$ 1,467	$ 1,217	$ 1,389	$ 1,305

Basic net income per common share	$ 0.27	$ 0.22	$ 0.30	$ 0.35	$ 0.34	$ 0.28	$ 0.32	$ 0.30
Diluted net income per common share	$ 0.27	$ 0.22	$ 0.30	$ 0.35	$ 0.33	$ 0.28	$ 0.32	$ 0.30

The following discussion and analysis provides information about the major components of our results of operations and financial condition, liquidity and capital resources and should be read in conjunction with our Consolidated Financial Statements and Notes thereto which are contained in this report. Additional discussion and analysis related to fiscal 2005 is contained in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2005, June 30, 2005 and September 30, 2005, respectively.

Overview

As a community focused commercial bank our primary business consists of providing a full range of banking services to our customers with an emphasis on quality personal service. Our core products consist of loans secured by real estate and commercial and consumer loans as well as various deposit products to meet our customers’ needs. Our primary source of income is generated from net interest income, the difference between interest income received on our loans and securities and interest expense paid on deposits and borrowings. Our income is also affected by our ability to price our products competitively and maximize the interest rate spread between the interest yield on loans and securities and the interest rate paid on deposits and borrowings. Our products also generate other income through product related fees and commissions. We incur operating expenses consisting primarily of salaries and benefits, occupancy and equipment and other professional and miscellaneous expenses.

Our assets have increased from $300.0 million at December 31, 2001 to $522.9 million at December 31, 2005, primarily through loan demand, while our total deposits have increased from $235.6 million to $398.3 million over that same period. In addition, for 70 consecutive years, we have paid dividends (prior to 1997 when we reorganized into a holding company, it was our wholly owned subsidiary, Four Oaks Bank & Trust Company, which paid dividends). For the past five years, dividends have averaged 26.4% of our average net income. Return on average equity and return on average assets for 2005 were 12.63% and 1.11%, respectively; return on average equity was up from 12.45% in 2004; however return on average assets was down slightly from 1.16% in 2004.

We set interest rates on deposits and loans at competitive rates while maintaining spreads of 4.08% and 4.16% in 2005 and 2004, respectively, between interest earned on average loans and investments and interest paid on average interest-bearing deposits and borrowings. Our gross loans have increased from $209.8 million at December 31, 2001 to $397.1 million at December 31, 2005; while our average net annual charge-offs over the same period were approximately $852,000. The sustained growth provided by operations resulted in increases in total assets of 31.2%, 16.6% and 7.4% for 2005, 2004 and 2003, respectively.

Our gross loans grew 26.9% and 14.7% in 2005 and 2004, respectively. Our total investments (including interest-earning deposits and FHLB stock) increased 59.7% and 29.0% in 2005 and 2004, respectively, due to the decision to build the portfolio as yields have continued to improve throughout 2004 and 2005. We closely monitor changes in the financial markets in order to maximize the yield on our assets. The growth in loans for 2005 and 2004 was funded respectively by deposit growth of 26.3% and 15.6%, increased borrowings of $31.0 million and $10.0 million, and net income of $5.0 million and $4.4 million, respectively, for 2005 and 2004. Improved earnings trends continued during 2005, ending the year with earnings of $5.0 million, an increase of 14.4% over 2004’s net income of $4.4 million. This increase was primarily due to an increase in net interest income. Strategic pricing of both loans and deposits and improved yields in our investment portfolio provided improvement in our net interest margin for 2005.

During 2005 and 2004, Four Oaks Mortgage Company, L.P. provided secondary market-type mortgages which contributed $106,000 and $76,000 in income for the years 2005 and 2004, respectively. Four Oaks Mortgage Company, L.P. is owned 49.99% by our wholly owned subsidiary, Four Oaks Mortgage Services, L.L.C., and 50.01% by its general partner, CTX Mortgage Ventures, LLC, a wholly owned indirect subsidiary of Centex Corporation.

In December 2004, we added the Retail Real Estate Lending division, which works with individuals, developers and contractors involved in real estate acquisition and development.

Management historically has monitored and controlled increases in overhead expenses while being committed to developing the skills and enhancing the professionalism of our employees. Employee turnover has been minimal, while the number of full-time equivalent employees has increased from 112 at December 31, 2001 to 135 at December 31, 2005.

Results of Operations

Comparison of Financial Condition at December 31, 2005 and 2004

During 2005, our total assets increased by $124.4 million, or 31.2%, from $398.5 million at December 31, 2004 to $522.9 million at December 31, 2005. This increase in our total assets resulted primarily from growth in our net loans, which increased from $308.8 million at December 31, 2004 to $392.1 million at December 31, 2005, an increase of $83.4 million, or 26.9%. The substantial growth in our loan portfolio continues to reflect a trend towards growth in commercial real estate lending primarily in real estate construction as a result of a continued shift in our markets from an agricultural focus to a suburban focus. Loans secured by real estate at December 31, 2005, grew $67.1 million over the prior year of which $51.9 million was related to construction and land development loans. In addition to loan growth, our securities portfolio increased $27.9 million to $80.2 million at December 31, 2005 and other earning assets (interest-earning deposits and FHLB stock) increased $7.1 million over the prior year. Our loan growth, increases in our securities portfolio and other earning assets was primarily funded by deposit growth of $83.0 million, or 26.3%, during 2005 to $398.3 million at December 31, 2005 compared with $315.3 million at December 31, 2004. Our local market customers continue to be our primary source for deposit growth, funding deposit growth predominantly in savings and time deposits. Deposits from our local market customers provided $60.4 million of the December 31, 2005 increase in deposits over December 31, 2004 while deposits outside our local customer base provided the remaining $22.6 million. The growth in deposits was encouraged by increased deposit rates as the national prime increased from 5.25% at January 1, 2005 to 7.25% at December 31, 2005 and successful deposit campaigns and branch calling efforts within our competitive market.

Shareholders’ equity increased by $4.3 million during 2005. This increase resulted from our net income of $5.0 million, dividend reinvestment plan proceeds of $671,000, proceeds from the exercise of stock options of $536,000 and employee stock purchase plan proceeds of $124,000, net of dividends paid of $1.3 million and other comprehensive loss of $738,000 comprised of unrealized losses on securities available for sale of $565,000, net of tax and unrealized losses on cash flow hedging activities of $173,000 net of tax.

Comparison of Operating Results for the Years Ended December 31, 2005 and 2004

Net Income

We earned net income of $5.0 million, or $1.15 basic net income per share for 2005, which was a 14.4% increase over net income of $4.4 million or $1.03 basic net income per share for 2004. We believe strategic pricing of both our loans and deposits improved our net interest margin by managing our overall cost of funds and allowing us to attract the higher balance, higher quality loans in our markets. The resulting $3.5 million, or 21.9%, increase in net interest income absorbed a 16.1% increase in non-interest expense for 2005 over the prior year. A full year of operating two new offices contributed to increased salaries and benefits, occupancy and equipment and other operating costs. In addition to the new offices, rising costs in employee benefits also contributed to increased personnel expense. Compliance costs related to the Sarbanes-Oxley Act of 2002 also increased costs for outside professional services.

Net Interest Income

Like most financial institutions, the primary component of earnings for the bank is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.

Net interest income increased to $19.4 million in 2005, with a net yield of 4.63%, compared to $15.9 million and a net yield of 4.56% in 2004, which was an increase of $3.5 million, or 7 basis points, from 2004. The increase in net interest income primarily was generated by an increased volume of $12.5 million in average net interest-earning assets, which produced $3.0 million in net interest income. The additional interest income over interest expense was driven by strong loan demand in a rising rate environment, acquisition of higher yielding investments as well as an increase of $10.0 million in average non-interest-bearing demand deposits. Also contributing to the increase in net interest income was the positive results of repricing our interest-earning assets faster than our interest-bearing funds in a rising rate environment, producing an additional $630,000 in net interest income. The rates earned on a substantial portion of our loans reprice to correspond with each prime rate increase. Most of our interest-bearing liabilities, however, have fixed interest rates until maturity and as a result do not reprice as quickly or in the same increments as our loan portfolio. The national prime increased 200 basis points during 2005 to 7.25% at December 31, 2005 from 5.25% at January 1, 2005.

On average, interest-earning assets grew $69.7 million during 2005 over the prior year period. A substantial portion of the increase in interest-earning assets was achieved through increased loan demand. Average loans increased $52.3 million during 2005 over the prior year to $351.1 million, generating additional interest income of $3.7 million. Rising interest rates generated additional interest income of $2.9 million on the bank’s loan portfolio. An increase in volume of interest-bearing liabilities of $58.0 million resulted in additional interest expense of $1.3 million while repricing due to rising interest rates increased interest expense by $2.9 million. The increase in interest expense primarily resulted from a $29.9 million increase in higher costing jumbo time deposits at an average rate paid on these deposits of 3.27%. However, an increase of $12.9 million in lower costing savings deposits at an average rate paid of 2.23% and an increase of $10.0 million in interest free demand deposits partially offset the increased cost of the jumbo time deposits.

Provision for Loan Losses and Asset Quality

Our provision for loan losses was $1.4 million during 2005 and $1.6 million during 2004. Net charge-offs in 2005 declined to $493,000 compared to $971,000 in 2004. As a percent of average loans, net charge-offs were 0.14%, the lowest level in the past five years. The lower level of net-charge-offs and nonperforming assets is attributable to continued efforts to improve asset quality, including improved underwriting.

The provision for loan losses is charged to bring the allowance for loan losses to the level deemed appropriate by management after adjusting for recoveries of amounts previously charged off. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio and results from management’s consideration of such factors as the financial condition of borrowers, past and expected loss experience, current economic conditions, and other factors management feels deserve recognition in establishing an appropriate reserve. Although management attempts to maintain the allowance at a level deemed adequate, future additions to the allowance may be necessary based upon changes in market conditions or the status of the loans included in the loan portfolio. In addition, various regulatory agencies periodically review our allowance for loan losses. These agencies may require us to make adjustments based upon their judgments about information available to them at the time of their examination. See “Allowance for Loan Losses and Summary of Loan Loss Experience” below. The Company evaluates its loan portfolio in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate or the loan’s observable market price, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

Our non-performing assets, which consist of loans past due 90 days or more, real estate acquired in the settlement of loans, and loans in nonaccrual status, decreased from $1.6 million at December 31, 2004 to $1.3 million at December 31, 2005. Our allowance for loan losses, expressed as a percentage of gross loans, was 1.25% and 1.30% at December 31, 2005 and 2004, respectively. At December 31, 2005, the allowance for loan losses amounted to $5.0 million, which management believes is adequate to absorb losses inherent in its loan portfolio.

Non-interest Income

Non-interest income before gains and losses on sales of securities, loans and loss on hedges increased $93,000, or 2.5%, from $3.7 million during 2004 to $3.8 million in 2005. Our non-interest income is comprised primarily of service charges on deposit accounts, financial services commissions, merchant fees, bank-owned life insurance income and various other sources of miscellaneous operating income. Fees charged on deposit accounts, our largest component of non-interest income, declined $66,000 for 2005 compared to 2004. These fees have been trending downward as competition for deposits by offering lower fees on deposit accounts continues among banking institutions in our market areas. Merchant fees increased $42,000 from $347,000 during 2004 to $389,000 in 2005. During the same period, other service charges, commissions and fees increased $211,000, of which $31,000 was attributable to increased profits from our investment in Four Oaks Mortgage Company, L.P., $39,000 was attributable to increased commissions from our financial services department and $81,000 was attributable to increased credit card interchange and stored value card fees. Income from bank-owned life insurance decreased $94,000. Net losses of $386,000 on sales of investment securities were recognized in 2005 in efforts to position our investment portfolio for higher yielding securities in a rising interest rate environment. A loss of $397,000 for 2005 was recognized due to the elimination of the fair value hedge accounting adjustments in net income for 2005. Net gains of $71,000 from sales of investment securities were recognized during 2004. Our net gains on sales of loans continued to trend downward during 2005 with net gains of $61,000 recorded compared to $72,000 during 2004 and $212,000 during 2003. The decline in loan sales was attributable to a slow down in funding of government-backed loans.

Non-interest Expense

Our non-interest expense increased from $11.5 million in 2004 to $13.4 million in 2005, an increase of $1.8 million. Although non-interest expense continues to increase, our non-interest expense as a percent of our average assets has declined over the last five years, down to below 3.0% for 2005, our lowest level in the last five years. Approximately 51.3% of the $1.8 million increase in non-interest expense over 2004 was due to increases in salaries and benefits. Salaries increased 12.7% while employee benefits increased 25.9%, primarily due to increased employee insurance costs. In addition to normal salary increases and increased costs for employee benefits overall, personnel costs grew due to additional staffing needs throughout the bank. In total, our number of full time equivalent employees grew from 126 for the year 2003, to 131 employees for the year 2004, up to 135 employees for the year 2005. The increased personnel costs reflect the costs of a full year of staffing two new offices which opened in January 2005. In addition to personnel costs, additional costs during the year were incurred in occupancy and equipment due to the additional staff, the opening of the new offices, as well as general upgrades in technology throughout the bank. For 2005, occupancy and equipment expense increased $41,000 and $90,000, respectively, over the prior year. Additional testing and documentation required for compliance with the Sarbanes-Oxley Act of 2002 continued to increase our fees paid for outside professional services in 2005, contributing to an increase of $218,000 in professional and consulting fees over 2004. Other operating expenses were up due to general asset growth and the increased costs due to additional staffing and new offices opened. The primary increases in other non-interest expense for 2005 over the prior year period included materials, training and seminars, up $40,000, advertising expense, up $62,000, printing and office supplies, up $39,000, postage and freight up $62,000, telephone expense up $13,000, checks, forgery and other losses up $46,000, auto expense up $35,000, waived charges up $73,000 and directors fees up $52,000. There were no other significant increases in the remaining other non-interest expense categories.

Comparison of Operating Results for the Years Ended December 31, 2004 and 2003

Net Income

We earned net income of $4.4 million or $1.03 basic net income per share for 2004, which was a 49.9% increase over net income of $2.9 million or $.70 basic net income per share for 2003. We believe strategic pricing of both our loans and deposits improved our net interest margin by lowering our overall cost of funds and allowing us to attract the higher balance, higher quality loans in our markets. Cost containment initiatives that began in prior years continue to positively impact our overhead levels. We incurred only a moderate increase in non-interest expense of 8.7% in 2004 over the prior year despite expenses incurred in preparation of the opening of two new offices in January 2005. Non-interest expense increased 11.6% for the year 2003 over the prior year when one new branch was opened and one branch was permanently relocated from temporary quarters.

Net Interest Income

Net interest income increased to $15.9 million in 2004, with a net yield of 4.56%, compared to $13.0 million and a net yield of 4.33% in 2003, which was an increase of $2.9 million, or 23 basis points, from 2003. Our level of average interest-earning assets increased from $300.7 million for 2003 to $349.6 million for 2004. Although the average rate we earned on these assets dropped 8 basis points from 6.30% in 2003 to 6.22% in 2004, the average growth in volume of earning assets, primarily loans, provided additional interest income of $3.4 million offsetting the $546,000 decrease due to decline in yields. Interest paid on interest-bearing liabilities declined $111,000 for 2004 due to declines in rates paid on interest-bearing funds. Our average interest-bearing liabilities, primarily time deposits, grew 15.9% to $282.7 million for 2004 resulting in an increase in interest expense of $828,000. However, declines in rates paid on interest-bearing funds provided a decrease in interest expense of $939,000, primarily in time deposits where the average rates paid for time deposits greater than $100,000 declined 56 basis points and other time deposits declined 32 basis points. The growth in our non-interest-bearing demand deposits of 22.9% also contributed to our increase in net interest income.

Provision for Loan Losses and Asset Quality

Our provision for loan losses was $1.6 million during 2004 and $1.4 million during 2003. Net charge-offs in 2004 were $971,000 compared to $803,000 in 2003. This increase resulted primarily from the growth in our loan portfolio during the year.

Our non-performing assets, which consist of loans past due 90 days or more, real estate acquired in the settlement of loans, and loans in nonaccrual status, decreased from $1.8 million at December 31, 2003 to $1.6 million at December 31, 2004. Our allowance for loan losses, expressed as a percentage of gross loans, was 1.30% and 1.26% at December 31, 2004 and 2003, respectively. At December 31, 2004, the allowance for loan losses amounted to $4.1 million, which management believes is adequate to absorb losses inherent in its loan portfolio.

Non-interest Income

Non-interest income increased 10.9% from $3.5 million during 2003 to $3.8 million during 2004. The $379,000 increase in non-interest income from 2003 to 2004 primarily resulted from increases in service charges on deposits accounts of $74,000, merchant fees of $23,000, other service charges of $389,000, as well as increases in income from bank-owned life insurance of $235,000, all of which were in part offset by declines in net gains from sales of securities and loans. Our net gains on sales of loans declined $140,000 in 2004 compared to the previous year primarily due to a slow down in funding of government-backed loans, which generated net gains of $212,000 during 2003.

Non-interest Expense

Our non-interest expense increased from $10.6 million in 2003 to $11.5 million in 2004, an increase of $919,000. Approximately 48.9% of this increase was due to increases in salaries and benefits. In addition to normal salary increases and increased benefits costs, we opened two new offices in January 2005, incurring additional expense during the fourth quarter of 2004 in preparation for these two new locations. Professional fees increased due to our preparation for compliance with the Sarbanes-Oxley Act of 2002.

Liquidity and Capital Resources

Our liquidity position is primarily dependent upon the bank’s need to respond to loan demand, the short-term demand for funds caused by withdrawals from deposit accounts (other than time deposits) and the liquidity of its assets. The bank’s primary liquidity sources include cash and amounts due from other banks, federal funds sold, and U.S. Government Agency and other short-term investment securities. In addition, the bank has the ability to borrow funds from the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (“FHLB”), to purchase federal funds from other financial institutions and to obtain wholesale deposits. At December 31, 2005, the bank had available lines of credit totaling $104.5 million with the FHLB and $32.7 million lines of credit from various financial institutions to purchase federal funds. Our management believes that our liquidity sources are adequate to meet our operating needs and the operating needs of the bank for the next eighteen months. Total shareholders’ equity was $41.6 million, or 8.03% of total assets at December 31, 2005, and $37.3 million or 9.36% of total assets at December 31, 2004.

Off-Balance Sheet Arrangements

As part of its normal course of business to meet the financing needs of its customers, the bank is at times a party to financial instruments with off-balance sheet credit risk. Such instruments include commitments to extend credit and standby letters of credit. At December 31, 2005, the bank’s outstanding commitments to extend credit consisted of undisbursed lines of credit, other commitments to extend, undisbursed portion of construction loans and stand-by letters of credit of $102.0 million. Additional detail regarding the bank’s off-balance sheet risk exposure is presented in Note K to the accompanying consolidated financial statements and the discussion below under “Derivative Financial Instruments.”

Interest Rate Sensitivity Analysis

As a part of our interest rate risk management policy, we periodically perform an interest rate sensitivity analysis. Interest rate sensitivity analysis is a common, though imperfect, measure of interest rate risk, which measures the relative dollar amounts of interest-earning assets and interest-bearing liabilities that reprice within a specific time period, either through maturity or rate adjustment. Any resulting interest rate “gap” is the difference between the amounts of such assets and liabilities that are subject to repricing. A positive gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing within the same period. Accordingly, in a declining interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a decrease in the yield on its assets greater than the decrease in the cost of its liabilities, and its net interest income should be negatively affected. Conversely, the yield on its assets for an institution with a positive gap would generally be expected to increase more quickly than the cost of funds in a rising interest rate environment, and such institution’s net interest income generally would be expected to be positively affected by rising interest rates. Changes in interest rates generally have the opposite effect on an institution with a negative gap.

The table below sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding as of December 31, 2005 that are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the traditional assumptions regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans or investments. The interest rate sensitivity of our assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions. (Dollars in thousands).


						Interest Rate Sensitivity as of December 31, 2005
						3 Months				Over 3 Months				Total Within				Over 12
						or Less				to 12 Months				12 Months				Months		Total
Interest-earning assets:
	Loans				$		224,889		$		16,950		$		241,839		$		155,255	$	397,094
	Securities available for sale				2				2,011				2,013				78,196			80,209
	Other earning assets				9,704				-				9,704				3,655			13,359
			Total interest-earning assets		$		234,595		$		18,961		$		253,556		$		237,106	$	490,662

	Percent of total interest-earning assets				47.81%				3.86%				51.68%				48.32%			100.00%
	Cumulative percent of total interest-
	earning assets				47.81%				51.68%				51.68%				100.00%			100.00%

Interest-bearing liabilities:
		Fixed maturity deposits				$		58,836		$		90,524		$		149,360		$	76,837	$	226,197
		All other deposits				103,151				-				103,151				-		103,151
		Borrowings				20,980				160				21,140				53,000		74,140
				Total interest-bearing liabilities		$		182,967		$		90,684		$		273,651		$	129,837	$	403,488

		Percent of total interest-bearing liabilities				45.35%				22.48%				67.83%				32.18%		100.00%
		Cumulative percent of total interest-
		bearing liabilities				45.35%				67.83%				67.83%				100.00%		100.00%

Interest sensitivity gap						$		51,628		$		(71,723)		$		(20,095)		$	107,269	$		87,174
Cumulative interest sensitivity gap						51,628				(20,095)				(20,095)				87,174		87,174
Cumulative interest sensitivity gap as a
percent of total interest-earning assets						10.52%				(4.10%)				(4.10%)				17.77%		17.77%
Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities						128.22%				92.66%				92.66%				121.61%		121.61%

Contractual Obligations and Commitments

In the normal course of business there are various outstanding contractual obligations that require future cash outflows. The following table shows our expected contractual obligations and future operating lease commitments as of December 31, 2005 (in thousands):


	Payments Due by Period
	Total		Less than 1 year		2-3 years		4-5 years			More than 5 years

Borrowings	$	74,140	$	21,140	$	-	$	10,000		$	43,000
Operating leases		122		62		53			7			-
Building obligation		1,032		1,032		-			-			-
Deposits		226,197⁽¹⁾		149,360		49,108			13,729			14,000
Purchase obligations	500		500		-		-			-
Total	$	302,041⁽¹⁾	$	172,094	$	49,161	$		23,736	$		57,000

(1)As Restated, See Note A.

The following table shows our undisbursed lines of credit, other commitments to extend, undisbursed portion of construction loans and stand-by letters of credit as of December 31, 2005 (in thousands):


	Amount of Commitment Expiration Per Period
	Total		Less than 1 year			2-3 years		4-5 years			More than 5 years

Undisbursed lines of credit	$	25,299	$	187		$	7,736	$	365		$	17,011
Other commitments to extend		30,227		21,028			7,330			481		1,388
Undisbursed portion of construction loans		41,657		37,870			3,775			12		-
Stand-by letters of credit		4,796		2,225			2,534			37		-

Total	$	101,979	$		61,310	$	21,375	$		895	$		18,399

Inflation

The effect of inflation on financial institutions differs somewhat from the effect it has on other businesses. The performances of banks, with assets and liabilities that are primarily monetary in nature, are affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, general increases in the price of goods and services will generally result in increased operating expenses.

Income Taxes

Income taxes, as a percentage of income before income taxes, for 2005 and 2004 were 35.37% and 34.54%, respectively. The increase was the result of management’s redirection of funds between loans and different types of taxable and tax exempt interest-bearing assets in response to economic conditions and the bank’s liquidity requirements.

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

The following schedule presents average balance sheet information for the years 2005, 2004 and 2003, along with related interest earned and average yields for interest-earning assets and the interest paid and average rates for interest-bearing liabilities. Non-accrual notes are included in loan amounts.


					Average Daily Balances, Interest Income/Expense, Average Yield/Rate

					For the Years Ended December 31,
					2005					2004					2003
					(As Restated, See Note A)
					Average			Average		Average			Average		Average			Average
					balance		Interest	rate		balance		Interest	Rate		balance		Interest	Rate
					(Dollars in thousands)
Interest-earning assets:
	Loans			$	351,103	$	26,612	7.58%	$	298,783	$	19,968	6.68%	$	249,240	$	17,318	6.95%
	Investment securities - taxable				57,242		2,389	4.17%		40,729		1,470	3.61%		40,691		1,272	3.13%
	Investment securities - tax-exempt				3,175		118	3.72%		4,278		162	3.79%		4,968		212	4.27%
	Other				7,787		285	3.66%		5,806		148	2.55%		5,773		141	2.44%

			Total interest-earning assets		419,307		29,404	7.01%		349,596		21,748	6.22%		300,672		18,943	6.30%
Other assets					30,155					26,826					23,550

				$	449,462				$	376,422				$	324,222
			Total assets
Interest-bearing liabilities:
	Deposits:
		NOW and money market		$	57,928		808	1.39%	$	52,677		361	0.69%	$	39,313		238	0.61%
		Savings			26,858		599	2.23%		13,967		59	0.42%		12,659		63	0.50%
		Time deposits greater
			than $100,000		124,248		4,066	3.27%		94,313		1,978	2.10%		70,567		1,878	2.66%
		Other time deposits			80,610		2,349	2.91%		78,987		1,725	2.18%		87,285		2,186	2.50%
	Borrowings				51,154		2,160	4.22%		42,799		1,688	3.94%		34,200		1,557	4.55%
		Total interest-bearing
			liabilities		340,798		9,982	2.93%		282,743		5,811	2.06%		244,024		5,922	2.43%
	Non-interest-bearing deposits				65,570					55,580					45,214
	Other liabilities				3,481					2,964					2,643
	Shareholders’ equity				39,613					35,135					32,341

		Total liabilities and
			shareholders’ equity	$	449,462				$	376,422				$	324,222
Net interest income and
	interest rate spread					$	19,422	4.08%			$	15,937	4.16%			$	13,021	3.87%
Net yield on average interest-
	earning assets							4.63%					4.56%					4.33%

Ratio of average interest-earning
	assets to average interest-bearing
	liabilities				123.04%					123.64%					123.21%

The following table shows changes in interest income and expense by category and rate/volume variances for the years ended December 31, 2005 and 2004. The changes due to rate and volume were allocated on their absolute values:


	Year Ended December 31, 2005 vs. 2004							Year Ended December 31, 2004 vs. 2003
	(As Restated, See Note A) Increase (Decrease) Due to							Increase (Decrease) Due to

	Volume		Rate			Total		Volume		Rate		Total
	(In thousands)

Interest income:
Loans	$	3,730		$	2,914	$	6,644	$	3,377	$	(727)	$	2,650
Investment securities - taxable		643			276		919		1		197		198
Investment securities - tax-exempt		(41)			(3)		(44)		(28)		(22)		(50)
Other		62			75		137		1		6		7
Total interest income		4,394			3,262		7,656		3,351		(546)		2,805

Interest expense:
Deposits:
NOW and money market		55			392		447		86		37		123
Savings		171			369		540		6		(10)		(4)
Time deposits greater than $100,000		804			1,284		2,088		566		(466)		100
Other time deposits		41			583		624		(195)		(266)		(461)
Borrowings		341			131		472		365		(234)		131

Total interest expense		1,412			2,759		4,171		828		(939)		(111)

Net interest income increase	$	2,982		$	503	$	3,485	$	2,523	$	393	$	2,916

Market Risk

Like most financial institutions, our most significant market risk exposure is the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the bank’s asset/liability management function. The following table presents information about the contractual maturities, average interest rates and estimated fair values of our financial instruments we considered market risk sensitive as of December 31, 2005. Loans include non-accrual loans but not the allowance for loan losses. (Dollars in thousands).


			2006	2007	2008	2009	2010	Five Years	Total	Interest Rate	Fair Value

Financial assets:
	Loans:
	Fixed rate		$ 29,699	$ 29,986	$ 39,866	$ 44,138	$ 31,443	$ 9,540	$ 184,672	7.19%	$ 182,991
	Variable Rate		212,422	-	-	-	-	-	212,422	7.80%	210,489
	Securities available for sale		2,013	3,958	5,921	10,090	29,453	28,774	80,209	4.50%	80,209
	Other earning assets		9,704	-	-	-	-	-	9,704	4.09%	9,704
		Total	$ 253,838	$ 33,944	$ 45,787	$ 54,228	$ 60,896	$ 38,314	$ 487,007	6.95%	$ 483,393


Financial liabilities:
	Money market, NOW and savings deposits		$ 103,151	-	-	-	-	-	$ 103,151	1.32%	$ 90,850
	Time deposits		149,360	$ 23,220	$ 6,830	$ 19,421	$ 27,366	-	226,197	3.66%	226,455
	Borrowings		21,140	-	-	-	10,000	43,000	74,140	4.43%	73,651
		Total	$ 273,651	$ 23,220	$ 6,830	$ 19,421	$ 37,366	$ 43,000	$ 403,488	3.20%	$ 390,956

Derivative Financial Instruments

A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or reference rate. These instruments primarily consist of interest rate swaps, caps, floors, financial forward and futures contracts and options written or purchased. Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risk. Credit risk arises when amounts receivable from counterparty exceed amounts payable. We control our risk of loss on derivative contracts by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit.

We have used interest rate swaps in the management of interest rate risk. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to alter the repricing characteristics of assets or liabilities without affecting the underlying principal positions. Through the use of a swap, assets and liabilities may be transformed from fixed to floating rates, from floating rates to fixed rates, or from one type of floating rate to another. At December 31, 2005, swap derivatives with a total notional value of $63.7 million, with terms ranging up to five years, were outstanding.

Although off-balance sheet derivative financial instruments do not expose us to credit risk equal to the notional amount, such agreements generate credit risk to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. We minimize such risk by evaluating the creditworthiness of the counterparties and consistently monitoring these agreements. The counterparties to these arrangements are primarily large commercial banks and investment banks. Where appropriate, master netting agreements are arranged or collateral is obtained in the form of rights to securities. At December 31, 2005, our interest rate swaps reflected a net unrealized loss of $1.0 million.

Other risks associated with interest-sensitive derivatives include the effect on fixed rate positions during periods of changing interest rates. Indexed amortizing swaps’ notional amounts and maturities change based on certain interest rate indices. Generally, as rates fall the notional amounts decline more rapidly, and as rates increase notional amounts decline more slowly. As of December 31, 2005, we had no indexed amortizing swaps outstanding. Under unusual circumstances, financial derivatives also increase liquidity risk, which could result from an environment of rising interest rates in which derivatives produce negative cash flows while being offset by increased cash flows from variable rate loans. We consider such risk to be insignificant due to the relatively small derivative positions we hold.

A discussion of derivatives is presented in Note J to our consolidated financial statements, which are presented under Item 8 of Part III in this Form 10-K.

Quarterly Financial Information

The following table sets forth, for the periods indicated, certain of our consolidated quarterly financial information. This information is derived from our unaudited financial statements, which include, in the opinion of management, all normal recurring adjustments that management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with our consolidated financial statements included under Item 8 of Part II in this Form 10-K. The results for any quarter are not necessarily indicative of results for any future period. (Dollars in thousands, except per share data).


		Year Ended December 31, 2005				Year Ended December 31, 2004
		Fourth	Third	Second	First	Fourth	Third	Second	First
		Quarter	Quarter	Quarter	Quarter	Quarter	Quarter	Quarter	Quarter
Operating Data:
	Total interest income	$ 8,507	$ 7,766	$ 6,908	$ 6,223	$ 5,856	$ 5,609	$ 5,215	$ 5,068
	Total interest expense	3,137	2,724	2,225	1,897	1,567	1,505	1,401	1,338
	Net interest income	5,370	5,042	4,683	4,326	4,289	4,104	3,814	3,730
	Provision for loan losses	527	498	191	187	205	401	422	568
	Net interest income after provision	4,843	4,544	4,492	4,139	4,084	3,703	3,392	3,162
	Non-interest income	558	731	1,315	473	938	1,071	982	858
	Non-interest expense	3,393	3,358	3,408	3,195	3,068	2,789	2,860	2,790
	Income before income taxes	2,008	1,917	2,399	1,417	1,954	1,985	1,514	1,230
	Provision for income taxes	703	700	860	475	691	654	532	431
	Net income	$ 1,305	$ 1,217	$ 1,539	$ 942	$ 1,263	$ 1,331	$ 982	$ 799

Per Share Data:
Net income:
	Basic	$ 0.30	$ 0.28	$ 0.35	$ 0.22	$ 0.30	$ 0.31	$ 0.23	$ 0.19
	Diluted	0.30	0.28	0.35	0.22	$ 0.30	$ 0.31	$ 0.23	$ 0.19

Cash dividends declared		0.08	0.07	0.07	0.07	0.06	0.06	0.06	0.06

Common stock price:
	High	$ 25.00	$ 24.00	$ 23.20	$ 19.20	$ 20.00	$ 14.72	$ 15.68	$ 16.64
	Low	19.80	19.80	18.64	17.60	14.88	14.08	14.08	13.44

Investment Portfolio

The valuations of investment securities at December 31, 2005, 2004 and 2003, respectively, were as follows (in thousands):


	Available for Sale
	2005						2004				2003
	Amortized Cost			Estimated fair value			Amortized cost		Estimated fair value		Amortized code			Estimated fair value

U.S. Government and agency Securities			$ 69,108			$ 68,431		$ 34,991		$ 34,958			$ 15,866		$ 15,914
State and municipal securities	3,963			3,910			3,573		3,632		4,664			4,955
Mortgage-backed securities	7,003			6,904			12,759		12,775		16,535			16,502
Other	685			964			628		977		567			832

Total securities		$ 80,759				$ 80,209		$ 51,951		$ 52,342		$ 37,632			$ 38,203

Pledged securities					$ 65,159					$ 33,408					$ 12,329

The following table sets forth the carrying value of our available for sale investment portfolio at December 31, 2005 (in thousands):


	Carry Value
		1 Year		After 1 Year through 5 Years		After 5 Years through 10 Years		After 10 Years						Total

U.S. Government and agency securities		$	1,000	$	47,810	$	19,621	$		-		$		68,431

State and municipal securities		$	-	$	339	$	1,436	$		2,135		$		3,910

Mortgage-backed securities		$	-	$	1,546	$	904	4,454				$		6,904

Other			-	-			-	964						964

Total		$	1,000	$	49,695	$	21,961	$	7,553		$		80,209

The following table sets forth the weighted average yield by maturity of our available for sale investment portfolio at December 31, 2005 amortized cost:


	Weighted Average Yields
		1 Year	After 1 Year through 5 Years	After 5 Years through 10 Years	After 10 Years	Total

U.S. Government and agency securities		5.50%	4.57%	4.40%	-	4.54%

State and municipal securities		-	5.29%	3.32%	3.63%	3.65%

Mortgage-backed securities		-	4.12%	5.24%	4.91%	4.77%

Other		-	-	-	4.53%	4.53%

Total weighted average yields		5.50%	4.57%	4.36%	4.49%	4.52%

Loan Portfolio

Loans consisted of the following, as extracted from the Call Reports of December 31, 2005, 2004, 2003, 2002 and 2001 (in thousands):


	2005		2004		2003		2002		2001

Loans receivable:
Loans secured by real estate:
Construction and land development	$	142,592	$	90,742	$	66,242	$	56,780	$	44,770
Secured by farmland		11,650		15,203		13,384		8,290		7,171
Secured by 1-4 family residential properties:
Revolving open-end loans & lines of credit		23,581		23,295		18,879		16,569		14,603
All other		66,140		58,158		55,113		43,821		48,190
Secured by multifamily residential properties		4,085		5,088		3,634		3,265		2,621
Secured by nonfarm nonresidential properties		84,189		72,611		63,372		42,941		38,446
Loans to finance agricultural production and other loans to farmers		3,729		4,020		5,084		6,277		6,329
Commercial and industrial loans		34,166		26,005		27,872		29,908		26,420
Loans to individuals for household, family and other personal expenditures:
Credit cards and related plans		3,933		3,807		3,574		3,527		2,917
Other		22,438		13,400		14,458		17,177		17,169

Obligations of states and political subdivisions in the U.S.:
Tax exempt obligations		113		225		332		-		202
All other loans		787		628		836		921		953
Lease financing receivables		9		12		13		14		20
Deferred cost (unearned income) on loans		318		379		170		(80)		(11)

Total loans		397,094		312,815		272,623		229,570		209,822

Allowance for loan losses		(4,965)		(4,055)		(3,430)		(2,860)		(2,650)

Net loans	$	392,129	$	308,760	$	269,193	$	226,710	$	207,172

Commitments and contingencies:
Commitments to make loans	$	97,183	$	89,377	$	68,731	$	44,525	$	45,510
Standby letters of credit	$	4,796	$	1,726	$	1,003	$	2,408	$	653

Certain Loan Maturities

The maturities and carrying amounts of certain loans as of December 31, 2005 are summarized as follows (in thousands):


	Commercial Financial and Agricultural		Real Estate Construction and Land Development		Total

Due within one year	$	40,213	$	84,519	$	124,732

Due after one year to five years:
Fixed rate		47,645		39,937		87,582
Variable rate		36,486		13,341		49,827

Due after five years:
Fixed rate		3,611		1,601		5,212
Variable rate		5,495		3,194		8,689

Total	$	133,450	$	142,592	$	276,042

Risk Elements

Past due and non-accrual loans, as extracted from the Call Reports of December 31, 2005, 2004, 2003, 2002 and 2001 were as follows (in thousands):


	2005		2004		2003		2002		2001

Non-accrual loans:
Real estate loans	$	535	$	614	$	739	$	1,059	$	1,651
Installment loans		114		80		96		191		62
Commercial and all other loans		348		250		224		287		331

Total	$	997	$	944	$	1,059	$	1,537	$	2,044

Agricultural loans included above	$	252	$	197	$	110	$	163	$	82

Past due 90 days or more and still accruing:
Real estate loans	$	64	$	188	$	597	$	-	$	24
Installment loans		-		1		5		36		19
Credit cards and related plans		10		11		18		17		9
Commercial and all other loans		-		26		15		30		65

Total	$	74	$	226	$	635	$	83	$	117

Agricultural loans included above	$	-	$	26	$	-	$	17	$	65

Foreclosed assets (included in other assets) were $247,000, $404,000, $75,000, $442,000, and $170,000, at December 31, 2005, 2004, 2003, 2002, and 2001, respectively.

Allowance for Loan Losses and Summary of Loan Loss Experience

As a matter of policy, the bank maintains an allowance for loan losses. The allowance for loan losses is created by direct charges to income and by recoveries of amounts previously charged off. The allowance is reduced as losses on loans are charged against the allowance when realized.

We evaluate our loan portfolio in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate or the loan’s observable market price, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The loan portfolio and the adequacy of the allowance is evaluated by management at least quarterly. In addition, our Loan Committee reviews our loan portfolio and credit quality quarterly. The amount of the allowance is based on management’s evaluation of the loan portfolio including trends in composition, growth and terms, historical and expected loan loss experience, economic conditions and conditions that may affect the borrowers’ ability to pay, and other factors management deems appropriate. In addition, regulatory examiners may require the bank to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination. The bank’s management believes its allowance for loan losses is adequate under existing economic conditions to absorb loan losses inherent in its loan portfolio. Although management attempts to maintain the allowance at a level deemed adequate, future additions to the allowance may be necessary based upon changes in market conditions or the status of the loans included in the loan portfolio.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loans are charged against the allowance for loan losses when management believes that the uncollectibility of a loan balance is confirmed. In addition to the review of loans considered impaired as discussed above, the allowance for loan losses is also based upon such factors as changes in the trends in volumes and terms of loans, levels and trends of charge-offs and recoveries, national and local economic trends and conditions that may affect the borrowers’ ability to pay, effects of changes in risk selection and underwriting standards as well as overall portfolio quality. If conditions change substantially from the assumptions used to evaluate the allowance for loan losses, it is possible that management's assessment of the allowance may change.

The following table summarizes the bank’s loan loss experience for the years ending December 31, 2005, 2004, 2003, 2002 and 2001 (in thousands, except ratios):


	2005		2004		2003		2002		2001

Balance at beginning of period	$	4,055	$	3,430	$	2,860	$	2,650	$		2,770

Charge-offs:
Commercial and other	245		417		311		604		668
Real estate	158		395		342		240		174
Installment loans to individuals	198		237		396		283		176
Credit cards and related plans	95		297		88		72		60
	696		1,346		1,137		1,199		1,078
Recoveries:
Commercial and other	49		206		31		74		38
Real estate	19		27		134		13		24
Installment loans	69		56		159		62		53
Credit cards and related plans	66		86		10		12		9
	203		375		334		161		124

Net charge-offs	493		971		803		1,038		954

Additions charged to operations	1,403		1,596		1,373		1,248		834

Balance at end of year	$	4,965	$	4,055	$	3,430	$	2,860		$	2,650

Ratio of net charge-offs during the year to average gross loans outstanding during the year	.14%		.32%		.32%		.48%		.47%

The following table summarizes the bank’s allocation of allowance for loan losses at December 31, 2005, 2004, 2003, 2002 and 2001 (in thousands, except ratios):


	At December 31,
	2005			2004			2003
	Amount		% of Total Loans (1)	Amount		% of Total Loans (1)	Amount		% of Total Loans (1)

Real estate loans	$	4,150	84%	$	3,432	84%	$	2,773	81%
Commercial and industrial loans		474	10%		389	10%		415	12%
Installment loans		330	6%		223	6%		227	7%
Unallocated		11	-%		11	-%		15	-%

Total	$	4,965	100%	$	4,055	100%	$	3,430	100%


	At December 31,
	2002			2001
	Amount		% of Total Loans (1)	Amount		% of Total Loans (1)

Real estate loans	$	2,139	75%	$	1,967	74%
Commercial and industrial loans		451	16%		414	16%
Installment loans		258	9%		254	10%
Unallocated		12	-%		15	-%

Total	$	2,860	100%	$	2,650	100%

________________________________________
(1) Represents total of all outstanding loans in each category as a percentage of total loans outstanding.

Deposits

Time certificates in amounts of $100,000 or more outstanding at December 31, 2005 by maturity were as follows (in thousands):


		At December 31, 2005
		(As Restated, See Note A)
		Amount
Three months or less		$ 31,072
Over three months through twelve months		51,946
Over twelve months through three years		33,102
Over three years		25,877
Total		$ 141,997

Borrowings

The bank borrows funds principally from the Federal Home Loan Bank of Atlanta. Information regarding such borrowings is as follows (in thousands, except rates):


	2005		2004		2003

Balance outstanding at December 31	$	63,000	$	43,000	$	33,000
Weighted average rate at December 31		4.44%		3.86%		4.58%
Maximum borrowings during the year	$	63,000	$	43,000	$	35,760
Average amounts outstanding during year	$	48,945	$	42,799	$	34,200
Weighted average rate during year		4.23%		3.94%		4.55%

In addition, short-term advances of $480,000 were outstanding from the Federal Home Loan Bank at December 31, 2005. For 2005 and 2004, average outstanding short-term balances were $148,000 and $638,000, respectively. At December 31, 2004, there were no short-term Federal Home Loan Bank advances outstanding.

In addition, the bank may purchase federal funds through unsecured federal funds lines of credit with various banks aggregating $32.7 million. These lines are intended for short-term borrowings and are payable on demand and bear interest based upon the daily federal funds rate. For 2005 and 2004, average federal funds purchased were $1.9 million and $1.1 million, respectively. At December 31, 2005 the bank had $10.5 million of federal funds borrowings outstanding under these lines. At December 31, 2004, there were no federal funds borrowings outstanding.

Also included with the bank’s borrowings at December 31, 2005 and 2004, is an outstanding promissory note for $160,000 for the purchase of property. The note matures June 2006 and bears interest at 7.50%.

Critical Accounting Estimates and Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Critical accounting estimates and policies are those we believe are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We believe that the allowance for loan losses represents a particularly sensitive accounting estimate. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the maturity of the loan portfolio, credit concentration, trends in historical loss experience, specific impaired loans and general economic conditions. See Note B to the consolidated financial statements for a comprehensive discussion of our accounting policy for the allowance for loan losses.

New Accounting Standards

In December 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and amends SFAS No. 95 Statement of Cash Flows. SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain proforma disclosures of fair value were required. The provisions of this Statement are effective for the first annual reporting period that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending March 31, 2006. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the fiscal years ended December 31, 2005, 2004, and 2003 would have decreased by approximately $88,000, $64,000, and $68,000, respectively. Accordingly, the adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.

Item 7A – Quantitative and Qualitative Disclosures About Market Risk.

This information is included under Item 7 of this report under the captions “Interest Rate Sensitivity,” “Market Risk,” and “Derivative Financial Instruments.”

Item 8 - Financial Statements.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Four Oaks Fincorp, Inc.

Four Oaks, North Carolina

We have audited the accompanying consolidated balance sheets of Four Oaks Fincorp, Inc. and Subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Four Oaks Fincorp, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note A to the consolidated financial statements, the Company has restated it 2005 consolidated financial statements.

/s/ Dixon Hughes PLLC.

Sanford, North Carolina

March 15, 2006, except as to the restatement discussed in Note A to the consolidated financial statements which is as of September 11, 2006.

Four Oaks Fincorp, Inc.

Consolidated Statements of Operations

December 31, 2005 and 2004


	2005		2004
	(As Restated, See Note A)
	(Amounts in thousands except share data)
ASSETS
Cash and due from banks	$	13,211	$	10,634
Interest-earning deposits		9,704		3,615
Investment securities available for sale, at fair value		80,209		52,342

Loans		397,094		312,815
Allowance for loan losses		(4,965)		(4,055)
Net loans		392,129		308,760
Accrued interest receivable		2,950		2,210
Bank premises and equipment, net		9,683		10,149
FHLB stock		3,655		2,621
Investment in life insurance		7,875		6,054
Other assets		3,456		2,115
Total assets	$	522,872	$	398,500

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
Non-interest-bearing demand	$	68,993	$	59,528
Money market and NOW accounts		59,251		55,467
Savings		43,900		14,900
Time deposits, $100,000 and over		141,997		108,655
Other time deposits		84,200		76,757
Total deposits		398,341		315,307
Borrowings		74,140		43,160
Accrued interest payable		2,255		1,201
Other liabilities		6,524		1,537
Total liabilities		481,260		361,205

Commitments and Contingencies (Notes I, J and M)
Shareholders’ equity:
Common stock; $1.00 par value, 10,000,000
shares authorized; 4,379,258 and 3,438,107 shares issued
and outstanding at December 31, 2005 and 2004, respectively		4,379		3,438
Additional paid-in capital		9,178		8,788
Retained earnings		28,815		25,091
Accumulated other comprehensive loss		(760)		(22)
Total shareholders’ equity		41,612		37,295

Total liabilities and shareholders’ equity	$	522,872	$	398,500

The accompanying notes are an integral part of these consolidated financial statements.
37

Four Oaks Fincorp, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2005, 2004 and 2003


			2005		2004		2003
			(As Restated, See Note A)
			(As Restated, See Note A)
			(Amounts in thousands, except per share data)
Interest and dividend income:
	Loans, including fees	$	26,612	$	19,968	$	17,318
	Investment securities:
	Taxable		2,389		1,470		1,272
	Tax-exempt		118		162		212
	Dividends		155		109		88
	Interest-earning deposits		130		39		53
	Total interest and dividend income		29,404		21,748		18,943
Interest expense:
	Deposits		7,823		4,123		4,365
	Borrowings		2,160		1,688		1,557
	Total interest expense		9,983		5,811		5,922
	Net interest income		19,421		15,937		13,021
Provision for loan losses			1,403		1,596		1,373
Net interest income after provision for loan losses			18,018		14,341		11,648
Non-interest income:
	Service charges on deposit accounts		1,875		1,941		1,867
	Other service charges, commissions and fees		1,235		1,024		635
	Gains (losses) on sale of investment securities		(386)		71		273
	Losses on hedges		(397)		-		-
	Gains on sale of loans		61		72		212
	Merchant fees		389		347		324
	Income from investment in bank-owned life insurance		300		394		159
	Total non-interest income		3,077		3,849		3,470
Non-interest expenses:
	Salaries		6,033		5,354		4,934
	Employee benefits		1,306		1,037		1,008
	Occupancy expenses		549		508		493
	Equipment expenses		1,313		1,223		1,124
	Professional and consulting fees		965		747		664
	Other taxes and licenses		248		251		251
	Merchant processing expenses		341		304		277
	Other operating expenses		2,599		2,083		1,837
	Total non-interest expenses		13,354		11,507		10,588
Income before income taxes			7,741		6,683		4,530
Provision for income taxes			2,738		2,308		1,612

	Net income	$	5,003	$	4,375	$	2,918

Basic net income per common share		$	1.15	$	1.03	$	0.70
Diluted net income per common share		$	1.14	$	1.02	$	0.69

The accompanying notes are an integral part of these consolidated financial statements.
38

Four Oaks Fincorp, Inc.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2005, 2004 and 2003


		2005		2004		2003
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands)

Net income	$	5,003	$	4,375	$	2,918

Other comprehensive income:
Securities available for sale:
Unrealized holding gains (losses) on
available for sale securities		(1,326)		(109)		40
Tax effect		529		44		(17)
Reclassification of (gains) losses recognized in
net income		386		(71)		(273)
Tax effect		(154)		28		109
Net of tax amount		(565)		(108)		(141)

Cash flow hedging activities:
Unrealized holding losses on cash flow
hedging activities		(290)		(370)		(56)
Tax effect		117		148		22
Net of tax amount		(173)		(222)		(34)

Total other comprehensive loss		(738)		(330)		(175)

Comprehensive income	$	4,265	$	4,045	$	2,743

The accompanying notes are an integral part of these consolidated financial statements.
39

Four Oaks Fincorp, Inc.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2005, 2004 and 2003


									Accumulated
					Additional				other		Total
	Common stock				paid-in		Retained		comprehensive		shareholders’
	Shares		Amount		capital		earnings		income (loss)		equity

	(Amounts in thousands, except share data)

BALANCE, DECEMBER 31, 2002	2,144,211	$	2,144	$	7,716	$	20,850	$	483	$	31,193
Net income	-		-		-		2,918		-		2,918
Other comprehensive loss	-		-		-		-		(175)		(175)
Effect of 5-for-4 stock split	533,706		534		(542)		-		-		(8)
Issuance of common stock	42,014		42		837		-		-		879
Current income tax benefit	-		-		18		-		-		18
Purchases and retirement
of common stock	(43,668)		(44)		-		(949)		-		(993)
Cash dividends of $.23 per share	-		-		-		(952)		-		(952)
BALANCE, DECEMBER 31, 2003	2,676,263		2,676		8,029		21,867		308		32,880
Net income	-		-		-		4,375		-		4,375
Other comprehensive loss	-		-		-		-		(330)		(330)
Effect of 5-for-4 stock split	682,474		683		(683)		-		-		-
Issuance of common stock	82,170		82		1,348		-		-		1,430
Current income tax benefit	-		-		94		-		-		94
Purchases and retirement
of common stock	(2,800)		(3)		-		(62)		-		(65)
Cash dividends of $.26 per share	-		-		-		(1,089)		-		(1,089)
BALANCE, DECEMBER 31, 2004	3,438,107		3,438		8,788		25,091		(22)		37,295
Net income⁽¹⁾	-		-		-		5,003	-			5,003
Other comprehensive loss	-		-		-		-		(738)		(738)
Effect of 5-for-4 stock split	872,060		872		(872)		-		-		-
Issuance of common stock	69,091		69		1,161		-		-		1,230
Current income tax benefit	-		-		101		-		-		101
Cash dividends of $.30 per share	-		-		-		(1,279)		-		(1,279)

BALANCE, DECEMBER 31, 2005⁽¹⁾	4,379,258	$	4,379	$	9,178	$	28,815	$	(760)	$	41,612


⁽¹⁾ As Restated, See Note A

The accompanying notes are an integral part of these consolidated financial statements.
40

Four Oaks Fincorp, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2005, 2004 and 2003


		2005		2004			2003
		(As Restated,
		See Note A)
	(Amounts in thousands)
Cash flows from operating activities:
Net income	$	5,003	$	4,375	$	2,918
Adjustments to reconcile net income to net cash
provided by operations:
Provision for loan losses		1,403		1,596		1,373
Provision for depreciation and amortization		1,038		1,008		946
Deferred income tax benefit		(672)		(188)		(129)
Net amortization of bond premiums and discounts		18		109		595
Gain on sale of loans		(61)		(72)		(212)
(Gain) loss on sale of investment securities		386		(71)		(273)
Loss on sale of foreclosed assets		-		25		15
(Gain) loss on disposition of premises and equipment		-		7		-
Increase in cash surrender value of life insurance		(300)		(394)		(159)
Net change in hedge activity		(397)		0		0
Changes in assets and liabilities:
Other assets		50		545		(130)
Interest receivable		(740)		(317)		(122)
Other liabilities		4,797		52		(155)
Interest payable		1,054		(83)		(501)
Net cash provided by operating activities		11,579		6,592		4,166

Cash flows from investing activities:
Proceeds from sales and calls of investment
securities available for sale		36,783		41,422		44,835
Proceeds from maturities of investment
securities available for sale		-		-		10,516
Purchase of investment securities available for sale		(65,994)		(55,779)		(37,320)
Purchase of FHLB stock		(1,034)		(698)		(273)
Net increase in loans		(85,142)		(42,305)		(43,811)
Additions to premises and equipment		(558)		(568)		(848)
Purchases of bank-owned life insurance		(1,521)		(3,552)		(2,896)
Proceeds from sale of foreclosed assets		589		860		521
Expenditures on foreclosed assets		(1)		-		(2)
Net cash used by investing activities		(116,878)		(60,620)		(29,278)
Cash flows from financing activities:
Net proceeds from borrowings		30,980		10,000		-
Net increase in deposit accounts		83,034		42,176		22,345
Proceeds from issuance of common stock		1,230		1,430		879
Purchases and retirement of common stock		-		(65)		(993)
Cash dividends paid		(1,279)		(1,089)		(960)
Net cash provided by financing activities		113,965		52,452		21,271

Net increase (decrease) in cash and cash equivalents		8,666		(1,576)		(3,841)

Cash and cash equivalents at beginning of year		14,249		15,825		19,666
Cash and cash equivalents at end of year	$	22,915	$	14,249	$	15,825

The accompanying notes are an integral part of these consolidated financial statements.
41

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE A - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

On August 1, 2006, the Company announced that it would restate its historical financial statements for the year ended December 31, 2005 and for the first quarter of 2006 to amend the accounting for certain derivative transactions relating to interest rate swap agreements on the Company’s brokered certificates of deposit under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).

Since late in 2003, the Company has entered into interest rate swap agreements to hedge the interest rate risk inherent in certain of its brokered certificates of deposit. From inception, the Company has applied a method of fair value hedge accounting under SFAS No. 133 (the "short-cut” method) that is appropriate if the hedging transactions are perfectly effective. However, after further examination in light of recent developments and discussions with its independent registered public accounting firm, Dixon Hughes PLLC, the Company and its Audit Committee concluded that the swap transactions did not qualify for the “short-cut” method and documentation regarding these transactions did not meet the technical requirements of SFAS No. 133. Therefore, any fluctuations in the market value of these interest rate risk management derivatives should have been recorded through the Company’s income statement. There is no effect on the Company’s cash flows from these revisions. Although these swaps have performed as expected, by providing an economic hedge against interest rate risk, the Company determined that it did not have adequate documentation at the inception of the interest rate swap agreements to qualify for hedge accounting treatment under SFAS No. 133.

The primary effect of this change in accounting treatment is the inclusion in net income of any increases or decreases in the fair value of interest rate swap agreements previously designated as hedges under SFAS No. 133. This is because fair value hedge accounting under SFAS No. 133 allows a company to record the change in fair value of the hedged item (in this case, brokered certificates of deposit) as an adjustment to income, which offsets the fair value adjustment on the related interest rate swap. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the brokered certificates of deposit. Additionally, the net cash settlement payments received during each of the above periods for these interest rate swaps were reclassified from interest expense on brokered certificates of deposit to non-interest income. The broker fee has been recognized as a deferred financing cost and is amortized to interest expense over the life of the related certificates of deposit.

The following tables below show the previously reported amounts and the restated results by financial statement line item for the consolidated statements of income and consolidated statements of cash flows for the year ended December 31, 2005, and the consolidated balance sheets and statement of shareholder’s equity as of December 31, 2005.


		As of December 31, 2005

	As Previously Reported	Adjustment	As Restated
	(Amounts in thousands)
Consolidated Balance Sheet:

Other assets	$ 2,994	$ 462	$ 3,456
Total assets	522,410	462	522,872
Time deposits, $100,000 and over	141,189	808	141,997
Total deposits	397,533	808	398,341
Total liabilities	480,452	808	481,260
Retained earnings	29,161	(346)	28,815
Total shareholders' equity	41,958	(346)	41,612
Total liabilities and shareholders' equity	522,410	462	522,872

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE A - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued)

Below are the Company’s consolidated statements of income, consolidated statement of shareholder’s equity and consolidated statements of cash flows stating both previously reported and restated amounts for the year ended December 31, 2005:


		Year Ended December 31, 2005
		As
		Previously
		Reported			Adjustment		As Restated
Consolidated Statement of Income:	(Amounts in thousands, except per share data)

Interest expense on deposits	$		7,657	$	166	$	7,823
Total interest expense			9,817		166		9,983
Net interest income			19,587		(166)		19,421
Net interest income after
provision for loan losses			18,184		(166)		18,018
Loss on hedges, net			-		(397)		(397)
Total non-interest income			3,474		(397)		3,077
Income before income taxes			8,304		(563)		7,741
Provision for income taxes			2,955		(217)		2,738
Net income			5,349		(346)		5,003

Basic net income per common share	$		1.23	$	(0.08)	$	1.15
Diluted net income per common share	$		1.22	$	(0.08)	$	1.14


		Year Ended December 31, 2005
		As
		Previously
		Reported		Adjustment		As Restated
Consolidated Statements of Shareholders’ Equity:		(Amounts in thousands)

Total shareholders' equity, January 1, 2005	$	37,295	$	-	$	37,295
Net income		5,349		(346)		5,003
Total shareholders' equity, December 31, 2005		41,958		(346)		41,612


		Year Ended December 31, 2005
		As
		Previously
		Reported		Adjustment		As Restated
Consolidated Statements of Cash Flows:		(Amounts in thousands)
Cash Flows from operating activities:
Net income	$	5,349	$	(346)	$	5,003
Deferred income tax benefit		(455)		(217)		(672)
Net change in hedging activity		-		(397)		(397)
Increase in other assets		(102)		152		50
Net cash provided by operating activities		12,387		(808)		11,579

Cash Flows from financing activities
Net increase in deposit accounts		82,226		808		83,034
Net cash provided by financing activities		113,157		808		113,965

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts and transactions of Four Oaks Fincorp, Inc. (the “Company”), a bank holding company incorporated under the laws of the State of North Carolina, and its wholly owned subsidiaries, Four Oaks Bank & Trust Company, Inc. (the “Bank”) and Four Oaks Mortgage Services, LLC, the Company’s mortgage origination subsidiary. All significant intercompany transactions have been eliminated.

Nature of Operations

The Company was incorporated under the laws of the State of North Carolina on February 5, 1997. The Company’s primary function is to serve as the holding company for its wholly owned subsidiary, the Bank. The Bank operates twelve offices in eastern and central North Carolina, and its primary source of revenue is derived from loans to customers and from its securities portfolio. The loan portfolio is comprised mainly of real estate, commercial and consumer loans. These loans are primarily collateralized by residential and commercial properties, commercial equipment, and personal property.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions cash and due from banks and interest-earning deposits.

Federal regulations require institutions to set aside specified amounts of cash as reserves against transactions and time deposits. As of December 31, 2005, the daily average gross reserve requirement was $6.5 million.

Investment Securities

Investment securities are classified into three categories:

(1) Held to Maturity - Debt securities that the Company has the positive intent and the ability to hold to maturity are classified as held to maturity and reported at amortized cost;

(2) Trading - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Investment Securities (Continued)

(3) Available for Sale - Debt and equity securities not classified as either securities held to maturity or trading securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of income taxes, as other comprehensive income, a separate component of shareholders' equity.

The Company has historically classified all securities as available for sale. Gains and losses on sales of securities, computed based on specific identification of adjusted cost of each security, are included in income at the time of the sale. Premiums and discounts are amortized into interest income using a method that approximates the interest method over the period to maturity.

Loans and Allowance for Loan Losses

Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.

Loan origination fees are deferred, as well as certain direct loan origination costs. Such costs and fees are recognized as an adjustment to yield over the contractual lives of the related loans utilizing the interest method.

The Company evaluates its loan portfolio in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate or the loan’s observable market price, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Income Recognition on Impaired and Nonaccrual Loans

Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged-off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms.

While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged-off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Foreclosed Assets

Assets acquired as a result of foreclosure are valued at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations of the property are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell. Losses from the acquisition of property in full or partial satisfaction of debt are treated as credit losses. Routine holding costs, subsequent declines in value, and gains or losses on disposition are included in other income and expense.

Bank Premises and Equipment

Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of assets. Useful lives range from 5 to 10 years for furniture and equipment and 40 years for premises. Expenditures for repairs and maintenance are charged to expense as incurred.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Due to the redemptive provisions of the FHLB, the Company estimated that fair value equals cost and that this investment was not impaired as of December 31, 2005.

Comprehensive Income

Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. Components of other comprehensive income for the Company consist of the unrealized gains and losses, net of taxes, in the Company’s available for sale securities portfolio and unrealized gains and losses, net of taxes, in the Company’s cash flow hedge instruments.

Accumulated other comprehensive income at December 31, 2005, 2004 and 2003 consists of the following:


		2005		2004		2003
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands)
Unrealized holding gains (losses) - investment securities
available for sale	$	(550)	$	391	$	571
Deferred income taxes		219		(157)		(229)
Net unrealized holding gains - investment securities
available for sale		(331)		234		342

Unrealized holding losses - cash flow hedge instruments		(716)		(426)		(56)
Deferred income taxes		287		170		22
Net unrealized holding losses - cash flow hedge
instruments		(429)		(256)		(34)

Total accumulated other comprehensive income (loss)	$	(760)	$	(22)	$	308

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Stock Compensation Plans

SFAS No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plans have no intrinsic value at the grant date and, under APB Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in APB No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied.


		2005		2004		2003
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands, except per share data)
Net income:
As reported	$	5,003	$	4,375	$	2,918
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects		(88)		(64)		(68)

Pro forma	$	4,915	$	4,311	$	2,850

Basic earnings per share:
As reported	$	1.15	$	1.03	$	0.70
Pro forma		1.14		1.02		0.68

Diluted earnings per share:
As reported	$	1.14	$	1.02	$	0.69
Pro forma		1.12		1.01		0.68

Net Income Per Common Share and Common Shares Outstanding

Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The weighted average number of shares outstanding during each period has been retroactively adjusted for a five for four stock split distributed November 25, 2005, October 29, 2004 and November 10, 2003. Potential common shares that may be issued by the Company relate solely to outstanding stock options.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Net Income Per Common Share and Common Shares Outstanding (Continued)

Basic and diluted net income per common share have been computed based upon net income as presented in the accompanying consolidated statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:


	2005	2004	2003

Weighted average number of common shares used in computing basic net income per common share	4,343,326	4,246,681	4,195,088

Effect of dilutive stock options	32,179	24,169	14,964

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share	4,375,505	4,270,850	4,210,052

There were no antidilutive shares outstanding for the years ended December 31, 2005, 2004 and 2003.

Derivative Instruments

The Company utilizes interest rate swaps in the management of interest rate risk. Interest rate swaps are contractual agreements between two parties to exchange a series of cash flows representing interest payments. A swap allows both parties to alter the repricing characteristics of assets or liabilities without affecting the underlying principal positions. Through the use of a swap, assets and liabilities may be transformed from fixed to floating rates, from floating rates to fixed rates, or from one type of floating rate to another. Swap terms generally range from one year to ten years depending on the need.

The net interest payable or receivable on interest rate swaps that are designated as hedges is accrued and recognized as an adjustment to the interest income or expense of the related asset or liability. Gains and losses from early terminations of derivatives are deferred and amortized as yield adjustments over the shorter of the remaining term of the hedged asset or liability or the remaining term of the derivative instrument. Upon disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any gains or losses are recognized in income. Unrealized holding gains and losses on derivatives designated as cash flow hedges are reported, net of applicable income tax effect, in accumulated other comprehensive income.

Derivative financial instruments that fail to qualify as a hedge are carried at fair value with gains and losses recognized in current earnings.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

New Accounting Standards

On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (“SAB 105”). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (“IRLC”), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on the Company’s consolidated financial statements.

In March 2004, the Emerging Issues Task Force (“EITF”) released EITF Issue 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (“Issue 03-01”). Issue 03-01 provides guidance for determining whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. The recognition and measurement guidance for other-than-temporary impairment has been delayed by the issuance of FASB Staff Position EITF 03-1-1 on September 30, 2004. The adoption of Issue 03-1 did not result in any other-than-temporary impairment of the Company’s investments.

In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03- 01”). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP EITF 03-1-b”) to delay the requirement to record impairment losses EITF 03-1. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. This FSP is to be applied to reporting periods beginning after December 15, 2005. The Company is in process of evaluating the impact of this FSP.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

New Accounting Standards (Continued)

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which contains guidance on applying the requirements in SFAS No. 123(r). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123(r) is adopted. The Company will adopt SAB 107 on January 1, 2006, and is currently evaluating the effect on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company will adopt SFAS No. 154 on January 1, 2006 with no expected material effect on its consolidated financial statements.

From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and amends SFAS No. 95 Statement of Cash Flows. SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first annual reporting period that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending March 31, 2006. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the fiscal years ended December 31, 2005, 2004 and 2003 would have decreased by approximately $88,000, $64,000, and $68,000, respectively. Accordingly, the adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE B - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

Reclassifications

Certain items included in the 2004 and 2003 consolidated financial statements have been reclassified to conform to the 2005 presentation. These reclassifications have no effect on the net income or shareholders’ equity previously reported.

NOTE C - INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available for sale as of December 31, 2005 and 2004 are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value


	(Amounts in thousands)
2005:
U.S. Government and agency securities	$	69,108	$	21	$	698	$	68,431
State and municipal securities		3,963		15		68		3,910
Mortgage-backed securities		7,003		3		102		6,904
Other		685		279		-		964
	$	80,759	$	318	$	868	$	80,209

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value


	(Amounts in thousands)
2004:
U.S. Government and agency securities	$	34,991	$	57	$	90	$	34,958
State and municipal securities		3,573		72		13		3,632
Mortgage-backed securities		12,759		53		37		12,775
Other		628		349		-		977
	$	51,951	$	531	$	140	$	52,342

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE C - INVESTMENT SECURITIES (Continued)

The following table shows gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2005 and 2004. As of December 31, 2005, the unrealized losses relate to thirty-five U.S. government agency securities, five mortgage-backed securities and twelve municipal securities. Four of the U.S. government agency securities and three of the municipal securities had continuous unrealized losses for more than twelve months. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.


	2005
	Less Than 12 Months				12 Months or More				Total

	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
(Amounts in thousands)
Securities available for sale:
U.S. government and
agency securities	$	50,622	$	546	$	7,840	$	152	$	58,462	$	698
State and municipal securities		2,810		53		626		15		3,436		68
Mortgage-backed securities		5,004		102		-		-		5,004		102

Total temporarily impaired
securities	$	58,436	$	701	$	8,466	$	167	$	66,902	$	868


	2004
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
(Amounts in thousands)
Securities available for sale:
U.S. government and
agency securities	$	18,892	$	90	$	-	$	-	$	18,892	$	90
State and municipal securities		1,968		13		-		-		1,968		13
Mortgage-backed securities		2,056		15		2,924		22		4,980		37

Total temporarily impaired
securities	$	22,916	$	118	$	2,924	$	22	$	25,840	$	140

The amortized cost and fair value of debt securities at December 31, 2005 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004


		Amortized Cost		Fair Value
	(Amounts in thousands)

Due within one year	$	1,000	$	1,000
Due after one year through five years		50,176		49,695
Due after five years through ten years		22,207		21,961
Due after ten years		7,376		7,553

	$	80,759	$	80,209

Securities with a carrying value of approximately $65.2 million and $33.4 million at December 31, 2005 and 2004, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Sales and calls of securities available for sale during 2005 and 2004 generated gross realized gains of $73,717 and $224,000, respectively. Gross realized losses amounted to $460,142 and $153,000, respectively.

NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans as of December 31, 2005 and 2004 are summarized as follows:


	2005		2004
	(Amounts in thousands)

Real estate - residential and other	$	177,995	$	159,152
Real estate - agricultural		11,650		15,203
Construction and land development		142,592		90,742
Other agricultural		3,729		4,020
Consumer loans		26,371		17,207
Commercial loans		34,166		26,005
Other loans		909		865
		397,412		313,194
Less:
Net deferred loan costs		(318)		(379)
Allowance for loan losses		(4,965)		(4,055)

	$	392,129	$	308,760

Nonperforming assets at December 31, 2005 and 2004 consist of the following:


	2005		2004
	(Amounts in thousands)

Loans past due ninety days or more	$	74		$	226
Nonaccrual loans		997			944
Foreclosed assets (included in other assets)		247			404

	$	1,318		$	1,574

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

During 2005, the Company revised its SFAS 114 methodology for reporting loans. At December 31, 2005, the recorded investment in loans considered impaired in accordance with SFAS No. 114 totaled $3.6 million. This amount consisted of both accrual and nonaccrual loans in the amount of $2.6 million and $1.0 million, respectively. At December 31, 2004, the investment in loans considered impaired amounted to $944,000, which consisted entirely of nonaccrual loans. Impaired loans of $3.6 million and $944,000 had related allowances for loan losses of $1.2 million and $151,000 at December 31, 2005 and 2004, respectively. For the years ended December 31, 2005 and 2004, the average recorded investment in impaired loans was approximately $3.5 million and $1.5 million, respectively. The amount of interest recognized on impaired loans during the portion of the year that they were impaired was not material.

A summary of the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 is as follows:


			2005			2004			2003
	(As Restated, See Note A)
	(Amounts in thousands)

Balance, beginning	$	4,055		$	3,430		$	2,860
Provision for loan losses		1,403			1,596			1,373
Loans charged-off		(696)			(1,346)			(1,137)
Recoveries of loans previously charged-off		203			375			334

Balance, ending	$	4,965		$	4,055		$	3,430

The Bank had loan and deposit relationships with most of its directors and executive officers and with companies with which certain directors and executive officers are associated. The following is a reconciliation of loans directly outstanding to executive officers, directors, and their affiliates (amounts in thousands):


Balance at December 31, 2004	$ 4,710
New loans	2,672
Principal repayments	(3,281)

Balance at December 31, 2005	$ 4,101

As a matter of policy, these loans and credit lines are approved by the Company’s Board of Directors and are made with interest rates, terms, and collateral requirements comparable to those required of other borrowers. In the opinion of management, these loans do not involve more than the normal risk of collectibility. At December 31, 2005, the Company had pre-approved but unused lines of credit totaling $1.6 million to executive officers, directors and their affiliates.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE E - BANK PREMISES AND EQUIPMENT

Bank premises and equipment at December 31, 2005 and 2004 are as follows:


	2005			2004
	(Amounts in thousands)

Land	$		2,237	$	2,237
Building			7,183		7,042
Furniture and equipment			7,369		6,952
			16,789		16,231
Less accumulated depreciation			(7,106)		(6,082)

	$	9,683		$	10, 149

Depreciation expense for the years ended December 31, 2005 and 2004 amounted to $1.0 million and $994,000, respectively.

NOTE F - DEPOSITS

At December 31, 2005, the scheduled maturities of time deposits are as follows (amounts in thousands):


	Less than $100,000		$100,000 or more		Total

Within one year	$	66,342	$	83,018	$	149,360
Over one year through three years		16,006		33,102		49,108
Over three years		1,852		25,877		27,729

	$	84,200	$	141,997	$	226,197

NOTE G - BORROWINGS

At December 31, 2005 and 2004, borrowed funds consisted of the following FHLB advances (amounts in thousands):


Maturity	Interest Rate		2005		2004

March 2006	4.52% - Variable	$	10,000	$	10,000
July 2006	5.75% - Fixed		10,000		10,000
July 2011	4.44% - Fixed		5,000		5,000
September 2011	4.38% - Fixed		3,000		3,000
October 2011	4.30% - Fixed		7,000		7,000
November 2011	4.56% - Variable		8,000		8,000
August 2015	3.77% - Fixed		10,000		-
October 2015	3.73% - Fixed		10,000		-

		$	63,000	$	43,000

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

The above advances are secured by a floating lien covering the Company’s loan portfolio of qualifying residential (1-4 units) first mortgage loans. At December 31, 2005, the Company has available lines of credit totaling $104.5 million with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at December 31, 2005 and 2004 were 4.44% and 3.86%, respectively. In addition to the above advances, the Company has short-term FHLB advances of $480,000 outstanding as of December 31, 2005.

In addition to the above advances, the Company has lines of credit of $32.7 million from various financial institutions to purchase federal funds on a short-term basis. The Company has $10.5 million outstanding as of December 31, 2005. The Company did not have any federal funds as of December 31, 2004.

At December 31, 2005 and 2004, the Company was obligated under an outstanding promissory note for $160,000 for the purchase of property. The note calls for set monthly interest only payments, with a balloon payment at maturity on June 2006. The note bears interest at 7.50%.

NOTE H - INCOME TAXES

Allocation of income tax expense between current and deferred portions is as follows:


	Years Ended December 31,
	2005		2004		2003
	(As Restated, See Note A)
	(Amounts in thousands)

Current tax expense:
Federal	$	2,947	$	2,086	$	1,470
State		463		410		271
		3,410		2,496		1,741
Deferred tax expense:
Federal		(559)		(161)		(106)
State		(113)		(27)		(23)
		(672)		(188)		(129)

	$	2,738	$	2,308	$	1,612

The reconciliation of expected income tax at the statutory federal rate of 34% with income tax expense is as follows:

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004


	Years Ended December 31,
	2005		2004		2003
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands)

Expense computed at statutory rate of 34%	$	2,631	$	2,272	$	1,540
Effect of state income taxes, net of federal benefit		232		304		164
Tax exempt income		(36)		(101)		(123)
Bank owned life insurance income		(102)		(152)		(61)
Other, net		13		(15)		92

	$	2,738	$	2,308	$	1, 612

Deferred income taxes consist of the following:
	Years Ended December 31,
	2005		2004		2003
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands)
Deferred tax assets:
Allowance for loan losses	$	1,870	$	1,518	$	1,277
Unamortized investment premiums		5		49		44
Net deferred loan fees		123		146		66
Derivatives		217		-		-
Other		47		38		31
Total deferred tax assets		2,262		1,751		1,418

Deferred tax liabilities:
Property and equipment		718		857		818
Other comprehensive income		(506)		(13)		207
Prepaid expense		81		93		-
Unaccreted investment discounts		3		13		-
Total deferred tax liabilities		296		950		1,025

Net deferred tax assets	$	1,966	$	801	$	393

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE I - REGULATORY RESTRICTIONS

The Bank, as a North Carolina banking corporation, may pay dividends to the Company only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure the financial soundness of the bank.

Current Federal regulations require that the Bank maintain a minimum ratio of total capital to risk weighted assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined in the regulations. In addition, the Bank must maintain a leverage ratio of 4%. As of December 31, 2005, the Bank’s capital exceeded the current capital requirements. The Bank currently expects to continue to exceed these minimums without altering current operations or strategy.

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as set forth in the table below. Management believes, as of December 31, 2005, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios are also presented in the table below (amounts in thousands, except ratios):


							Minimum To Be Well
				Minimum			Capitalized Under
				For Capital			Prompt Corrective
	Actual			Adequacy Purposes			Action Provisions

		Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2005:
(As Restated, See Note A)
Total Capital (to Risk Weighted Assets)	$	42,682	10.4%	$	33,837	8.0%	$	41,046	10.0%
Tier I Capital (to Risk Weighted Assets)		37,717	9.2%		16,418	4.0%		24,628	6.0%
Tier I Capital (to Average Assets)		37,717	7.7%		19,694	4.0%		24,617	5.0%

As of December 31, 2004:
Total Capital (to Risk Weighted Assets)	$	37,642	11.8%	$	25,427	8.0%	$	31,784	10.0%
Tier I Capital (to Risk Weighted Assets)		33,668	10.6%		12,714	4.0%		19,071	6.0%
Tier I Capital (to Average Assets)		33,668	8.6%		15,605	4.0%		19,506	5.0%

The Company is also subject to these capital requirements. At December 31, 2005 and 2004, the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 11.5% and 13.0%, 10.3% and 11.7%, and 8.6% and 9.5%, respectively.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE J - DERIVATIVES

Derivative Financial Instruments

The Company has stand-alone derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected on the Company’s consolidated balance sheets as derivative assets and derivative liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.

Derivative instruments are generally either negotiated over-the-counter (“OTC”) contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreements terms, including the underlying instruments, amount, exercise prices and maturity.

Risk Management Policies - Hedging Instruments

The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the measurement period. Based upon the outcome of the simulation analysis, the Company considers the use of derivatives as a means of reducing the volatility of net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.

Interest Rate Risk Management - Cash Flow Hedging Instruments

The Company originates variable rate loans for its loan portfolio. These loans expose the Company to variability in cash flows, primarily from interest receipts due to changes to interest rates. If interest rates increase, interest income increases. Conversely, if interest rates decrease, interest income decreases. Management believes it is prudent to limit the variability of a portion of its cash flows on variable rate loans therefore, generally hedges a portion of its variable-rate receipts. To meet this objective, management enters into interest rate swap agreements whereby the Company receives fixed rate payments and makes variable rate payments during the contract period.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE J – DERIVATIVES (Continued)

At December 31, 2005 and 2004, the information pertaining to an outstanding interest rate swap agreement used to hedge variable rate loans is as follows (amounts in thousands):


	2005		2004

Notional amount	$	25,000	$	25,000
Weighted average pay rate		6.09 %		4.38 %
Weighted average receive rate		5.85 %		5.85 %
Weighted average maturity in years		1.7		2.7
Unrealized loss relating to interest rate swaps	$	(716)	$	(426)

This agreement requires the Company to make payments at a variable rate determined by a specified index (prime) in exchange for receiving payments at a fixed rate.

At December 31, 2005 and 2004, the Company’s interest rate swaps used to hedge variable rate loans reflected an unrealized loss of $716,000 and $426,000, respectively. The unrealized losses are included in other comprehensive income, net of tax, in the accompanying consolidated balance sheet.

Risk management results for the year ended December 31, 2005 related to the balance sheet hedging of variable rate loans indicate that the hedges were 100% effective and that there was no component of the derivative instruments’ gain or loss which was excluded from the assessment of hedge effectiveness.

At December 31, 2005, the unrealized loss relating to use of interest rate swaps was recorded in derivative liabilities in accordance with SFAS No. 133. Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with variable rate loans are reported in other comprehensive income.

Interest Rate Risk Management - Fair Value Hedging Instruments

The Company uses fixed rate time deposits for use in its lending and investment activities and other general purposes. These debt obligations expose the Company to variability in their fair value due to changes in the level of interest rates. Management believes that it is prudent to limit the variability in the fair value of a portion of its fixed-rate funding. It is the Company’s objective to hedge the change in fair value of fixed-rate funding coverage levels that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this liability to other liabilities of the Company.

At December 31, 2005, the Company had interest rate swap agreements related to fixed-rate obligations that provide for the Company to pay floating interest payments and receive fixed interest payments, one of which had been designated as a fair value hedge under SFAS No. 133, others of which were not designated as fair value hedges. The gains (losses) from such interest rate swaps that were not designated as accounting hedges are recognized in non-interest income in the line item losses on hedges.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE J - DERIVATIVES (Continued)

At December 31, 2005 and 2004, the information pertaining to outstanding interest rate swap agreements is as follows (amounts in thousands):


	2005		2004


Notional amount	$	38,711	$	26,000
Weighted average pay rate		4.28%		2.30%
Weighted average receive rate		3.73%		3.66%
Weighted average maturity in years		5.4		5.6
Unrealized gain (loss) relating to interest rate swaps	$	(1,049)	$	213

These agreements require the Company to make payments at variable-rate determined by a specified index (LIBOR) in exchange for receiving payments at a fixed-rate.

No interest rate swaps were terminated during 2005 or 2004. During 2004, an interest rate swap was called at par, with no corresponding gain or loss recognized. At December 31, 2005, the Company’s interest rate swap to hedge fixed rate funding reflected an unrealized loss of $240,000. At December 31, 2005, the Company’s interest rate swaps not designated as a fair value hedge reflected a realized loss of $397,000. The above interest rate swaps are recorded in other liabilities in the accompanying balance sheet.

NOTE K - COMMITMENTS AND CONTINGENCIES

The Bank is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.

Stand-by letters of credit are conditional lending commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE K - COMMITMENTS AND CONTINGENCIES (continued)

A summary of the contract amount of the Bank’s exposure to off-balance sheet credit risk as of
December 31, 2005 is as follows (amounts in thousands):


Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	71,884
Undisbursed lines of credit		25,299
Financial stand-by letters of credit		366
Performance stand-by letters of credit		4,430

NOTE L - STOCK OPTION PLAN

The Company has a non-qualified stock option plan for certain key employees under which it is authorized to issue options for up to 976,563 shares of common stock. Options are granted at the discretion of the Company’s Board of Directors at a price approximating market, as determined by a committee of Board members. All options granted subsequent to a 1997 amendment will be 100% vested one year from the grant date and will expire after such a period as is determined by the Board at the time of grant. Options granted prior to the amendment have ten year lives and a five year level vesting provision.

A summary of the status of the Company’s stock options, after giving retroactive effect to stock splits, as of December 31, 2005, 2004 and 2003, and changes during the years ending on those dates is presented below:


	Options	Option Price
	Outstanding	Per Share

Balance December 31, 2002	166,287	$5.91 – 10.58

Granted	56,349	$11.52
Exercised	(30,570)	$9.90
Forfeited	-	-
Expired	(191)	$9.90

Balance December 31, 2003	191,875	$5.91 – 11.26

Granted	42,344	$14.08
Exercised	(77,328)	$10.49
Forfeited	(1)	$10.24
Expired	(9)	$10.58


Balance December 31, 2004	156,881	$5.91 – 11.26

Granted	38,875	$18.20
Exercised	(40,844)	$10.69
Forfeited	(3,321)	$12.72
Expired	(599)	$10.24

Balance December 31, 2005	150,992	$13.45

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE L - STOCK OPTION PLAN (Continued)

The weighted average exercise price of all exercisable options at December 31, 2005 is $11.81. There were 368,244 shares reserved for future issuance at December 31, 2005.

Additional information concerning the Company’s stock options at December 31, 2005 is as follows:


Exercise Price	Number Outstanding	Remaining Contractual Life	Number Exercisable

$ 5.92	6,592	1.19 years	6,592
$10.24	23,413	.15 years	23,413
$11.52	43,362	1.16 years	43,362
$14.08	38,750	2.15 years	38,750
$18.20	38,875	3.15 years	-

	150,992		112,117

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2005, 2004 and 2003:


	2005	2004	2003

Dividend yield	1.84%	2.06%	1.69%
Expected volatility	24.31%	21.92%	21.65%
Risk free interest rate	3.75%	3.00%	2.82%
Expected life	4 years	4 years	4 years

The weighted average fair value of options granted during 2005, 2004 and 2003 was $3.79, $2.46, and $2.57, respectively.

NOTE M - OTHER EMPLOYEE BENEFITS

Supplemental Retirement

In 1998, the Company’s subsidiary, Four Oaks Bank & Trust Company, adopted a Supplemental Executive Retirement Plan (“SERP”) for its president. The Company has purchased life insurance policies in order to provide future funding of benefit payments. Plan benefits will accrue and vest during the period of employment and will be paid in annual benefit payments over the officer’s remaining life commencing with the officer’s retirement. The liability accrued under the plan amounts to $122,000 and $99,000 at December 31, 2005 and 2004, respectively. During 2005, 2004 and 2003, the expense attributable to this plan amounted to $23,000, $20,000 and $18,000, respectively.

Employment Agreements

The Company has entered into employment agreements with certain of its executive officers to ensure a stable and competent management base. The agreements provide for benefits as spelled out in the contracts and cannot be terminated by the Company’s Board of Directors, except for cause, without prejudicing the officers’ rights to receive certain vested rights, including compensation. In addition, the Company has entered into severance compensation agreements with certain of its executive officers to provide them with severance pay

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE M - OTHER EMPLOYEE BENEFITS (Continued)

benefits in the event of a change in control of the Company, as outlined in the agreements, the acquirer will be bound to the terms of the contracts.

Defined Contribution Plan

The Company sponsors a contributory profit-sharing plan in effect for substantially all employees. Participants may make voluntary contributions resulting in salary deferrals in accordance with Section 401(k) of the Internal Revenue Code. The plans provide for employee contributions up to $14,000 of the participant's annual salary and an employer contribution of 25% matching of the first 6% of pre-tax salary contributed by each participant. Expenses related to these plans for the years ended December 31, 2005, 2004 and 2003 were $79,000, $47,000 and $56,000, respectively. Contributions under the plan are made at the discretion of the Company’s Board of Directors.

Employee Stock Ownership Plan

The Company sponsors an employee stock ownership plan (ESOP) which makes the employees of a company, owners of stock in the company. The Four Oaks Bank & Trust Company’s Employee Stock Ownership Trust is available to full-time employees at least 21 years of age after six months of service. Contributions are voluntary by the Company and employees cannot contribute. Stock issued is purchased on the open market and the Company does not issue new shares in conjunction with this plan. Voluntary contributions are determined by the Company’s Board of Directors annually based on Company performance and are allocated to employees based on annual compensation. Contribution expenses for this plan for 2005, 2004, and 2003 were $223,000, $180,000, and $189,000, respectively.

Employee Stock Purchase and Bonus Plan

The Employee Stock Purchase and Bonus Plan (the “Purchase Plan”) is a voluntary plan that enables full-time employees of the Company and its subsidiaries to purchase shares of the Company’s common stock. The Purchase Plan is administered by a committee of the Board of Directors, which has broad discretionary authority to administer the Purchase Plan. The Company’s Board of Directors may amend or terminate the Purchase Plan at any time. The Purchase Plan is not intended to be qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended.

Once a year, participants in the Purchase Plan purchase the Company’s common stock at fair market value. Participants are permitted to purchase shares under the Purchase Plan up to (5%) of their compensation, with a maximum purchase amount of $1,000 per year. The Company matches, in cash, fifty percent (50%) of the amount of each participant’s purchase, up to $500. After withholding for income and employment taxes, participants use the balance of the Company’s matching grant to purchase shares of the Company’s common stock.

As of December 31, 2005, 195,312 shares of the Company’s common stock had been reserved for issuance under the Purchase Plan, and 113,490 shares had been purchased. During 2005, 6,872 shares were purchased under the Purchase Plan.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE N - LEASES

The Bank has entered into non-cancelable operating leases for three branch facilities. Future minimum lease payments under the leases for future years are as follows (amounts in thousands):


2006	$ 62
2007	37
2008	16
2009	7
2010	-
	$ 122

In addition, the Bank has leased a building from one of its directors for $938 and $908 per month in 2005 and 2004, respectively under an operating lease on a month-to-month basis.

Total rental expense under operating leases for the years ended December 31, 2005, 2004 and 2003 amounted to $57,000 and $45,000 and $31,000, respectively.

NOTE O - PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Four Oaks Fincorp, Inc., the parent company, at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 is presented below:


	2005		2004
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands)
Condensed Balance Sheets

Assets:
Cash and cash equivalents	$	3,940	$	3,074
Equity investment in subsidiaries		37,116		33,665
Securities available for sale		668		695
Total assets	$	41,724	$	37,434

Liabilities and Shareholders’ Equity:
Liabilities:
Other liabilities	$	112	$	139

Shareholders' equity		41,612		37,295

Total liabilities and shareholders’ equity	$	41,724	$	37,434

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE O - PARENT COMPANY FINANCIAL INFORMATION (Continued)


	2005		2004		2003
	(As Restated, See Note A)
	(As Restated, See Note A)
	(Amounts in thousands)
Condensed Statements of Operations
Equity in earnings of subsidiaries	$	4,972	$	4,361	$	2,897
Interest income		81		30		22
Other investment income		17		15		17
Miscellaneous expenses		(67)		(31)		(18)

Net income	$	5,003	$	4,375	$	2,918


		2005		2004		2003

Condensed Statements of Cash Flows	(Amounts in thousands)

Operating activities:
Net income	$	5,003	$	4,375	$	2,918
Equity in undistributed earnings of subsidiaries		(4,972)		(4,361)		(2,897)
Cash flows provided by operating activities		31		14		21

Investing activities:
Purchase of securities available for sale		(53)		(14)		(16)
Upstream dividend received from subsidiary		937		1,089		1,166
Cash flows provided by investing activities		884		1,075		1,150

Financing activities:
Proceeds from issuance of common stock		1,230		1,430		879
Purchases and retirements of common stock		-		(65)		(993)
Dividends paid		(1,279)		(1,089)		(960)
Cash flows used by financing activities		(49)		276		(1,074)

Net increase in cash and cash equivalents		866		1,365		97

Cash and cash equivalents, beginning of year		3,074		1,709		1,612

Cash and cash equivalents, end of year	$	3,940	$	3,074	$	1,709

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of estimated fair values for financial instruments. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instruments’ values and should not be considered an indication of the fair value of the Company taken as a whole. The following methods and assumptions were used to estimate the fair value of each class of financial instrument.

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents are equal to the fair value due to the liquid nature of the financial instruments.

Investment Securities Available for Sale

Fair values of investment securities available for sale are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

Fair values have been estimated by type of loan: residential real estate loans, consumer loans, and commercial and other loans. For variable-rate loans that reprice frequently and with no significant credit risk, fair values are based on carrying values. The fair values of fixed rate loans are estimated by discounting the future cash flows using the current rates at which loans with similar terms would be made to borrowers with similar credit ratings and for the same remaining maturities. The Company has assigned no fair value to off-balance sheet financial instruments since they are either short term in nature or subject to immediate repricing.

FHLB Stock

The carrying amount of FHLB stock approximates fair value.

Investment in Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at year-end. Fair value of time deposits is estimated by discounting the future cash flows using the current rate offered for similar deposits with the same maturities.

Borrowings

The fair values are based on discounting expected cash flows at the interest rate for debt with the same or similar remaining maturities and collection requirements.

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair value.

Derivative Financial Instruments

Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.

The following table presents information for financial assets and liabilities as of December 31, 2005 and 2004 (amounts in thousands):


	2005				2004
	Carrying Value			Estimated Fair Value	Carrying Value		Estimated Fair Value
	Carrying Value			Estimated Fair Value	Carrying Value		Estimated Fair Value
	(As Restated, See Note A)
Financial assets:
Cash and cash equivalents	$	22,915	$	22,915	$	14,249	$	14,249
Securities available for sale		80,209		80,209		52,342		52,342
Loans, net		392,129		388,515		308,760		308,713
FHLB stock		3,655		3,655		2,621		2,621
Investment in life insurance		7,875		7,875		6,054		6,054
Accrued interest receivable		2,950		2,950		2,210		2,210

Financial liabilities:
Deposits	$	398,341	$	375,517	$	315,307	$	309,801
Borrowings		74,140		73,651		43,160		41,651
Accrued interest payable		2,255		2,255		1,201		1,201

Derivative financial instruments:
Interest rate swap agreements:
Liabilities, net loss	$	1,765	$	1,765	$	213	$	213

Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004

NOTE Q - CASH FLOW SUPPLEMENTAL DISCLOSURES

The following information is supplemental information regarding the cash flows for the years ended

December 31, 2005, 2004 and 2003:


	2005		2004		2003
	(Amounts in thousands)
Cash paid for:
Interest on deposits and borrowings	$	10,871	$	5,895	$	4,365
Income taxes		3,684		2,192		1,637

Summary of noncash investing and financing activities:
Transfer from loans to foreclosed assets		431		1,214		167
Loans to facilitate the sale of foreclosed assets		-		393		111
Tax benefit from the exercise of non-qualified stock options
Stock option		101		94		18

Decrease in fair value of securities available for sale, net of tax		(565)		(108)		(141)
Decrease in fair value of cash flow hedge, net of tax		(173)		(222)		(34)

NOTE R - STOCK PURCHASE PLAN

On December 10, 2001, the Company’s Board of Directors approved a Stock Purchase Program authorizing the Company to purchase up to 100,000 shares, or approximately 4.7% of the then outstanding shares of common stock. During 2004, the Company purchased 2,800 shares at an average cost of $23.25 per share. The 2004 purchase amount does not reflect the five-for-four stock split during 2004 to shareholders of record as of October 15, 2004, payable on or after October 29, 2004 nor the five-for-four stock split to shareholders of record as of November 9, 2005, payable on or after November 25, 2005. Effective December 31, 2005, the Company’s Board of Directors extended this stock purchase plan until December 31, 2006.

Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not Applicable.

Item 9A - Controls and Procedures.

As required by paragraph (b) of Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective, in that they provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the United States Securities and Exchange Commission’s rules and forms.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of fiscal 2005 that we believe have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B – Other Information.

Not Applicable.

PART III

This Part incorporates certain information from the definitive proxy statement (the “2006 Proxy Statement”) for the Company’s 2006 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after the end of the Company’s fiscal year.

Item 10 – Directors and Executive Officers of the Registrant.

Director information is incorporated by reference from the sections entitled “Information about Our Board of Directors,” “Election of Directors,” and under the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance,” in the 2006 Proxy Statement. Information on our executive officers is included under the caption “Our Executive Officers” on Page 9 of this report. Information about our Code of Ethics is incorporated by reference from the section entitled “Code of Ethics,” in the 2006 Proxy Statement.

Item 11 - Executive Compensation.

This information is incorporated by reference from the sections entitled “Executive Compensation,” “Board Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Comparison of Cumulative Total Return” in the 2006 Proxy Statement.

Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

This information is incorporated by reference from the section entitled “Security Ownership of Management and Certain Beneficial Owners” and the sections entitled “Equity Compensation Plan Information,” “Nonqualified Stock Option Plan” and “Employee Stock Purchase and Bonus Plan” in the 2006 Proxy Statement.

Item 13 - Certain Relationships and Related Transactions.

This information is incorporated by reference from the section entitled “Certain Transactions” in the 2006 Proxy Statement.

Item 14 - Principal Accountant Fees and Services

Information regarding principal accountant fees and services is incorporated by reference from the section entitled “Audit Firm Fee Summary” in the 2006 Proxy Statement.

PART IV

Item 15 – Exhibits, Financial Statement Schedules.

(a)(1)

Financial Statements. The following financial statements and supplementary data are included in Item 8 of this Annual Report on Form 10-K/A.


*Financial Statements*	Form 10-K/A Page
Report of Independent Registered Public Accounting Firm, Dixon Hughes PLLC	34
Consolidated Balance Sheets as of December 31, 2005 and 2004	35
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003	36
Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004 and 2003	37
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003	38
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003	39
Notes to Consolidated Financial Statements	40

(a)(2)

Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to Consolidated Financial Statements.

(a)(3)

Exhibits. The following exhibits are filed as part of this Annual Report on Form 10-K/A.


Exhibit No.	Description of Exhibit
3.1	Articles of Incorporation of Four Oaks Fincorp, Inc. including Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004)
3.2	Bylaws of Four Oaks Fincorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997)
4	Specimen of Certificate for Four Oaks Fincorp, Common Stock (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997)
10.1	Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1997) (management contract or compensatory plan, contract or arrangement)
10.2	Severance Compensation Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1997) (management contract or compensatory plan, contract or arrangement)
10.3	Amended and Restated Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement)
10.4	Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement)
10.5	Amended and Restated Dividend Reinvestment and Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 29, 2004) (management contract or compensatory plan, contract or arrangement)
10.6	Four Oaks Bank & Trust Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998) (management contract or compensatory plan, contract or arrangement)
10.7	Employment Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001) (management contract or compensatory plan, contract or arrangement)
10.8	Severance Compensation Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2002) (management contract or compensatory plan, contract or arrangement)
10.9	Executive Employment Agreement with W. Leon Hiatt, III (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.10	Severance Compensation Agreement with W. Leon Hiatt, III (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.11	Executive Employment Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.12	Severance Compensation Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.13	Form of Stock Option Agreement (Non-Employee Director) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 1, 2005) (management contract or compensatory plan, contract or arrangement)
10.14	Form of Stock Option Agreement (Employee) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 1, 2005) (management contract or compensatory plan, contract or arrangement)
10.15	Executive Employment Agreement with Jeff D. Pope (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004) (management contract or compensatory plan, contract or arrangement)
10.16	Severance Compensation Agreement with Jeff D. Pope (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004) (management contract or compensatory plan, contract or arrangement)
10.17	Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 25, 2006) (management contract or compensatory plan, contract or arrangement)


21^**	Subsidiaries of Four Oaks Fincorp, Inc.
23^**	Consent of Dixon Hughes PLLC
23.1	Consent of Dixon Hughes PLLC
31.1^**	Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2^**	Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1^**	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.2^**	Certification of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]



^** Previously filed with the Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities Exchange Commission on March 30, 2006.


32.3	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.4	Certification of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]

(b) See (a)(3) above.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FOUR OAKS FINCORP, INC.

Date: September 21, 2006 By:

/s/ Ayden R. Lee, Jr.

Ayden R. Lee, Jr.

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: September 21, 2006

/s/ Ayden R. Lee, Jr.

Ayden R. Lee, Jr.

President, Chief Executive Officer

and Director

Date: September 21, 2006

/s/ Nancy S. Wise

Nancy S. Wise

Executive Vice President and

Chief Financial Officer

Date: September 21, 2006

/s/ Rebekah J. Whaley

Rebekah J. Whaley

Senior Vice President and Controller

Date: September 21, 2006

/s/ William J Edwards

William J. Edwards

Director

Date: September 21, 2006

/s/ Warren L. Grimes

Warren L. Grimes

Director

Date: September 21, 2006

/s/ Dr. R. Max Raynor, Jr.

Dr. R. Max Raynor, Jr.

Director

Date: September 21, 2006

/s/ Percy Y. Lee

Percy Y. Lee

Director

Date: September 21, 2006

/s/ Merwin S. Canaday

Merwin S. Canaday

Director

Date: September 21, 2006

/s/ Paula C. Bowan

Paula C. Bowman

Director

Date: September 21, 2006

/s/ William Ashley Turner

William Ashley Turner

Director

Date: September 21, 2006

/s/ Michael A. Weeks

Michael A. Weeks

Director

EXHIBIT INDEX


Exhibit No.	Description of Exhibit
3.1	Articles of Incorporation of Four Oaks Fincorp, Inc. including Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004)
3.2	Bylaws of Four Oaks Fincorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997)
4	Specimen of Certificate for Four Oaks Fincorp, Common Stock (incorporated by reference to Exhibit 4 to the Company’s Current Report on Form 8-K12G3 filed with the SEC on July 2, 1997)
10.1	Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1997) (management contract or compensatory plan, contract or arrangement)
10.2	Severance Compensation Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1997) (management contract or compensatory plan, contract or arrangement)
10.3	Amended and Restated Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement)
10.4	Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004) (management contract or compensatory plan, contract or arrangement)
10.5	Amended and Restated Dividend Reinvestment and Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 29, 2004) (management contract or compensatory plan, contract or arrangement)
10.6	Four Oaks Bank & Trust Company Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998) (management contract or compensatory plan, contract or arrangement)
10.7	Employment Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001) (management contract or compensatory plan, contract or arrangement)
10.8	Severance Compensation Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2002) (management contract or compensatory plan, contract or arrangement)
10.9	Executive Employment Agreement with W. Leon Hiatt, III (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.10	Severance Compensation Agreement with W. Leon Hiatt, III (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.11	Executive Employment Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.12	Severance Compensation Agreement with Nancy S. Wise (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2003) (management contract or compensatory plan, contract or arrangement)
10.13	Form of Stock Option Agreement (Non-Employee Director) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 1, 2005) (management contract or compensatory plan, contract or arrangement)
10.14	Form of Stock Option Agreement (Employee) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 1, 2005) (management contract or compensatory plan, contract or arrangement)
10.15	Executive Employment Agreement with Jeff D. Pope (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004) (management contract or compensatory plan, contract or arrangement)
10.16	Severance Compensation Agreement with Jeff D. Pope (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004) (management contract or compensatory plan, contract or arrangement)


10.17	Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 25, 2006) (management contract or compensatory plan, contract or arrangement)
21	Subsidiaries of Four Oaks Fincorp, Inc.
23	Consent of Dixon Hughes PLLC
23.1	Consent of Dixon Hughes PLLC
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3	Certification of Chief Executive Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.4	Certification of Chief Financial Officer Pursuant to Rule 13a-14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.2	Certification of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.3	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]
32.4	Certification of Chief Financial Officer to Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that Act, be deemed to be incorporated by reference into any document or filed herewith for the purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]



Previously filed with the Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities Exchange Commission on March 30, 2006.