10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

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	(IRS Employer Identification
incorporation or organization)	Number)
6114 U.S. 301 South
Four Oaks, North Carolina	27524
(Address of principal executive offices)	(Zip Code)

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

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 o 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 o 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:

YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

YES x NO o

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.  o

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

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Large accelerated filer  o	Accelerated filer  o
Non-accelerated filer  o  (Do not check if a smaller reporting company)	Smaller reporting company  x

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

$14,283,592

(Aggregate market 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, 2012)

7,843,272

(Number of shares of Common Stock, par value $1.00 per share, outstanding as of March 19, 2013)

Documents Incorporated by Reference		Where Incorporated
(1)	Proxy Statement for the 2013 Annual Meeting of Shareholders to be held June 3, 2013	Part III

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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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements represent our judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, 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, our ability to comply with the Written Agreement (the “Written Agreement”) we entered with the Federal Reserve Bank of Richmond (the “FRB”) and the North Carolina Office of the Commissioner of Banks (the “NCCOB”) in May 2011, 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, our ability to raise capital and continue as a going concern, the failure of assumptions underlying the establishment of the allowance for possible loan losses, our ability to maintain an effective internal control environment, the low trading volume of our common stock and the risks discussed in Item 1A. Risk Factors below.

Any forward looking statements contained in this Annual Report on Form 10-K are as of the date hereof and we undertake no duty to update them if our view changes later, except as required by law. These forward looking statements should not be relied upon as representing our view as of any date subsequent to the date hereof.

PART I

Item 1 - Business.

Overview

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. Our corporate offices and banking offices are located in eastern and central North Carolina. We have no significant assets other than cash, the capital stock of the bank and its membership interest in Four Oaks Mortgage Services, L.L.C.(inactive), as well as $1,186,000 in securities available for sale.

In addition, we have an interest in Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing trust preferred securities.  The Trust is not included in the consolidated financial statements of the Company.

The bank continues to remain a community-focused bank engaging in general commercial banking business to the communities we serve. The bank provides a full range of banking services, including such services as:

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Deposit Accounts	Loan Products	Wealth Management	Bank Access Services	Merchant Services	Other Services
üChecking	üMortgage	üFinancial Planning Services	üInternet Banking	üRemote Deposit Capture	üCashier's Checks
üSavings	üEquity Line of Credit	üWealth Management Services	üTelephone Banking	üATM Cards	üTraveler's Check Cards
ü Free Checking & Savings Program	üAgriculture	üInvestment Services	üMobile Banking	üVISA Debit Cards	üGift Cards
ü Money Market	üCommercial/ Business	üIndividual Retirement Account (IRA)	üAutomated Teller Machines (ATMs)	üAutomated Clearing House (ACH) Origination	üFree Notary Services to all bank customers
ü Certificates of Deposit (CD)	üReal Estate	üLife Insurance	üNight Depository		üBill Pay Service
ü  Christmas Club	üHome Improvement	üLong Term Care			üElectronic Funds Transfer (EFT) Services
ü Overdraft Privilege	üConstruction	üAnnuities			üWire Services
ü E-Statements	üConsumer				üSafe Deposit Box
	üCredit Cards

The wealth management services listed above are made available through an arrangement with Lincoln Financial Services Corporation acting as a registered broker-dealer performing the brokerage services. The securities involved in these services are not deposits or other obligations of the bank and are not insured by the Federal Deposit Insurance Corporation (“FDIC”).

Our market area is concentrated in eastern and central North Carolina.  From its headquarters located in Four Oaks and its thirteen locations, the bank serves a major portion of Johnston County, and parts of Wake, Harnett, Duplin, Sampson, Moore and Richmond counties. 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 a branch office 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 Raleigh at 1408 Garner Station Boulevard, 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 201 West Center Street, one in Harrells at 590 Tomahawk Highway, one in Zebulon at 805 North Arendell Avenue, and one in Dunn at 604-A Erwin Road. 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. Harnett County is contiguous to Cumberland, Moore, Lee, Chatham, Wake, Johnston and Sampson counties.

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 2011 was estimated in excess of 170,000.  As of June 2012, the bank had the largest percentage of deposit market share for Johnston County. The majority of the bank’s customers are individuals and small to medium-size businesses. 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.

On August 17, 2009, we entered into a joint venture with PrimeLending to provide mortgage lending services. Through this partnership, Four Oaks Mortgage Services, L.L.C., we offered a competitive product line of secondary market-type mortgages. On September 30, 2012, the partnership with PrimeLending terminated. The Bank began underwriting residential mortgages under Four Oaks Mortgage Company, a division of Four Oaks Bank & Trust Company, upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. Four Oaks Mortgage Services, LLC., is currently inactive.

The following table sets forth certain of our financial data and ratios for the years ended December 31, 2012 and 2011 derived from our audited financial statements and notes. 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:

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	2012			2011
	(In thousands, except ratios)
Net loss	$	(6,969	)	$	(9,090	)
Average equity capital accounts	$	30,471		$	35,964
Ratio of net loss to average equity capital accounts	(22.87		)%	(25.28		)%
Average daily total deposits	$	731,873		$	762,575
Ratio of net loss to average daily total deposits	(0.95		)%	(1.19		)%
Average daily loans	$	560,245		$	651,944
Ratio of average daily loans to average daily total deposits	76.55		%	85.49		%

Employees

At December 31, 2012, the bank employed 192 full time employees and 13 part time 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.

Competition

Commercial banking in North Carolina is extremely competitive due in large part to North Carolina’s early adoption of 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 2012 we operated branches in Johnston, Wake, Sampson, Duplin, Harnett, Moore and Richmond counties, North Carolina. At that time in Johnston County, North Carolina, the bank’s primary market, there were a total of 43 branches represented by the top thirteen financial institutions in the county which happened to be all commercial banks. The bank ranked first among the thirteen banks with approximately $457 million or 30.71% of the Johnston County deposit market 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” 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 such as; a strong local brand, its affiliation with the community, and its emphasis on providing specialized services to small and medium-sized businesses as well as professional and upper-income individuals. The bank offers its customers modern, high-tech banking without forsaking community values such as prompt, friendly, and personalized services. Being responsive and sensitive to individualized needs helps the bank to attract and retain customers.  To continue attracting new customers, the bank also relies on goodwill and referrals from our shareholders and satisfied customers, as well as traditional media.  To enhance a positive image in the community and support one of the bank's values, we participate in local events, and our officers and directors serve on boards of local civic and charitable organizations.

Supervision and 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 are 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.

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Holding Company Regulation

Overview

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 FRB 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.

Effective December 2, 2009, we have elected to become a bank holding company, and therefore we are not subject to the financial holding company regulatory framework under the Gramm-Leach-Bliley Act (“GLBA”).  However, the additional customer privacy protections introduced by the GLBA do apply to us and the bank. The GLBA’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 GLBA’s rulemaking provisions, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, 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 years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the U.S. and no more than 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.

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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 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 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 well 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, 2012, the Company had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 5.9%, 10.2% and 3.3%, respectively.

Dividends

During 2012, we paid no cash dividends on our common stock. Under the terms of the Written Agreement, neither the Company nor the bank may pay cash dividends on common stock without the prior approval of the FRB. In general, our ability to pay cash dividends is dependent in part upon the amount of dividends paid to us by the bank. No dividends were paid to us by the bank during 2012.  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.  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 federal 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.  At present, the Company does not have a sufficient level of retained earnings to pay cash dividends on its common stock.

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Dodd-Frank Act.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was intended primarily to overhaul the financial regulatory framework following the global financial crisis and impacts all financial institutions including our holding company and the bank. The Dodd-Frank Act contains significant regulatory and compliance changes, including, among other things.

• enhanced authority over troubled and failing banks and their holding companies;

• increased capital and liquidity requirements;

• increased regulatory examination fees; and

• specific provisions designed to improve supervision and safety and soundness by imposing restrictions and limitations

on the scope and type of banking and financial activities.

In addition, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system that will be enforced by new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve, the Office of Comptroller of the Currency, the FDIC, and the Consumer Financial Protection Bureau. The Dodd-Frank Act requires the various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act are not yet known and may not be known for many months or years. However, a few changes pursuant to the Dodd-Frank Act that may have an impact on us include, but are not limited to,

• elimination of the federal law prohibition on the payment of interest on commercial demand deposit accounts;

• expansion of the assessment base for determining deposit insurance premiums to include liabilities other than just deposits;

• new regulations regarding debit card fees;

• potentially heightened capital standards;

• increased requirements and limitations with respect to transactions with affiliates and insiders; and

• enhanced corporate governance and executive compensation requirements.

Bank Regulation

Overview

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.

Insurance Assessments

The deposit accounts of the bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to a maximum of $250,000 per insured depositor. A temporary program insured 100% of non-interest bearing accounts from December 31, 2010 to December 31, 2012, when it expired. 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.

The bank is subject to insurance assessments imposed by the FDIC. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 and further amended by the Dodd-Frank Act.

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Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. Effective April 1, 2011, the FDIC implemented a revised assessment rate calculator, which is based on a number of elements to measure the risk each institution poses to the DIF. The new assessment rate is applied to average consolidated total assets minus average tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act also changed the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits.

USA Patriot Act of 2001

The USA Patriot Act of 2001 is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat money laundering and terrorist financing. 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.

Community Reinvestment Act

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 GLBA’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.

Prompt Corrective Action

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,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.”  An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated

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by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.  Institutions that fail to comply with capital or other standards are restricted in the scope of permissible activities and are subject to enforcement action by the federal banking agencies.

At December 31, 2012, the Bank had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 8.9%, 10.2% and 5.0%, respectively, of which all are greater than the minimum requirements to be considered well capitalized.  

Dividends

Under the North Carolina Business Corporation Act, the bank may not pay a dividend or distribution, if after giving it, the effect would be that the bank would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than its liabilities. North Carolina banking law requires that cash dividends be paid out of undivided profits determined pursuant to North Carolina General Statutes Section 53-87. The Federal Reserve also imposes limits on the bank's payment of dividends. All dividends paid by the bank are paid to the Company, the sole shareholder of the bank. The amount of future dividends paid by the bank will in general be a function of the profitability of the bank, which cannot be accurately estimated or assured. Under the terms of the Written Agreement, the bank is prohibited from paying dividends without the prior written approval of the FRB and the NCCOB. The bank did not pay dividends during 2012, and until the Written Agreement is terminated, the bank’s ability to pay dividends will be restricted.

Written Agreement

In late May 2011, the Company and the bank entered into the Written Agreement with the FRB and the NCCOB.  Under the terms of the Written Agreement, the Bank developed and submitted for approval, within the time periods specified, plans to:

• revise lending and credit administration policies and procedures at the Bank and provide relevant training

• enhance the Bank's real estate appraisal policies and procedures

• enhance the Bank's loan grading and independent loan review programs

• improve the Bank's position with respect to loans, relationships, or other assets in excess of $750,000, which are now or in the future become past due more than 90 days, are on the Bank's problem loan list, or adversely classified in any report of examination of the Bank, and

• review and revise the Bank's current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance

In addition, the Bank has agreed that it will:

• refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement

• eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB, and

• take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB

In addition, the Company has agreed that it will:

• refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval

• refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB, and

• refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB

Under the terms of the Written Agreement, both the Company and the Bank have agreed to:

• submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis

• notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's minimum ratios

• refrain from declaring or paying any dividends absent prior regulatory approval

• comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments, and

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• submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement

The Company is committed to expeditiously addressing and resolving the issues raised in the Written Agreement. As such, the Board of Directors has established an Enforcement Action Committee that meets regularly to monitor the Bank's progress on compliance with the Written Agreement. The Bank has made progress on multiple provisions included in the Written Agreement and continues to aggressively work to implement any necessary changes to policies and procedures. Several control changes have been implemented to address weaknesses around identification and valuation of impaired loans, the support and validation of the allowance for loan losses, and the valuation of foreclosed assets. Additionally, the Bank has implemented additional controls around obtaining updated collateral valuations as required by regulation and has established new policies to further reduce Commercial Real Estate concentrations, ensure current financial information is evaluated, and control interest only loans. Other areas also addressed included the adequacy of credit resources, portfolio risk management and reporting,and consistency and compliance when dealing with loan workouts. A material failure to comply with the terms of the Written Agreement could subject the Company to additional regulatory actions and further restrictions on its business. These regulatory actions and resulting restrictions on the Company's business may have a material adverse effect on its future results of operations and financial condition.

Since the Company and the bank entered the Written Agreement, management has had frequent and regular communication with the FRB and NCCOB. This communication has involved:

• updates on the progress involving each of the actions outlined in the Written Agreement

• specific steps taken by the Company to remain in compliance with the Written Agreement, and

• communications, verbally and via interim internal reports, regarding the financial status of the Company including, but not limited to, the Company's key capital ratios

To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated. Nor has the Company received any indication that additional measures are required beyond those contained in the Written Agreement. Despite the actions taken thus far, there is no assurance that additional measures or actions will not be required by the regulatory authorities in the future.

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.

Executive Officer of the Registrant

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

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Name	Age	Year first employed	Positions and Offices with our Company & Business Experience During Past Five (5) Years
Ayden R. Lee, Jr.	64	1980	Chief Executive Officer and President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company
Clifton L. Painter	64	1986	Senior Executive Vice President, Chief Operating Officer and Chief Credit Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company.  Mr. Painter has been our Senior Executive Vice President since 1990, Chief Operating Officer since 1993, and Chief Credit Officer since 2005.  From 1989 to 1990, Mr. Painter served as Senior Vice President, as City Executive from 1988 to 1993, and as Vice President and Branch Manager from 1986 to 1988.
Nancy S. Wise	57	1991	Executive Vice President, Chief Financial Officer of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company.  Ms. Wise has been our Executive Vice President and Chief Financial Officer since 2005.  She joined our company as Senior Vice President and Chief Financial Officer in 1991.
W. Leon Hiatt, III	45	1994	Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Chief Administrative Officer of Four Oaks Bank & Trust Company.  Mr. Hiatt has been our Executive Vice President and Chief Administrative Officer of Four Oaks Bank & Trust Company since 2005.  From 1996 to 2004, he served as our Senior Vice President, and from 1994 to 1996, he served as our Credit Administrator.
Jeff D. Pope	56	2000	Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Chief Banking Officer of Four Oaks Bank & Trust Company.  Mr. Pope has been our Executive Vice President and Chief Banking Officer of Four Oaks Bank & Trust Company since January 2009.  From 2005 until January 2009, he served as Executive Vice President and Branch Administrator, and from 2000 until 2005, he served as Senior Vice President and Regional Executive.
Lisa S. Herring	37	2002	Executive Vice President of Four Oaks Fincorp, Inc. and Four Oaks Bank & Trust Company, Chief Risk Officer of Four Oaks Bank & Trust Company.  Ms. Herring has been our Executive Vice President and Chief Risk Officer of Four Oaks Bank & Trust Company since July 2009.  From 2005 until July 2009, Ms. Herring served as our Senior Vice President and General Auditor.  From 2002 until 2005, Ms. Herring served as our Vice President and General Auditor.

Available Information

We maintain 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, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available under “Investor Relations.”   We are registered as a bank holding company with the Federal Reserve System.  Additionally, we are a state-chartered member of the Federal Reserve System and the FDIC insures the bank’s deposits up to applicable limits.  Our

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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”.

Item 1A. Risk Factors

Risk Related to Our Business

We may not be able to continue without additional capital to fund our operations, and an inability to improve our regulatory capital position could adversely affect our operations.

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future.  During 2012, we experienced continued loan losses, increases to our reserves and declining capital levels. However, management believes that our current operations and cash availability are sufficient for us to discharge our liabilities and meet our commitments in the normal course of business. While management does not anticipate further deterioration in the bank’s loan portfolio and has performed stress tests and financial modeling under various potential scenarios in determining that we and the bank will maintain at least adequate capitalization under federal regulatory guidelines, no assurances regarding these expectations can be made.  If we are unable to become profitable and cannot generate cash flow from our operating activities, we may be required to raise additional capital or debt to fund our operations. Such financing may be unavailable when needed or may not be available on acceptable terms.

At December 31, 2012, the Bank was classified as “well capitalized” for regulatory capital purposes.  Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. We are also working to reduce our balance sheet to improve capital ratios and actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support our balance sheet long-term. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, we may be unable to discharge our liabilities in the normal course of business. There can be no assurance that we will be successful in any efforts to raise additional capital during 2013.

If we fail to evaluate, implement, and integrate strategic opportunities or maximize potential capital raising opportunities successfully, our business may suffer.

From time to time we evaluate strategic opportunities available to us for product, technology, or business acquisitions or dispositions and possible capital raising opportunities.  If we choose to make acquisitions or dispositions or raise significant capital that may result in a change in control, we face certain risks, such as failure of an acquired business to meet our performance expectations, diversion of management attention, retention of existing customers of our current and acquired business, and difficulty in integrating or separating a business’s operations, personnel, and financial and operating systems. We may not be able to successfully address these risks or any other problems that arise from future acquisitions, dispositions, or change in control investments. Any failure to successfully evaluate strategic or capital raising opportunities and address risks or other problems that may arise from such transactions could adversely affect our business, results of operations and financial condition.

Our profitability may be 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 Harnett 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 subject to interest rate risks.

Like most financial institutions, our most significant market risk exposure is the risk of economic loss resulting from adverse changes in market prices and interest rates. Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets

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and liabilities, and (iii) the average duration of our mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations.

We are subject to examination and scrutiny by a number of regulatory authorities, and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations, or financial position pursuant to the terms of formal or informal regulatory orders, including our current Written Agreement with the FRB and the NCCOB.

We are subject to examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions, and requirements on us and our banking subsidiaries if they determine, upon conclusion of their examination or otherwise, violations of laws with which we or our subsidiaries must comply or weaknesses or failures with respect to general standards of safety and soundness, including, for example, in respect of any financial concerns that the regulators may identify and desire for us to address. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, cease and desist orders, civil money penalties and termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings.

In late May 2011, the Company and the bank entered into the Written Agreement with the FRB and the NCCOB. The Written Agreement requires the Company and the bank to take certain actions, including, among other things, strengthening credit risk management practices at the bank; enhancing the bank’s policies and procedures related to lending, credit administration, real estate appraisals, loan review, and allowance for loan and lease losses; improving the bank’s position with respect to past due loans, classified loans, and foreclosed assets; and improving capital at the Company on a consolidated basis and at the bank on a stand-alone basis. The Company and the bank are also restricted from taking certain actions, including the payment of dividends as discussed below. Compliance with the Written Agreement’s provisions has caused the Company and the bank to incur higher expenses in connection with such compliance.

We are committed to expeditiously addressing and resolving the issues raised in the Written Agreement. As such, the Board of Directors has established an Enforcement Action Committee that meets regularly to monitor the Bank's progress on compliance with the Written Agreement. The Bank has made progress on multiple provisions included in the Written Agreement and continues to aggressively work to implement any necessary changes to policies and procedures. Several control changes have been implemented to address weaknesses around identification and valuation of impaired loans, the support and validation of the allowance for loan losses, and the valuation of foreclosed assets. Additionally, the Bank has implemented additional controls around obtaining updated collateral valuations as required by regulation and has established new policies to further reduce Commercial Real Estate concentrations, ensure current financial information is evaluated, and control interest only loans. Other areas also being addressed are the adequacy of credit resources, portfolio risk management and reporting, and consistency and compliance when dealing with loan workouts. There can be no assurance that the terms and conditions of the Written Agreement will be met or that the impact or effect of such terms and conditions will not have a material adverse effect on our financial condition, results of operations and future prospects. A material failure to comply with the terms of the Written Agreement could subject the Company and the bank to additional regulatory actions and further restrictions on our business. The Company and the bank cannot determine whether or when the Written Agreement will be terminated. Even if the Written Agreement is terminated, in whole or in part, the Company and the bank may remain subject to supervisory enforcement actions that restrict their activities.

We are exposed to risks in connection with the loans we make, and may not be able to prevent unexpect ed losses which could adversely impact our results of operations.

A significant source of risk for us arises from the possibility that loan losses will be sustained because borrowers, guarantors, and related parties 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.

If the value of real estate in our core market areas were to decline materially, a significant portion of our loan portfolio could become undercollateralized, which could have a material adverse effect on us. With most of our loans concentrated in the Coastal Plain region of North Carolina, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings

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and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. In addition to the financial strength and cash flow characteristics of the borrower in each case, the bank often secures loans with real estate collateral. At December 31, 2012, approximately 91.9% of the bank's loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

Legislative and regulatory actions taken now or in the future to address the liquidity and credit crisis in the financial industry may significantly affect our liquidity and financial condition.

The Federal Reserve, U.S. Congress, the U.S. Treasury Department, the FDIC and others have taken numerous actions to address the liquidity and credit situation in the financial markets. These measures include actions to encourage loan restructuring and modification for homeowners, the establishment of significant liquidity and credit facilities for financial institutions and investment banks, and coordinated efforts to address liquidity and other weaknesses in the banking sector.

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which was intended primarily to overhaul the financial regulatory framework following the global financial crisis and impacts all financial institutions including our holding company and the bank. The Dodd-Frank Act contains significant regulatory and compliance changes, including, among other things,

• enhanced authority over troubled and failing banks and their holding companies;

• increased capital and liquidity requirements;

• increased regulatory examination fees; and

• specific provisions designed to improve supervision and safety and soundness by imposing restrictions and limitations on the scope and type of banking and financial activities.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress.  The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act are not yet known and may not be known for many months or years. While many of the provisions in the Dodd-Frank Act are aimed at financial institutions significantly larger than us, it will likely increase our regulatory compliance burden and may have a material adverse effect on us, including by increasing the costs associated with our regulatory examinations and compliance measures. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.

Further, the U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including interpretation and implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer or increasing the ability of non-banks to offer competing financial services and products. While we cannot predict the regulatory changes that may be borne out of the recent economic crisis, and we cannot predict the extent to which we will become subject to increased regulatory scrutiny by any of these regulatory agencies, any regulatory changes or scrutiny could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, credit unions, savings and loan associations, and other institutions. We cannot predict whether additional legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

Our allowance for probable loan losses may be insufficient.

We maintain an allowance for probable loan losses, which is a reserve established through a provision for probable loan losses charged to expense.  This allowance represents management’s best estimate of probable losses based on those that have been incurred within the existing portfolio of loans.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions and unidentified losses inherent in the current loan portfolio.  The determination of the appropriate level of the allowance for probable loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates and assumptions regarding current credit risks and future trends, all of which may undergo material changes.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may require an increase in the allowance for probable loan losses.  In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for probable

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loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.  In addition, if charge-offs in future periods exceed the allowance for probable loan losses; we will need additional provisions to increase the allowance for probable loan losses.  Any increases in the allowance for probable loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.  See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes A and C to our consolidated financial statements presented under Item 8 of Part II of this Form 10-K, for further discussion related to our process for determining the appropriate level of the allowance for probable loan losses.

Our cost estimates associated with our real estate and land acquisition and development loans, as well as the value of those completed projects, may be underestimated.

We extend real estate land loans, construction loans, and acquisition and development loans to builders and developers, primarily for the construction/development of properties. We originate these loans on a presold and speculative basis and they include loans for both residential and commercial purposes. At December 31, 2012, our loan portfolio was comprised of $457.5 million of real estate loans, including land acquisition and development loans, or 91.9% of total loans.

In general, construction and land lending involves additional risks because of the inherent difficulty in estimating a property’s value both before and at completion of the project. Construction costs may exceed original estimates as a result of increased materials, labor, or other costs. In addition, because of current uncertainties in the residential and commercial real estate markets, property values have become more difficult to determine than they have been historically. Construction and land acquisition and development loans often involve the repayment dependent, in part, on the ability of the borrower to sell or lease the property. These loans also require ongoing monitoring. In addition, speculative construction loans to a residential builder are often associated with homes that are not presold, and thus pose a greater potential risk than construction loans to individuals on their personal residences. At December 31, 2012, $20.1 million of our residential construction loans were for speculative construction loans. Residential construction loans and commercial construction loans represented 2.3% and 44.3%, respectively, of our nonperforming assets at December 31, 2012.

Our non-owner occupied commercial real estate loans may be dependent on factors outside the control of our borrowers.

We originate non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. Non-owner occupied commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on a non-owner occupied commercial real estate loan, our holding period for the collateral typically is longer than a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner occupied commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

As of December 31, 2012, our non-owner occupied commercial real estate loans totaled $89.0 million, or 17.9% of our total loan portfolio.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely

affect our operations.

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 Commissioner of Banks.  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:

• 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;

• payment of interest, interest rates on deposits;

• the possible expansion of branch offices; and/or

• our ability to make other financial services available.

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We also are subject to capitalization guidelines set forth in federal regulations, and could be subject to enforcement actions to the extent that we are found by regulatory examiners to be undercapitalized. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations 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 Securities and Exchange Commission (the “SEC”) may adversely affect our ability to operate profitably.

U.S. and international credit markets and economic conditions could affect the Company’s liquidity and financial condition.

Global market and economic conditions continue to be disruptive and volatile and the disruption has particularly had a negative impact on the financial sector.  The duration and severity of the continued effects of the recent financial turmoil are still unknown.  The cost and availability of funds to the Company has been adversely affected by illiquid credit markets.  Continued turbulence in U.S. and international markets and economies may continue to adversely affect the Company’s liquidity, financial condition, and profitability.

A portion of our commercial real estate loan portfolio utilizes interest reserves which may not accurately portray the financial condition of the project and the borrower’s ability to repay the loan.

Some of our commercial real estate loans utilize interest reserves to fund the interest payments and are funded from loan proceeds. Our decision to establish a loan-funded interest reserve upon origination of a loan is based on the feasibility of the project, the creditworthiness of the borrower and guarantors and the protection provided by the real estate and other collateral. When applied appropriately, an interest reserve can benefit both the lender and the borrower. For the lender, an interest reserve provides an effective means for addressing the cash flow characteristics of a properly underwritten acquisition, development and construction (“ADC”) loan. Similarly, for the borrower, interest reserves provide the funds to service the debt until the property is developed, and cash flow is generated from the sale or lease of the developed property.

Although potentially beneficial to the lender and the borrower, our use of interest reserves carries certain risks. Of particular concern is the possibility that an interest reserve may not accurately reflect problems with a borrower’s willingness or ability to repay the debt consistent with the terms and conditions of the loan obligation. For example, a project that is not completed in a timely manner or falters once completed may appear to perform if the interest reserve keeps the loan current.

In some cases, we may extend, renew, or restructure the term of certain loans, providing additional interest reserves to keep the loan current. As a result, the financial condition of the project may not be apparent and developing problems may not be addressed in a timely manner. Consequently, we may end up with a matured loan where the interest reserve has been fully advanced, and the borrower’s financial condition has deteriorated. In addition, the project may not be complete, its sale or lease-up may not be sufficient to ensure timely repayment of the debt or the value of the collateral may have declined, exposing us to increasing credit losses.As of December 31, 2012, our commercial real estate loans with interest reserves totaled $11.1 million or 2.23% of our total loan portfolio.

The holders of our subordinated debentures and subordinated promissory notes have rights that are senior to those of our shareholders. Exercising those rights may have an adverse impact on our capital resources.

We have issued $12.0 million of subordinated debentures in connection with a trust preferred securities (“Trust Preferred Securities”) issuance by our subsidiary, the Trust and $12.0 million aggregate principal amount of subordinated promissory notes.  We unconditionally guarantee payments of the principal and interest on the trust preferred securities.  Our subordinated debentures and subordinated promissory notes are senior to our shares of common stock.  As a result, we must make payments on the subordinated debentures (and the related trust preferred securities) and subordinated promissory notes before any dividends can be paid on our common stock and, in the event of bankruptcy, dissolution or liquidation, the holders of the debentures and promissory notes must be satisfied before any distributions can be made to the holders of common stock.

We have the right to defer payment of interest on our subordinated debentures at any time and from time to time for a period not exceeding five years, provided that no deferral period extends beyond the stated maturities of the subordinated debentures. In January 2011, we elected to defer the regularly scheduled interest payments on the subordinated debentures. Such deferral of interest payments by us will result in a deferral of distribution payments on the related trust preferred securities. We may not pay any cash dividends on our common stock until we are current on payments on the Trust Preferred Securities. In addition, we are currently prohibited by the Written Agreement from paying interest on our subordinated debentures in connection with our Trust Preferred Securities and on our subordinated promissory notes without prior approval of the supervisory authorities. We obtained approval to pay the interest on our subordinated promissory notes for every quarter of 2012. We cannot predict whether or when the Written Agreement will be terminated or when we will cease deferring interest payments on the subordinated debentures.

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We may be subject to environmental liability associated with our lending activities.

A significant portion of our loan portfolio is secured by real property.  During the ordinary course of business, we may foreclose on and take title to properties securing certain loans.  In doing so, there is a risk that hazardous or toxic substances could be found on these properties.  If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage.  Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.  Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards.  The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

We may not be able to effectively compete with larger financial institutions for business.

Commercial banking in North Carolina is extremely competitive due in large part to North Carolina’s early adoption of 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.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods.  For example, consumers can now maintain funds that historically would have been held as bank deposits in brokerage accounts or mutual funds.  Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks.  The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.  The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Inadequate resources to make technological improvements may impact our business.

The banking industry undergoes frequent technological changes with 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.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems.  While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that we can prevent any such failures, interruptions or security breaches or, if they do occur, that they will be adequately addressed.  The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We may not be able to attract and retain skilled people and the lack of sufficient talent could adversely impact our operations.

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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.  Consequently the loss of one or more members of our executive management team may have a material adverse effect on our operations. We expect to compete effectively in this area by offering competitive financial packages that include incentive-based compensation.

Our internal controls and procedures may fail or be circumvented.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures.  Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

Risk Related to Our Common Stock

An investment in our common stock is not an insured deposit, and as with any stock, inherent market risk may cause you to lose some or all of your investment.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.  Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company.  As a result, if you acquire our common stock, you may lose some or all of your investment.

Our common stock is thinly traded.

Our common stock is traded on the OTC Bulletin Board. There can be no assurance, however, that an active trading market for our common stock will develop or be sustained in the future. Our common stock is thinly traded and has substantially less liquidity than the average trading market for many other publicly traded companies. Thinly traded stocks can be more volatile than stock trading in an active public market. Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to changes in analysts’ recommendations or projections, our announcement of developments related to our business, operations, and stock performance of other companies deemed to be peers, news reports of trends, concerns, irrational exuberance on the part of investors and other issues related to the financial services industry. Over the past several years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies, including those in the financial services sector, have experienced wide price fluctuations that have not necessarily been related to operating performance. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector of the economy, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Therefore, our shareholders may not be able to sell their shares at the volume, prices, or times that they desire.

As part of our capital raising efforts, we may issue additional shares of common stock or convertible securities that would dilute the percentage ownership interest of existing shareholders, and may dilute the book value per share of common stock. This could adversely affect the terms on which we may obtain additional capital.

Our authorized capital includes 20,000,000 shares of common stock. As of December 31, 2012, we had 7,815,385 shares of common stock outstanding and had 141,549 shares of underlying options that are or may become exercisable at a weighted average exercise price of $7 per share. In addition, as of December 31, 2012, we had the ability to issue 190,933.3 shares of common stock pursuant to options that may be granted in the future under our existing equity compensation plans, 43,900 shares of common stock under the Employee Stock Purchase and Bonus Plan, and 864,620 shares of common stock under the Dividend Reinvestment and Stock Purchase Plan. Subject to applicable law, our Board of Directors generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of common stock for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. Any issuance of additional shares of common stock or convertible securities will dilute the percentage ownership interest of our shareholders, may dilute the book value per share of our common stock, and could adversely affect the terms on which we may obtain additional capital.

Our ability to pay dividends and interest on our outstanding securities is currently restricted.

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We have not paid any cash dividends on our common stock since we suspended dividends in the fourth quarter of 2010, and we do not expect to resume paying cash dividends on our common stock for the foreseeable future. In order to preserve capital, in January 2011, we also exercised our right to defer regularly scheduled interest payments on our outstanding subordinated debentures issued in connection with our Trust Preferred Securities. Pursuant to the terms of the indenture governing the subordinated debentures, we may not pay any cash dividends on our common stock until we are current on interest payments on such subordinated debentures. In addition, under the terms of the Written Agreement, we may not pay cash dividends on our common stock or interest on our subordinated debentures or subordinated promissory notes without the prior approval of the FRB. Accordingly, our ability to pay dividends to our shareholders and interest on our subordinated debentures and subordinated promissory notes will be restricted until the Written Agreement is terminated. As a bank holding company, our ability to declare and pay dividends also depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.

We depend on dividends from the bank to meet our cash obligations, but the Written Agreement prohibits payment of such dividends without prior regulatory approval, which may affect our ability to pay our obligations and dividends.

We are a separate legal entity from the bank, and we do not have significant operations of our own. We have historically depended on the bank’s cash and liquidity as well as dividends to pay our operating expenses. However, the Written Agreement prohibits the bank from paying dividends to us without the prior written approval of the FRB and the NCCOB. Accordingly, our ability to receive dividends from the bank will be restricted until the Written Agreement is terminated. In addition, various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. The bank is also subject to limitations under state law regarding the payment of dividends, including the requirement that dividends may be paid only out of undivided profits and only if the bank has surplus of a specified level. In addition to these explicit limitations, it is possible, depending upon the financial condition of the bank and other factors, that the federal and state regulatory agencies could take the position that payment of dividends by the bank would constitute an unsafe or unsound banking practice. Without the payment of dividends from the bank, we may not be able to service our obligations as they become due or to pay dividends on our common stock. Consequently, the inability to receive dividends from the bank could adversely affect our financial condition, results of operations, cash flows and prospects.

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 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:

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Properties Owned
Location	Year Built	Present Function	Square Feet
102 East Main Street Clayton, North Carolina	1986	Branch Office	4,900
200 East Church Street Benson, North Carolina	1987	Branch Office	2,300
128 North Second Street Smithfield, North Carolina	1991	Branch Office	5,500
403 South Brightleaf Boulevard Smithfield, North Carolina	1995	Limited-Service Facility	860
200 Glen Road Garner, North Carolina	1996	Branch Office	3,500
325 North Judd Parkway Northeast Fuquay-Varina, North Carolina	2002	Branch Office	8,900
406 East Main Street Wallace, North Carolina	2006	Branch Office	9,300
805 N. Arendell Avenue Zebulon, North Carolina	2007	Branch Office	6,100
105 Commerce Avenue Southern Pines, North Carolina	2005	Administration/Loan Servicing	4,100

On September 1, 2008, the Bank leased three offices of its Fuquay-Varina branch office to PrimeLending.  Under the terms of the agreement, the Bank received $1,200 per month in rental income from PrimeLending, renewable each month. The agreement terminated on September 30, 2012 and the relationship with PrimeLending dissolved. The Fuquay-Varina location is now wholly occupied by the Bank.

The Bank leases a limited-service facility in downtown Four Oaks located at 111 North Main Street from M.S. Canaday, who is a former director of the company as well as a former director of the Bank.  Under the terms of the lease, which the Bank believes to be arms-length, the Bank paid $1,138 per month in rent in 2012.  The lease is month-to-month and we review its terms on an annual basis.  The Bank also leases a branch office located at 201 West Center Street, Holly Springs, North Carolina.  Under the terms of the lease, the Bank will pay $2,900 per month ending April 1, 2013, it is anticipated that the lease will be renewed. 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 periods of one year duration until the lease is terminated by one of the parties.  In addition, the Bank has entered into a ten year lease, commencing on June 12, 2006, on its Sanford office located at 830 Spring Lane, Sanford, North Carolina, which was closed in May 2012, however, the facility is still under a lease contract.  Under the terms of the lease, the Bank will pay $8,200 each month with an annual rate increase not to exceed 2.5% over a 10 year period.  On September 17, 2011, the Bank entered into a two year lease on its Dunn office located at 604-A Erwin Road, Dunn, North Carolina.  Under the terms of the lease, the Bank will pay $1,150 each month for the period beginning September 17, 2011 and ending August 31, 2013. In addition, the Bank has leased additional space for its Dunn location for a renewable one year term beginning September 8, 2010 at $450 per month.  On February 25, 2008, the Bank entered into a five year lease on its Garner Village office, which was subsequently merged with the Garner Station office on November 4, 2011, located at 574 Village Court, Garner, North Carolina. Under the terms of the lease, the Bank will pay $3,400 each month with an annual rate increase not to exceed 3% over a five year period and the lease expires on April 30, 2013. The Bank also has a lease on the building at 1408 Garner Station Boulevard, Raleigh, North Carolina which expires on June 30, 2022. The Bank paid $12,400 each month until September 2012, with a 3% increase each consecutive year thereafter, until expiration in June 30, 2022. Below is a summary of leased properties.

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Properties Leased
Location	Present Function
111 North Main Street Four Oaks, North Carolina	Limited-Service Facility
201 West Center Street Holly Springs, North Carolina	Branch Office
590 Tomahawk Highway Harrells, North Carolina	Branch Office
830 Spring Lane Sanford, North Carolina	Administrative
604-A Erwin Road Dunn, North Carolina	Branch Office
574 Village Court Garner, North Carolina	Vacant
1408 Garner Station Boulevard Raleigh, North Carolina	Branch Office

Management believes each of the properties referenced above is adequately covered by insurance. The net book value for our properties, including land, buildings, and furniture and equipment was $13.4 million at December 31, 2012.  Additional information is disclosed in Note D-Bank Premises and Equipment and Note S-Branch Sale to our consolidated financial statements presented under Item 8 of Part II of this Form 10-K.

Item 3 - Legal Proceedings.

We are party to certain legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.

Item 4 -Mine Safety Disclosures

Not Applicable.

PART II

Item 5 - Market for Registrant's Common Equity, Related Stockholder 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):

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	Fiscal Year Ended December 31,
	2012				2011
	High		Low		High		Low
First quarter	$	1.99	$	0.95	$	4.80	$	2.60
Second quarter	2.00		1.05		2.80		1.50
Third quarter	2.20		1.56		2.80		1.45
Fourth quarter	1.82		0.80		1.65		0.85

As of March 19, 2013, the approximate number of holders of record of our common stock was 2,400. We have no other issued 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. No dividends were paid to us by the bank during 2012 or 2011. Our written agreement requires us to obtain prior regulatory approval for the payment of dividends from the bank to the Company and from the Company to its shareholders.

We have currently suspended payment of our quarterly cash dividend. In addition, the Company exercised its right to defer regularly scheduled interest payments on the subordinated debentures related to its Trust Preferred Securities. The Company cannot pay any cash dividends on its common stock until it is current on its interest payments on the subordinated debentures. Actual declaration of any future dividends and the establishment of the record dates related thereto remain subject to further action by our board of directors as well as the limitations discussed above.

We did not sell any securities in 2012 that were not registered under the Securities Act.  During 2012, we repurchased no shares of our equity securities registered pursuant to Section 12 of the Exchange Act. We made no purchases on behalf of the Company or any "affiliated purchaser" (as  defined  in  Rule 10b-18(a)(3) under the Exchange Act) of the Company's common stock during 2012.

Item 6 - Selected Financial Data

Not applicable.

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

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 audited consolidated financial statements and notes thereto which are contained in this report.  Additional discussion and analysis related to fiscal year 2012 is contained in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2012, June 30, 2012 and September 30, 2012, respectively.

Impact of Recent Developments on the Banking Industry

The banking industry, including the Company, continues to operate in a challenging and volatile economic environment.  The effects of the downturn in the housing market have adversely impacted credit markets, consumer confidence, and the broader economy.  Along with other financial institutions, the Company’s stock price has suffered as a result.  Management cannot predict when these market difficulties will subside.  While the recent economic downturn and the difficulties it presents for the Company and others in the banking industry are unprecedented, management believes that the business is cyclical and must be viewed and measured over time.  The Company’s primary focus at this time is to manage the business safely in this challenging economic environment, including taking actions to reduce our non-performing loans and foreclosed assets, and to preserve our capital.

Description of Business

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, 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

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primarily of salaries and benefits, occupancy and equipment and other professional and miscellaneous expenses. Refer to Item 1. Business, of this report, for a more detailed description of the business.

Comparison of Financial Condition at December 31, 2012 and 2011

Overview

During 2012, our total assets decreased by approximately $51.1 million, or 5.58% from $916.6 million at December 31, 2011 to $865.5 million at December 31, 2012 (or the 2012 period).  The decrease in total assets was primarily due to contraction in our loan portfolio of $80.4 million, a decrease in investments of $16.4 million, offset by the increase in foreclosed assets of $3.0 million, and an increase in cash and cash equivalents of $41.9 million.  Deposits declined approximately $46.0 million for the 2012 period, primarily due to the intentional calls of brokered deposits. Equity decreased by $7.0 million.

The loan portfolio decreased from $581.1 million at December 31, 2011 to $500.7 million at December 31, 2012, a decrease of approximately $80.4 million, or 13.8%. This loan contraction primarily resulted from a lack of demand by qualified borrowers and our heightened standards for lending due to our need to preserve capital. The decline in the overall loan portfolio was also attributable to loan charge-offs, coupled with transfers to foreclosed assets. Loans secured by residential real estate at December 31, 2012decreased by $34.2 million or 15.6% while commercial real estate loans decreased by $56.4 million or 17.2%.  Additionally, over $19 million in loans were being held for sale at December 31, 2012 (see Item 8. Note S-Branch Sale). New loan demand remains slow due to the combined effects of the prolonged recession and consequential increased competition for lending opportunities. Although new loan volume has been down since the onset of the recession, we remain committed to building and maintaining mutually beneficial relationships with our customers.

Certain investments decreased approximately $16.4 million from the 2011 to 2012 period. Our securities portfolio decreased$18.9 million from $113.2 million at December 31, 2011, to $94.4 million at December 31, 2012.  This decrease resulted from approximately $67.9 million in sales and paydowns, net of $49.2 million in purchased securities. The majority of proceeds from investment sales, paydowns, and maturities are strategically re-deployed into new security purchases. The decline in securities was offset by a $2.7 million increase in CDs held for investment at other banks.

The $41.9 million increase in cash and cash equivalents resulted from an increase of $4.7 million provided by operations and $83.1 million provided by investing activities, offset by $45.8 million used for financing activities.

Deposits decreased by $46.0 million, or 6.17%, during 2012 to $699.9 million at December 31, 2012 compared to $745.9 million at December 31, 2011.  Noninterest bearing demand deposits increased by 36.87% or $50.9 million during 2012, and interest bearing deposits decreased15.95% or $97.0 million.  Wholesale deposits decreased 67.05% or $98.1 million to $48.2 million at December 31, 2012 as compared to $146.3 million at December 31, 2011.

Shareholders’ equity declined $7.0 million, or 23.63%, to $22.7 million at December 31, 2012, as compared to $29.7 million at December 31, 2011.  The decline resulted primarily from a net operating loss of $7.0 million for the 2012 period.

Prior to 2010, for 73 consecutive years, we 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). We suspended dividends in the fourth quarter of 2010 due to losses for the year and continue to monitor our ability to pay dividends based on our financial soundness and the terms of the Written Agreement.

In spite of the net loss reported for the 2012 period, the Bank is well capitalized. If the Bank was not well capitalized, it could not accept brokered deposits without prior FDIC approval. If approval was granted, the Bank could not offer an effective yield in excess of 75 basis points on interest rates paid on deposits of comparable size and maturity in the Bank’s normal market area for deposits accepted from within its normal market area, or the national rate paid on deposits of comparable size and maturity for deposits accepted outside the Bank’s normal market area.  With respect to non-brokered deposits, as a well capitalized institution, the Bank is permitted to offer interest rates that are significantly higher than the prevailing rates in its normal market area.

We are committed to improving our financial position as well as our capital levels.  Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. The Company is also working to reduce its balance sheet to improve capital ratios and actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term.  Specific efforts made during 2012, include loan reduction and entering into an agreement to sell certain assets of our branches located in Rockingham and Southern Pines. On March 22, 2013 we

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consummated the sale of such assets and First Bank assumed certain liabilities of such branches. However, there can be no assurance that the Company will be successful in any efforts to raise additional capital during 2013.

The following table indicates the ratios for return on average assets and average equity, dividend payout, and average equity to average assets for 2012, 2011, and 2010:

	As of and for the Year Ended December 31,
	2012		2011		2010
Selected Performance Ratios
Return of average assets	(0.77	)%	(0.97	)%	(2.96	)%
Return of average equity	(22.87	)%	(25.28	)%	(42.83	)%
Dividend payout ratio	0.00	%	0.00	%	(0.79	)%
Average equity to average assets	3.37	%	3.83	%	6.92	%

Investment Portfolio

Our investment portfolio as of December 31, 2012 consists of primarily residential mortgage-backed securities ("MBSs"). The MBSs consist of fixed-rate mortgage securities underwritten and guaranteed by Ginnie Mae (GNMA) and Fannie Mae (FNMA) with the U.S. Department of the Treasury. In addition to economic and market conditions, our overall management strategy for our investment portfolio is determined by, among other factors, loan demand, deposit mix, liquidity and collateral needs, our interest rate risk position and the overall structure of our balance sheet.

Available for sale securities are reported at fair value and consist of taxable municipal securities, trust preferred securities, as well as equity and debt instruments not classified as trading securities or as held to maturity securities. As of December 31, 2012 our available for sale investment portfolio consisted of $5.9 million of taxable municipal securities, $1.0 million of trust preferred, $60.7 million in GNMAs, $5.9 million in FNMAs, and $180,000 in various equity shares.

As of December 31, 2012, we own $20.3 million in GNMA that are accounted for as held to maturity and are carried at book value.

During 2012, we strategically sold $50.4 million of securities for gains of $2.0 million. Also during 2012, $17.5 million in cash flows were received from paydowns of mortgage-backed securities. Proceeds from these sales and maturities were re-deployed throughout the year into $49.2 million in new security purchases for our investment portfolio.

Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary would result in permanent write-downs of the individual securities to their fair value. If we do not intend to sell the security prior to recovery and it is more likely than not we will not be required to sell the impaired security prior to recovery, the credit loss portion of the impairment is recognized in earnings and the remaining impairment is recognized in other comprehensive income. Otherwise, the full impairment loss is recognized in earnings. The classification of securities is generally determined at the date of purchase.

The valuations of investment securities, available for sale, at December 31, 2012, 2011 and 2010 respectively, were as follows (amounts in thousands):

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	Available for Sale
	2012				2011				2010
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
U.S. Government and agency securities	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal securities	—		—		—		—		—		—
Taxable Municipals	5,459		5,913		17,046		17,919		31,285		30,021
Mortgage-backed securities
GNMA	60,056		60,743		72,839		73,629		102,046		100,447
FNMA	5,872		5,880		—		—		—		—
Trust preferred securities	1,175		1,006		1,175		1,085		1,750		1,299
Equity securities	170		180		170		157		310		403
Total securities	$	72,732	$	73,722	$	91,230	$	92,790	$	135,391	$	132,170
Pledged securities			$	72,536			$	91,549			$	87,529

The valuations of investment securities, held to maturity, at December 31, 2012, 2011 and 2010 were as follows (amounts in thousands):

	Held to Maturity
	2012				2011				2010
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost	Estimated fair value
Mortgage-backed securities
GNMA	$	20,329	$	20,668	$	20,445	$	20,456	—	—
Total securities	$	20,329	$	20,668	$	20,445	$	20,456	—	—
Pledged securities			$	20,668			$	20,456

The following table sets forth the carrying value of our available for sale investment portfolio at December 31, 2012(amounts in thousands):

	Available for Sale
	Carrying Value
	Within 1 year		After 1 year through 5 years		After 5 years through 10 years		After 10 years		Total
Taxable Municipals	$	—	$	271	$	5,077	$	565	$	5,913
Mortgage-backed securities
GNMA	—		39,470		17,639		3,634		60,743
FNMA	—		5,880		—		—		5,880
Trust preferred securities	—		—		—		1,006		1,006
Equity securities	—		—		—		180		180
Total	$	—	$	45,621	$	22,716	$	5,385	$	73,722

The following table sets forth the carrying value of our held to maturity investment portfolio at December 31, 2012(amounts in thousands):

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	Held to Maturity
	Carrying Value
	Within 1 year		After 1 year through 5 years		After 5 years through 10 years		After 10 years		Total
Mortgage-backed securities
GNMA	$	—	$	18,253	$	2,415	$	—	$	20,668
Total	$	—	$	18,253	$	2,415	$	—	$	20,668

The following table sets forth the weighted average yield by maturity of our available for sale investment portfolio at December 31, 2012 amortized cost:

	Available for Sale
	Weighted Average Yields
	Within 1 year		After 1 year through 5 years		After 5 years through 10 years		After 10 years		Total
Taxable Municipals	—	%	1.51	%	2.30	%	3.30	%	2.36	%
Mortgage-backed securities
GNMA	—	%	1.27	%	1.20	%	1.35	%	1.26	%
FNMA	—	%	0.89	%	—	%	—	%	0.89	%
Trust preferred securities	—	%	—	%	—	%	8.03	%	8.03	%
Equity securities	—	%	—	%	—	%	5.50	%	5.50	%
Total weighted average yields	—	%	1.22	%	1.43	%	3.11	%	1.43	%

The following table sets forth the weighted average yield by maturity of our held to maturity investment portfolio at December 31, 2012 amortized cost:

	Held to Maturity
	Weighted Average Yields
	Within 1 year		After 1 year through 5 years		After 5 years through 10 years		After 10 years		Total
Mortgage-backed securities
GNMA	—	%	1.12	%	1.29	%	—	%	1.14	%
Total weighted average yields	—	%	1.12	%	1.29	%	—	%	1.14	%

Loan Portfolio

We have a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in our markets.  This policy relates to loan administration, documentation, approval, and reporting requirements for various types of loans.  The policy is designed to comply with all applicable federal and state regulatory requirements and establishes minimum standards for the extension of credit.  The lending policy also establishes pre-determined lending authorities for loan officers commensurate with their abilities and experience.  In addition, the policy establishes committees to review for approval or denial of credit requests at various lending amounts.  These committees are the Credit Department Loan Committee, the Executive Loan Committee, comprised of the Chief Executive Officer and four independent directors, and the Board Loan Committee that reviews the larger requests and requests that fall under Regulation O.  Approval authorities are under

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regular review and are subject to adjustment.  Loan requests outside of standard policy or guidelines may be made on a case by case basis when justified, documented, and approved by the appropriate authority.

Underwriting criteria for all types of loans are prescribed within the lending policy. The following is a description of each loan type and related criteria.

Residential Real Estate

Owner occupied 1-4 family residential comprises approximately 15% of our total loan portfolio.  The outstanding balances have generally been very stable.  These loans are held within the Bank’s portfolio.  Terms may range up to 85 months with amortizations of 20 years. Home equity loans with a revolving line of credit feature comprise approximately 7% of the portfolio.  Underwriting criteria and procedures for residential real estate mortgage loans generally include:

• Monthly debt payments of the borrower to gross monthly income should not exceed 42% with stable employment of two years.

• Loan to value ratio limits of up to 90% of the appraised value.

• A credit investigation, which includes an Equifax credit report with a Beacon score of at least620.

• Verification of income by various methods.  (From January 1, 2005 through June 1, 2008, the Bank waived income verification and used stated income for residential lot applications in the Wallace branch office when applicants had a Beacon score of at least 679.)

• Appropriate insurance to protect the Bank, typically in the amount of the loan.

• Flood certifications are procured.

• Collateral is investigated using current valuations and is supplemented by the loan officer’s knowledge of the local market.  Outside appraisals are completed by appraisers on the Bank’s approved list.  The appraisals on loans greater than $250,000 are reviewed by an outside source that certifies it is compliant with Uniform Standards of Professional Appraisal Practice.

Commercial Real Estate

Commercial real estate and real estate construction makes up the largest segment of our loan portfolio.  This segment is closely monitored at the staff and Board level.  Our Board of Directors receives reports on a monthly basis detailing trends.   Underwriting criteria and procedures for commercial real estate loans generally include:

• Procurement of federal income tax returns and financial statements, preferably for the past three years if available, and related supplemental information deemed relevant.  The Bank has a policy of requiring audited financial statements on certain loan requests based on size and complexity.

• Rent rolls, tenant listings, and other similar documents are requested as needed.

• Detailed financial and credit analysis related to cash flow, collateral, the borrower’s capital and character, and the operational environment is performed and presented to the appropriate officer or committee for approval.

• Cash flows from the project financed and aggregate cash flows of the principals and their entities must produce a minimum debt service coverage ratio of 1.25:1.

• Cash or collateral equity injection by the applicant, ranging from 15% to 35% based on regulatory loan to value ratio limits, in order to meet minimum federal guidelines for each loan category.

• Past experience of the investor in commercial real estate.

• Past experience of the customer with the Bank.

• Tangible net worth analysis of the borrower and any guarantors.

• General and local commercial real estate conditions are monitored and considered in the decision-making process.

• Alternative uses of the security are considered in the event of default.

• Credit enhancements are utilized when necessary and desirable, such as the use of guarantors and take out commitments.

• Non-construction real estate loans typically have a 15-year amortization with a five-year balloon payment.  If appropriate, a loan may be set up as an interest only single payment if repayment coincides with the maturity.

• Commercial construction projects require that an engineer or architect review the applicant’s cost figures for accuracy.  In addition, all draw requests must be approved by either the engineer or architect for accuracy before payment is made.

• On-site progress inspections are completed to protect the Bank.

• Requests for residential construction loans are closely monitored at the contractor level and subdivision level for concentrations.  A request is denied if either the predetermined builder’s concentration or Bank’s concentration limit has been attained.

• Real estate construction loans are made for terms not to exceed 12 months for residential construction and 18 to 24 months for commercial construction.

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Financial

Financial loans are secured by stocks, bonds, and mutual funds.  Underwriting procedures and criteria for financial loans generally include:

• Stock loans should be structured to coincide with the identified source of repayment.

• The maximum loan to value ratio for stock listed for sale on the NYSE, AMEX, or NASDAQ is 60% of its market value.

• Generally, stock loans should not exceed 60 months.

Agricultural

Crop production lending presents many risks to the lender because of weather uncertainty and fluctuations in commodity prices.  Underwriting procedures and criteria for agricultural loans generally include:

• The farmer should have the financial capacity to withstand at least one bad crop year.

• The farmer must possess sufficient equity in equipment or farmland for the Bank to term, within acceptable collateral margins (ranging from 50% to 70%) and cash flow debt service coverage requirements (generally 1.25:1), any line outstanding after the sale of crops.

• Farmers should meet certain qualitative criteria with respect to the farmer’s knowledge and experience.

• For new customers, documentation on where the farmer previously banked and the circumstances underlying the new loan request.

Commercial Inventory and Accounts Receivable

Underwriting procedures and loan to value ratiosfor commercial inventory loans and accounts receivable loans generally include:

• Up to 75% of eligible accounts receivable.

• Up to 80% of the individually assigned accounts receivable. The customer assigns individual invoices, sometimes with shipping documents attached. These may be stamped or marked to show that they have been assigned to the Bank. The customer brings payments to the Bank for processing against individual invoices.

• 50% or less of the cost or market on materials and qualified finished goods, depending on their quality and stability.

• 0% on work-in-progress.

Installment Loans

These loans are predominantly direct loans to established customers of the Bank and primarily include the financing of automobiles, boats, and other consumer goods.  The character, capacity, collateral, and conditions are evaluated using policy limitations. Installment loans are typically made for terms that do not exceed 60 months with any exceptions being documented.  Installment loan underwriting criteria and procedures for such financing generally include:

• Financial statements are required on all consumer loans secured by a primary residence, all unsecured loans of $10,000 or more, and all secured transactions of $50,000 or more.

• Income verification is required on all consumer loans secured by a primary residence, all unsecured loans greater than $20,000, and all secured loans of $50,000 or more at origination.

• Past experience of the customer with the Bank.

• A debt to income ratio that does not exceed 38%.

• Stable employment record of two years.

• Stable residency record of two years.

• A Beacon score of at least 620.

• Terms to match the usefulness or life of the security.

• If unsecured, the total unsecured loans of the applicant should not exceed 15% of adjusted net worth or 20% of the applicant’s gross annual income.

Interest Only Loans

Interest only loans are generally limited to construction lending, properties recently completed and undergoing occupancy stabilization period, and revolving lines of credit. Any other loans made as interest only should have a well documented reason and proper approval.

Bank policy generally prohibits underwriting negative amortization loans or hybrid loans.

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The following loan table describes our loan portfolio composition by category based on new loan classifications discussed in Note C - Loans and Allowance for Loan Losses to the financial statements for December 31, 2012, 2011, 2010, 2009, and 2008 (amounts in thousands):

	2012			2011			2010			2009			2008
Loans receivable:
Commercial and industrial
Commercial and industrial loans	$	23,802		$	34,224		$	39,437		$	54,982		$	53,336
Municipal	2,323			3,079			4,270			7,396			883
Agriculture	2,252			2,026			1,837			2,582			3,060
Business credit cards	1,186			1,016			1,109			1,037			919
Total commercial and industrial	29,563			40,345			46,653			65,997			58,198
Commercial real estate
Commercial construction and land development	90,899			113,762			133,171			176,160			187,329
Commercial non-owner occupied	88,956			91,714			126,032			110,105			80,369
Commercial owner occupied	71,489			99,191			94,965			80,509			70,836
Farmland	20,749			23,835			24,487			19,577			15,918
Total commercial real estate	272,093			328,502			378,655			386,351			354,452
Residential real estate
Residential construction	20,445			26,707			45,296			49,141			87,852
Residential mortgage
First lien, closed-end	96,363			118,391			117,892			130,552			107,647
Junior lien, closed-end	5,267			6,228			6,449			6,986			6,736
Home equity loans	36,123			39,264			40,719			38,054			37,078
Multifamily	27,256			29,089			30,870			18,189			8,033
Total residential mortgage	185,454			219,679			241,226			242,922			247,346
Consumer loans
Consumer loans	7,399			9,359			11,711			14,288			13,906
Consumer credit cards	2,265			2,092			2,048			2,128			2,060
Total consumer loans	9,664			11,451			13,759			16,416			15,966
Other
Other loans	1,271			2,330			2,262			3,858			5,723
Lease financing receivables	7			—			—			—			4
Deferred cost (unearned income) and fees	(123		)	(75		)	(301		)	(411		)	(189		)
Total Loans	497,929			602,232			682,254			715,133			681,500
Allowance for loan losses	(16,549		)	(21,141		)	(22,100		)	(15,676		)	(9,542		)
Net Loans	$	481,380		$	581,091		$	660,154		$	699,457		$	671,958
Loans held for sale	$	19,297		$	—		$	—		$	—		$	—
Commitments and contingencies:
Commitments to make loans	71,924			78,683			93,878			70,669			119,958
Standby letters of credit	2,838			1,940			2,537			2,189			2,940

The maturities and carrying amounts of certain loans as of December 31, 2012 are summarized as follows (amounts in thousands):

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	Commercial and Industrial		Commercial Real Estate		Residential Construction		Total
Due within one year:
Fixed rate	$	16,629	$	101,000	$	19,524	$	137,153
Variable rate (1)	1,192		12,923		—		14,115
Due after one year through five years:
Fixed rate	9,522		142,294		771		152,587
Variable rate (1)	—		—		—		—
Due after five years:
Fixed rate	2,220		15,876		150		18,246
Variable rate (1)	—		—		—		—
Total	$	29,563	$	272,093	$	20,445	$	322,101

⁽¹⁾ Variable rate loans that have hit their established interest rate floor are reported as fixed rate loans.

Asset Quality

Nonperforming Assets

Nonperforming assets are comprised of nonperforming loans, accruing loans which are past due 90 days or more, repossessed assets and other real estate owned ("foreclosed assets"). Nonperforming loans are loans that have been placed into nonaccrual status when doubts arise regarding the full collectibility of principal or interest and we are therefore uncertain that the borrower can satisfy the contractual terms of the loan agreement. In addition our policy is to place a loan on nonaccrual status at the point when the loan becomes past due 90 days unless there is sufficient documentation to establish that the loan is well secured and in the process of collection. These nonaccrual loans may be returned to accrual status when the factors which initially indicated the doubtful collectibility of the loans have ceased to exist. Foreclosed assets consists typically of real estate assets acquired either through foreclosure proceedings or deed in lieu of foreclosure. Foreclosed assets and repossessed assets are carried at their estimated fair market valuation less the expected costs of disposition.

Nonperforming assets have decreased year over year by 29.3%, having fallen to $51.1 million as of December 31, 2012 from their previous level of $72.4 million as of December 31, 2011.  This decrease is the result of aggressive asset resolution activity and the addition of resources in 2012 specifically dedicated to the effective management and reduction of the problem asset portfolio. As a result of this increased resolution activity, credit losses associated with loan charge offs and the write down of foreclosed assets would be expected to increase from that of prior periods relative to assets, and is symptomatic of the reductions in the level of nonperforming assets noted above. Bank management continues to focus its efforts upon the reduction of the level of all non-performing assets and also continues to explore a variety of options which would enhance and accelerate this resolution activity while minimizing associated losses.

The following table describes our nonperforming asset portfolio composition by category based on the loan classifications discussed in Note C - Loans and Allowance for Loan Losses to the financial statements for December 31, 2012, 2011, 2010, 2009, and 2008 (amounts in thousands):

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	2012			2011			2010			2009			2008
Nonaccrual loans:
Commercial and industrial	$	664		$	779		$	3,501		$	387		$	607
Commercial construction and land development	15,941			29,538			22,969			8,921			5,808
Commercial real estate	9,091			14,830			10,718			2,751			2,115
Residential construction	833			1,469			4,773			3,822			6,072
Residential mortgage	9,408			13,466			9,482			4,134			6,169
Consumer	33			59			49			90			33
Total nonaccrual loans	$	35,970		$	60,141		$	51,492		$	20,105		$	20,804
Foreclosed assets:
Commercial and industrial	$	71		$	—		$	—		$	—		$	—
Commercial construction and land development	$	8,363		$	6,863		$	3,954		$	3,068		$	409
Commercial real estate	2,420			2,183			1,749			1,775			574
Residential construction	602			837			1,469			3,896			—
Residential mortgage	3,680			2,276			1,633			1,969			208
Total foreclosed assets	$	15,136		$	12,159		$	8,805		$	10,708		$	1,191
Past due 90 days or more and still accruing:
Commercial and Industrial	$	—		$	—		$	109		$	20		$	18
Business Credit Cards	—			—			—			—			—
Commercial construction and land development	—			—			—			441			456
Commercial real estate	—			—			—			425			112
Residential construction	—			—			—			—			—
Residential mortgage	—			—			797			287			400
Consumer	—			—			6			32			60
Consumer credit cards	32			60			34			—			—
Total past due 90 days and still accruing	$	32		$	60		$	946		$	1,205		$	1,046
Total nonperforming assets	$	51,138		$	72,360		$	61,243		$	32,018		$	23,041
Nonperforming loans to gross loans	7.23		%	10.00		%	7.69		%	2.98		%	3.21		%
Nonperforming assets to total assets	5.91		%	7.89		%	6.46		%	3.28		%	2.49		%
Allowance coverage of nonperforming loans	45.97		%	35.12		%	42.15		%	73.56		%	43.67		%

Nonaccrual and TDR Loans

Interest income is calculated by the relevant interest method based upon the daily outstanding balance of the loan. The recognition of interest income ceases however when it becomes probable that full collectibility of all interest due under the contractual terms of the loan agreement may not occur. As a result, loans may either be placed in nonaccrual status and/or restructured to allow for a payment stream which may appropriately accommodate a borrower's diminished repayment capacity. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower’s weakened financial condition. Such restructured loans are typically initially placed into nonaccrual status and may later be returned to accrual status depending upon a demonstrated ability by the borrower to meet the repayment terms of the restructured loan. Payments received on nonaccrual loans are applied first to principal and thereafter applied to interest only after all principal has been collected. We accrue interest on restructured loans at the restructured rates when we anticipate that no loss of original principal will occur.

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The gross interest income that would have been recorded for loans accounted for on a nonaccrual basis at December 31, 2012 and 2011 was approximately $5.1 million and $12.4 million, respectively.  These amounts represent interest income that would have been recorded if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period. The amount of interest recognized on nonaccrual loans and troubled debt restructuring ("TDR") during 2012 and 2011 was approximately $356,000 and $713,000, respectively.  

The composition of the nonperforming asset portfolio is dominated by commercial construction and land development loans and foreclosed assets, representing 42.7% of the nonaccrual loan portfolio and 55.2% of the foreclosed assets portfolio. This is to be expected given that real estate secured lending is a significant portion of the Bank's total portfolio. This loan segment has been negatively impacted by the economic environment found within the Bank's market area and the resultant diminished demand for the products of such development and construction projects. For the nonaccrual loans within this portfolio there is a continual process of review with regards to the adequacy of reserves, and currently this category accounts for 35.5% of reserves for all loans which have been individually evaluated for impairment and 49.0% of the Bank's total allowance for loan and lease losses. Foreclosed assets within this category are continually reviewed and marked to market as required.

In addition, the Company has $10.9 million in loans in the coastal North Carolina region which are collateralized by properties that have seen significant declines in value. The Company has evaluated these loans in determining its allowance for loan losses as of December 31, 2012, and has determined that its exposure to loss on these loans is either mitigated by the values of the underlying collateral or reflected within our increased provision.

Troubled Debt Restructurings

Loans are classified as a TDR when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.

Loans in the process of renewal or modification are reviewed by the Bank to determine if the risk grade assigned is accurate based on updated information. All loans identified by the Bank's internal loan grading system to pose a heightened level of risk at or prior to renewal or modification are also reviewed to determine if the loan should be classified as a TDR. The Bank's knowledge of the borrower's situation and any updated financial information obtained is first used to determine whether the borrower is experiencing financial difficulty. Once this is determined, the Bank reviews the modification terms to determine whether a concession has been granted. If the Bank determines that both conditions have been met, the loan will be classified as a TDR. If the Bank determines that both conditions have not been met, the loan is not classified as a TDR, but would typically then be monitored for any additional deterioration. Documentation to support this determination of TDR classification is maintained within the credit file.

The Bank's policy with respect to accrual of interest on loans restructured in a TDR process follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is considered. If the borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual until such time as continued performance has been demonstrated, typically a period of at least six consecutive payments. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. We will continue to closely monitor these loans and will cease the accrual of interest if management believes that the borrowers may not continue repayment performance based upon the restructured terms.

All TDRs are considered to be impaired and are evaluated as such in the quarterly allowance calculation.  As of December 31, 2012, the recorded investment in performing TDRs and their related allowance for loan losses totaled $13.3 million and $1.0 million, respectively.  Outstanding nonperforming TDRs and their related allowance for loan losses totaled $18.3 million and $628,000, respectively, as of December 31, 2012.

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	2012		2011		2010		2009		2008
Performing TDRs:
Commercial and industrial	$	349	$	360	$	873	$	668	$	—
Commercial construction and land development	3,484		1,631		9,130		908		—
Commercial real estate	5,522		4,910		5,962		2,028		—
Residential construction	—		165		314		627		—
Residential mortgage	3,945		3,728		4,286		5,015		—
Consumer	—		15		18		28		—
Total performing TDRs	$	13,300	$	10,809	$	20,583	$	9,274	$	—

	2012		2011		2010		2009		2008
Non-Performing TDRs:
Commercial and industrial	$	87	$	315	$	516	$	37	$	—
Commercial construction and land development	10,659		18,357		16,525		273		—
Commercial real estate	4,437		7,395		6,897		—		—
Residential construction	—		345		2,078		—		—
Residential mortgage	3,113		7,470		4,908		—		—
Consumer	—		8		14		—		—
Total non-performing TDRs	$	18,296	$	33,890	$	30,938	$	310	$	—

As of December 31, 2012 there were 52 restructured loans in accrual status totaling $13.3 million compared to 52 restructured loans in accrual status totaling $10.8 million as of December 31, 2011. A number of TDR loans have demonstrated acceptable repayment performance during the course of the year and this fact is demonstrated by the increase in the levels of performing TDRs to 42% of total TDRs as of December 31, 2012 compared to 24% of total TDRs designated as performing as of December 31, 2011.

Foreclosed Assets

As of December 31, 2012 there were 281 foreclosed properties valued at $15.1 million and 208 nonaccrual loans totaling $36.0 million compared with 163 foreclosed properties valued at $12.2 million and 357 nonaccrual loans totaling $60.1 million, as of December 31, 2011.

The following table presents for the dates indicated information regarding these foreclosed assets.

	2012			2011			2010			2009			2008
Foreclosed Assets beginning of period	$	12,159		$	8,805		$	10,708		$	1,191		$	1,689
Loans transferred to foreclosed assets	12,970			11,318			9,860			12,299			374
Improvements to foreclosed assets	11			74			357			27			61
Proceeds from sales, net of selling expenses	(7,254		)	(4,872		)	(8,164		)	(2,631		)	(736		)
Net loss on sale of foreclosed assets	(429		)	(390		)	(792		)	(178		)	(197		)
Valuation allowance for foreclosed assets	(2,321		)	(2,776		)	(3,164		)	—			—
Foreclosed assets end of period	$	15,136		$	12,159		$	8,805		$	10,708		$	1,191

Allowance for Loan Losses and Summary of Loan Loss Experience

The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses.  Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed.  Management evaluates the adequacy of our allowance for loan losses on a monthly basis.  The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio

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composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations.  Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.

Management has developed a model for evaluating the adequacy of the allowance for loan losses.  The model uses the Company’s internal grading system to quantify the risk of each loan.  The grade is initially assigned by the lending officer and/or the credit administration function.  The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm.  The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. Additionally, regulatory agencies review the adequacy of the risk grades assigned as well as the risk grade process and may require changes based on judgments that differ from those of management that could impact the allowance for loan losses.

The grading system is comprised of seven risk categories for active loans.  Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan.  Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan.  Grade 6 loans are considered sub-standard and are generally impaired, however, certain of these loans continue to accrue interest, and are not TDRs and are not considered impaired.    Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Loans can also be classified as non-accrual, troubled debt restructure, or otherwise impaired, all of which are considered impaired and evaluated for specific reserve under FASB ASC 310-10 regardless of the risk grade assigned.

When the Bank determines that a loan is impaired an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal.  Each loan is analyzed to determine the net value of collateral and an estimate of potential loss.  The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal.  If collection is deemed to be collateral dependent then the deficiency is generally charged off unless the deficiency is less than 10% of the balance, there has not been a prior charge-off, and the amount of such items in aggregate is immaterial. If the collection of the loan is not collateral dependent then a specific reserve is established for the deficiency. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value.  Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and prior charge-offs.

Loans that are not assessed for specific reserves under Financial Accounting Standards Board Accounting Standard Codification ("FASB ASC") 310-10 are reserved for under FASB ASC 450.  The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels for each call report category. The qualitative factor addresses loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations.   Together these two components comprise the ASC 450, or general, reserve.    

The Bank incorporated three key changes to the allowance for loan losses methodology for the ASC 450 reserve during the fourth quarter of 2012 that produce a more prudent reserve in the current environment. The changes included i) making the qualitative charge-off trend factor more objective, ii) factoring in risk grade to the determination of quantitative reserve assigned for each loan category, and iii) changing the look-back period for determining the charge-off rate used for calculating the quantitative ASC 450 reserve. The net effect of all changes, compared to the prior model, is detailed in Note A in the consolidated financial statements of this report.

The allowance for loan losses at December 31, 2012 was $16.5 million, which represents 3.32% of total loans outstanding compared to $21.1 million or 3.51% as of December 31, 2011.  For the year ended December 31, 2012, net loan charge-offs were $12.0 million compared with $12.4 million for the prior year period and non-accrual loans were $36.0 million and $60.1 million at December 31, 2012 and 2011, respectively.    

In the second quarter of 2012 the Bank established a dedicated Special Assets department which included additional staff dedicated to problem loan resolution. Resolutions of problem loans could result in various outcomes including work-outs that would return the loan to pass and/or performing status as well as resolutions that escalate the loan to settlement or charge-off. As a result of having dedicated resources to manage the problem loan portfolio the Bank has been able to significantly reduce the number of problem loans. In addition, fewer loans are deteriorating and being added to the problem loan categories.

Impaired loans evaluated for specific reserve as of December 31, 2012 were $58.9 million compared to $93.1 million for the year ended December 31, 2011. While the amount of loans evaluated for specific reserve declined by $34.2 million, the percentage

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reserved for those balances went up from 7.91% as of December 31, 2011 to 9.15% as of December 31, 2012. The total of the reserve assigned to a loan and the amount previously charged off compared to the original loan amount or original maximum credit demonstrates the capacity for future losses on the loan. The higher the percentage of reserve plus prior charge-off the lower the remaining capacity for future losses. Of the loans that have had a prior charge-off and/or have a specific reserve assigned to them, 26% have been written down and reserved for equal to or more than 50% of the original loan amount or maximum credit. As of December 31, 2011, the Company had $29.7 million in loans in the coastal North Carolina region which are collateralized by properties that have seen significant declines in value, compared to $10.9 million as of December 31, 2012. Loans in this region that have have been evaluated for specific reserve have been written down and/or reserved for an average of 73% of the original loan amount or maximum credit as of December 31, 2012 compared to 64.18% as of December 31, 2011.

The net impact to the ASC 310 reserve was a decrease from $7.4 million as of December 31, 2011 to $5.4 million as of December 31, 2012. The reduction in specific reserve for 2012 was primarily the result of the efforts by Special Assets to reduce problem loans as well as fewer loans being identified as problems. In 2011, 346 loans totaling $67.0 million were moved to non-accrual status compared to 138 loans totaling $19 million in 2012. In 2011, 295 loans totaling $38.9 million were downgraded from pass to non-pass compared to 116 loans totaling $12.2 million in 2012.

The ASC 450 reserve as of December 31, 2011 was 2.71% compared to 2.50% as of December 31, 2012. While the ASC 450 reserve decreased year over year it was increased from 2.08% as of September 30, 2012 due to increased charge-offs that resulted from problem loan resolution in the fourth quarter. The change in the general reserve considers the net charge-offs as well as the improved credit quality of the remaining loans in the portfolio. As of December 31, 2011, 11 out of 12 allowance for loan loss categories had more than 4% of the total unimpaired loans for that category in risk grades 5 and 6 compared to 3 out of 13 with more than 4% as of December 31, 2012 .

The three categories that still have more than 4% in risk grades 5 and 6 as of December 31, 2012 have also improved as shown below:

Percentage of Performing Unimpaired Loans in Risk Grades 5 and 6	2012	2011
Land, Land Development, Commercial Construction	17%	44%
1-4 Family non-revolving senior liens	10%	30%
1-4 Family non-revolving junior liens	11%	36%

As further support for the improving credit quality of our borrowers, it is noted that the 30-89 day past due numbers are down to $2.6 million as of December 31, 2012 compared to $6.8 million as of December 31, 2011, a 54% decrease. Additionally 30-89 days past dues have declined $10 million (75%) since the peak in February 2011.

The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business.  While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used.  We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance.  Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above.  Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.

The following table summarizes the Bank’s loan loss experience for the years ending December 31, 2012, 2011, 2010, 2009, and 2008 (amounts in thousands, except ratios):

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	2012			2011			2010			2009			2008
Balance at beginning of period	$	21,141		$	22,100		$	15,676		$	9,542		$	6,653
Charge-offs:
Commercial and industrial	649			2,142			6,137			1,496			260
Business credit cards	54			39			58			11			76
Commercial construction and land development	7,929			7,735			12,593			2,502			141
Commercial real estate	3,691			1,802			2,499			593			544
Residential construction	103			588			1,634			1,876			—
Residential mortgage	1,801			2,126			4,842			2,657			582
Consumer	473			375			569			349			309
Consumer credit cards	43			102			105			111			83
	14,743			14,909			28,437			9,595			1,995
Recoveries:
Commercial and industrial	622			419			820			35			51
Business credit cards	—			—			—			—			—
Commercial construction and land development	1,176			404			865			19			12
Commercial real estate	366			485			210			—			—
Residential construction	—			291			229			22			—
Residential mortgage	458			771			736			95			7
Consumer	147			127			249			70			78
Consumer credit cards	1			13			8			18			10
	2,770			2,510			3,117			259			158
Net charge-offs	(11,973		)	(12,399		)	(25,320		)	(9,336		)	(1,837		)
Additions charged to operations	7,381			11,440			31,744			15,470			3,336
Adjustments due to Merger with Longleaf Community Bank	—			—			—			—			1,390
Balance at end of year	$	16,549		$	21,141		$	22,100		$	15,676		$	9,542
Ratio of net charge-offs during the year to average gross loans outstanding during the year	2.21		%	1.90		%	3.58		%	1.30		%	0.29		%

While charge-offs remained at close to 2011 levels, the quality of remaining loans has improved. Charge-offs in 2012 were elevated due to the Bank's efforts to work through problem loans. The Bank added additional dedicated resources in 2012 to focus on the resolution of these credits. As a result of these efforts, non-performing loans were reduced 40% from $60.1 million as of December 31, 2011 to $36.0 million as of December 31, 2012. There are three categories that contributed the most to charge-offs in 2012, Commercial Construction and land development, commercial real estate, and residential mortgage. Impaired loans for each of these categories are down 45%, 32%, and 30% respectively compared to December 31, 2011.

The following table summarizes the Bank’s allocation of allowance for loan losses at December 31, 2012, 2011, 2010, 2009, and 2008 (amounts in thousands, except ratios)

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	At December 31,
	2012				2011				2010
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
Commercial and industrial	$	1,185	7	%	$	2,730	13	%	$	2,049	9	%
Commercial construction and land development	7,251		44	%	8,799		41	%	8,375		39	%
Commercial real estate	2,961		18	%	3,800		18	%	4,038		18	%
Residential construction	423		3	%	740		4	%	2,848		13	%
Residential mortgage	4,471		27	%	4,630		22	%	4,291		19	%
Consumer	188		1	%	413		2	%	415		2	%
Other	70		—	%	29		—		84		—
Total	$	16,549	100	%	$	21,141	100	%	$	22,100	100	%

	At December 31,
	2009				2008
	Amount		% of Total Loans (1)		Amount		% of Total Loans (1)
Commercial and industrial	$	1,737	11	%	$	686	7	%
Commercial construction and land development	5,441		35	%	2,535		27	%
Commercial real estate	1,418		9	%	1,929		20	%
Residential construction	1,814		12	%	845		9	%
Residential mortgage	4,655		29	%	2,721		28	%
Consumer	446		3	%	728		8	%
Other	165		1	%	98		1	%
Total	$	15,676	100	%	$	9,542	100	%

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

Deposits

Deposits are the primary source of funds for our portfolio loans, mortgage pipeline and investments. Our deposit strategy is to obtain deposit funds from within our market areas through relationship banking. We believe that the great majority of our deposits are from individuals and entities located in our market areas as we represent over 30% of the market share in Johnston County where our main office and five branch offices are located. We are positioned to obtain wholesale deposits, including brokered deposits, from various sources in order to supplement our liquidity if needed. As of December 31, 2012, total deposits were approximately $699.9 million, down from $745.9 million at December 31, 2011, due to reductions in brokered deposits of $91.8 million which were repaid due to excess liquidity.

Traditional core deposits generally include noninterest-bearing demand deposits, interest-bearing transaction accounts, which are savings, money market and interest checking accounts as well as relationship-oriented certificates of deposit less than $100,000. Our core deposits increased $55.6 million during 2012, while time deposits over $100,000 decreased $101.6 million which includes the $91.8 million reduction of brokered deposits referenced above. Our noninterest-bearing demand deposit growth includes deposits related to ACH customers averaging $64.4 million in 2012, which represents high daily balances that are short term in nature. As we successfully grew lower-costing transaction deposits, we intentionally, reduced time deposits, in particular, generally higher costing time deposits with non-relationship customers. Our continued success in building and retaining core deposit relationships has provided the opportunity to rely less on non-traditional funding sources such as Internet deposits, brokered time deposits as well as significantly reduce generally non-relationship and more volatile time deposits. It is important to note that

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while a large percentage of our time deposits are over $100,000, they are with very loyal customers whom we have served for many years throughout our 100 year history.

Brokered deposits, including time deposits placed in the Certificate of Deposit Account Registry Service, ("CDARS"), and various brokered deposit programs decreased $98.1 million, or 67.0%, from $146.3 million as of December 3, 2011, compared to $48.2 million at December 31, 2012. The CDARS program provides full FDIC insurance on deposit balances greater than posted FDIC limits by exchanging larger depository relationships with other CDARS members. CDARS is offered as a service to our customers who either require or desire full FDIC insurance coverage of their deposits. Non-CDARS brokered deposit reductions have been intentional as we needed to reduce excess liquidity throughout 2012.

Time certificates in amounts of $100,000 or more outstanding at December 31, 2012, 2011, 2010, 2009, and 2008, by maturity were as follows (amounts in thousands):

	2012		2011		2010		2009		2008
Three months or less	$	37,937	$	37,829	$	26,589	$	64,526	$	126,259
Over three months through six months	33,520		33,808		85,088		56,805		73,743
Over six months through twelve months	48,734		74,976		97,933		93,433		54,065
Over twelve months through three years	68,973		144,493		126,780		89,103		21,645
Over three years	26,820		26,524		45,235		1,800		2,823
Total	$	215,984	$	317,630	$	381,625	$	305,667	$	278,535

Borrowings

The Bank borrows funds principally from the FHLB.  There were no short-term advances outstanding from the FHLB at December 31, 2012, 2011, and 2010.

Information regarding such borrowings at December 31, 2012, 2011, and 2010, are as follows (amounts in thousands, except rates):

	2012			2011			2010
Balance outstanding at December 31	$	112,000		$	112,000		$	112,271
Weighted average rate at December 31	3.58		%	3.58		%	3.58		%
Maximum borrowings during the year	$	112,000		$	112,271		$	112,543
Average amounts outstanding during year	$	112,000		$	112,170		$	112,441
Weighted average rate during year	3.58		%	3.58		%	3.63		%

The Company completed a $12 million offering of Subordinated Promissory Notes on August 12, 2009, see Note I - Subordinated Promissory Notes and the Company also has $12.4 million in subordinated debentures, see Note H - Trust Preferred Securities.

The Bank may purchase federal funds through secured federal funds lines of credit with various banks aggregating $16.0 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 2012, 2011, and 2010, the Bank purchased no federal funds. At December 31, 2012 and December 31, 2011, the Bank had no federal funds borrowings outstanding under these lines.

Results of Operations for the Years Ended December 31, 2012 and 2011

Overview

During 2012, we had a net loss of $5.4 million or $0.90 basic and diluted net loss per share, which represents a $2.0 million, or 23.33% improvement from the 2011net loss of $9.1 million, or $1.20 basic and diluted net loss per share.  The improvement

39

in performance resulted from a $4.1 million decrease in loan loss provision, $2.0 million increase in non-interest income, offset by a $3.5 million decrease in net interest income as well as a modest $604,000 increase in non-interest expense.

The allowance for loan losses decreased as the need for additional provisions declined in 2012. The reserves required for the allowance for loan losses declined as the campaign to aggressively resolve problem loans continued. Loan charge-offs totaled $14.7 million in 2012 as compared to $14.9 million in 2011.  Recoveries of loan charge-offs totaled $2.8 million in 2012 as compared to $2.5 million in 2011.  However, the provision for loan loss expense decreased approximately $4.1 million, to $7.4 million in 2012 as compared to $11.4 million in 2011, resulting in an ending allowance for loan losses of $16.5 million at December 31, 2012, as compared to $21.1 million at December 31, 2011.  

Non-interest income increased 37.72%, or $2.0 million, as a result of increased service charges, commissions and fees, an increase in other non-interest income, a gain on sale of investment securities, and the lack of an impairment loss in 2012 which was recognized in 2011. Service charges, commissions and fees increased $254,000 for 2012 primarily due to increases in interchange fees on credit card purchases, increases in fees associated with higher levels of deposit activity, and increased rental income resulting from additional foreclosed assets. Likewise, other non-interest income increased $313,000 for 2012 as a result of fees from the sale of participating Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") government loans. Gain on sale of securities increased $1.0 million, from a gain of $958,000 on sales of $85.9 million during 2011, to nearly $2.0 million gain on sales of $50.4 million during 2012. No impairment losses related to securities were recorded in 2012, compared to a $585,000 impairment loss recorded in 2011.

Net interest income decreased $3.5 million, or 13.58%, from $25.9 million for 2011, to $22.4 million for 2012. The primary reason for this decline was a $5.6 million reduction in interest income, offset by a $2.1 million decrease in interest expense. A decline in both outstanding loans and time deposits, as well as a decrease in investment yields, account for the above mentioned decreases.

Non-interest expense increased approximately $604,000 in 2012, from $28.9 million for 2011, compared to $29.5 million for 2012. Other operating expenses increased $456,000 resulting from high volume of appraisals for impaired loan properties, a significant increase in insurance expense, write-off of the core deposit intangible from a prior merger, net of decreased cost from discontinued merchant programs. Collection expense increased $254,000 in 2012 as we aggressively addressed asset quality performance. Consulting fees were up by $405,000 primarily as a result of special teams contracted to assist us with managing our non-performing loans and foreclosed assets. These increased expenses were offset by a total $480,000 decrease comprised of decreases in salaries, equipment expense, and FDIC insurance assessment as management continues to seek ways to contain costs.

Net Interest Income

The primary component of earnings for the Bank is net interest income, which 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 decreased by $3.5 million, from $25.9 million and a net yield of 2.87% in 2011 compared to $22.4 million with a net yield of 2.59% in 2012.  The major reason for this decline was due to a $5.6 million reduction in interest income, offset by a $2.1 million decrease in interest expense, both primarily driven by declines in the Bank's outstanding loan balance and time deposits, and a decrease in investment yields. Our loans repriced to the floor rate when they renewed or were modified and deposits repriced to lower levels as the low rate environment continued throughout 2012.  The decrease in yield and net interest income was a result of a 45 basis point (bp) decline in the yield on interest earning assets, which was only marginally offset by a 10bp decline in yield of interest-bearing liabilities since time deposits greater than $100,000, borrowings and subordinated debentures were not re-priced during 2012.  The national prime rate remained at 3.25% at December 31, 2012.

On average, our interest-earning assets declined$38.7 million during 2012 from 2011, which accounts for the majority of the $5.6 million decrease in interest income. The decline in interest-earning assets was primarily a result of a $91.7 million decrease in loans, offset by a $53.6 million increase in interest earning deposits in banks. The nearly $6.0 million decrease in interest income on loans was due to a decline in the Bank's outstanding loan balance, offset by a slight increase in the average interest rates. Average bank loans decreased by $91.7 million during 2012, from $651.9 million during 2011, to $560.2 million during 2012. 

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The average interest on those loans increased 5bp, from 5.61% during 2011, to 5.66% during 2012 which had little impact on the income. Additionally, interest income on investments also decreased $1.0 million resulting from a 93bp decline in the average yield, from 2.45% in 2011 to 1.52% in 2012. Although the average deposits in banks increased $53.6 million, the average yield on those deposits were 0.36%, a 2bp increase over the 2011 period, and had little impact on the overall decrease on interest earning income.

Interest expense from interest-bearing liabilities decreased by $2.1 million. The primary reason for the decrease in interest expense was the decline in time deposits. Average time deposits at $100,000 and over, decreased from $354.4 million during 2011, compared to $276.7 million during 2012, resulting in a $1.5 million decrease in interest expense.

We set interest rates on deposits and loans at competitive rates. Interest rate spreads have decreased to 2.28% from 2.63% for 2012 and 2011, respectively. The interest rate spread is the difference between the interest rates earned on average loans and investments, and the interest rates paid on average interest-bearing deposits and borrowings. 

The following schedule presents average balance sheet information for the years 2012, 2011, and 2010, along with related interest earned and average yields for interest-earning assets and the interest paid and average rates for interest-bearing liabilities(amounts in thousands, except for average rates).  Nonaccrual notes are included in loan amounts.

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	Average Daily Balances, Interest Income/Expense, Average Yield/Rate For the Years Ended December 31,
	2012						2011						2010
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
Interest-earning assets:
Loans (1)	$	560,245	$	31,704	5.66	%	$	651,944	$	36,550	5.61	%	$	708,095	$	41,489	5.86	%
Investment securities - taxable	112,141		1,710		1.52	%	112,327		2,753		2.45	%	87,352		2,704		3.10	%
Investment securities - tax exempt	—		—		—	%	—		—		—	%	32,393		1,271		3.92	%
Other investments and FHLB stock	7,680		313		4.08	%	8,103		258		3.18	%	9,822		357		3.63	%
Interest earning deposits in banks	183,555		652		0.36	%	129,982		443		0.34	%	63,809		157		0.25	%
Total interest-earning assets	863,621		34,379		3.98	%	902,356		40,004		4.43	%	901,471		45,978		5.10	%
Other assets	39,910						35,979						53,518
Total assets	$	903,531					$	938,335					$	954,989
Interest-bearing liabilities:
Deposits:
NOW and money market deposits	$	125,400	$	379	0.30	%	$	118,243	$	503	0.43	%	$	123,458	$	766	0.62	%
Savings deposits	32,586		75		0.23	%	31,190		89		0.29	%	30,385		121		0.40	%
Time deposits, $100,000 and over	276,672		4,425		1.60	%	354,370		5,919		1.67	%	320,751		5,618		1.75	%
Other time deposits	133,825		1,787		1.34	%	141,281		2,270		1.61	%	183,135		3,449		1.88	%
Borrowed funds	112,000		4,076		3.64	%	112,170		4,072		3.63	%	112,442		4,082		3.63	%
Subordinated debentures and promissory notes	24,372		1,263		5.18	%	24,372		1,243		5.10	%	24,372		1,246		5.11	%
Total interest-bearing liabilities	704,855		12,005				781,626		14,096		1.80	%	794,543		15,282		1.92	%
Noninterest-bearing deposits	163,390						117,491						89,688
Other liabilities	4,815						3,254						4,740
Stockholders' equity	30,471						35,964						66,018
Total liabilities and shareholders' equity	$	903,531					$	938,335					$	954,989
Net interest income and interest rate spread			$	22,374	2.28	%			$	25,908	2.63	%			$	30,696	3.18	%
Net yield on average interest-earning assets					2.59	%					2.87	%					3.41	%
Ratio of average interest-earning assets to average interest-bearing liabilities					122.52	%					115.45	%					113.46	%

(1) Loans includes loans held for sale, which were reclassified on December 31, 2012 in anticipation of the sale to First Bank which closed on March 22, 2013

The following table shows changes in interest income and expense by category and rate/volume variances for the years ended December 31, 2012, 2011 and 2010. The changes due to rate and volume were allocated on their absolute values(amounts in thousands, except for average rates):

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	Year Ended December 31, 2012 vs. 2011									Year Ended December 31, 2011 vs. 2010
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Loans	$	(6,246	)	$	303		$	(5,943	)	$	(3,218	)	$	(1,720	)	$	(4,938	)
Loans held for sale	1,096			—			1,096			—			—			—
Investment securities - taxable	(5		)	(1,038		)	(1,043		)	698			(595		)	103
Investment securities - tax exempt	—			—			—			(1,272		)	—			(1,272		)
Other investments	(15		)	70			55			(53		)	(99		)	(152		)
Other interest-earning assets	186			23			209			193			92			285
Total interest income	(4,984		)	(642		)	(5,626		)	(3,652		)	(2,322		)	(5,974		)
Interest expense:
Deposits
NOW and money market deposits	26			(150		)	(124		)	(27		)	(236		)	(263		)
Savings deposits	4			(18		)	(14		)	3			(35		)	(32		)
Time deposits over $100,000	(1,270		)	(223		)	(1,493		)	2			(97		)	(95		)
Other time deposits	(111		)	(373		)	(484		)	(176		)	(608		)	(784		)
Borrowed funds	(6		)	10			4			(10		)	—			(10		)
Subordinated Debentures	—			20			20			—			(2		)	(2		)
Total interest expense	(1,357		)	(734		)	(2,091		)	(208		)	(978		)	(1,186		)
Net interest income increase (decrease)	$	(3,627	)	$	92		$	(3,535	)	$	(3,444	)	$	(1,344	)	$	(4,788	)

Provision for Loan Losses

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.

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 to $51.1 million at December 31, 2012 from $72.4 million at December 31, 2011.  This decrease is the result of aggressive asset resolution activity and the addition of resources in 2012 specifically dedicated to the effective management and reduction of the problem asset portfolio. Our provision for loan losses was $7.4 million during 2012 compared to $11.4 million during 2011, a decrease of $4.1 million.  Net charge-offs in 2012 decreased to $12.0 million compared to $12.4 million in 2011.  As a percent of average loans, net charge-offs were 2.1%, a decrease of 0.2% from 2011.  Our allowance for loan losses, expressed as a percentage of gross loans, was 3.32% and 3.51% at December 31, 2012 and 2011, respectively.  At December 31, 2012, the allowance for loan losses amounted to $16.5 million which management believes is adequate to absorb losses inherent in our loan portfolio.

Non-interest Income

Non-interest income before gains and losses on sales of securities, and impairment losses on investments increased$417,000 or 8.35%, from $5.0 million during 2011 to $5.4 million in 2012.  Our non-interest income is comprised primarily of service

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charges on deposit accounts, financial services commissions, merchant fees, changes in the value of bank-owned life insurance and various other sources of miscellaneous operating income.

Non-interest Expense

Our non-interest expense increased from $28.9 million in 2011 to $29.5 million in 2012, a increase of $604,000, primarily the result of increases in professional and consulting fees and various other operating expenses.

Income Taxes

Due to the losses in 2012, 2011, and 2010 as well as the uncertainty of when positive earnings will be realized in the future, we have recorded deferred tax assets in each of the years which have been been fully reserved through establishment of a valuation allowance of $21.7 million as of December 31, 2012, $18.6 million as of December 31, 2011, and $15.2 million as December 31, 2010.

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, 2012, 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 $74.8 million. See Note L - Commitments and Contingencies in the accompanying notes to the consolidated financial statements for additional detail regarding the Bank's off-balance sheet risk exposure.

Liquidity and Capital Resources

Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources.  The term "liquidity" refers to our ability to generate adequate amounts of cash to meet our needs for funding loan originations, deposit withdrawals, maturities of borrowings and operating expenses. Management measures our liquidity position by giving consideration to both on and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.

Sources of liquidity include cash and cash equivalents, (net of federal requirements to maintain reserves against deposit liabilities), investment securities eligible for pledging to secure borrowings, investments available for sale, loan repayments, loan sales, deposits and borrowings from the Federal Home Loan Bank secured with pledged loans and securities, and from correspondent banks under overnight federal funds credit lines. In addition to interest rate sensitive deposits, the Company's primary demand for liquidity is anticipated funding under credit commitments to customers.

We have maintained a sufficient level of liquidity in the form of cash, federal funds sold, and investment securities. These aggregated $303.7 million at December 31, 2012, compared to $278.2 million at December 31, 2011.

Supplementing customer deposits as a source of funding, we have available lines of credit from various correspondent banks to purchase federal funds on a short-term basis of approximately $16.0 million. As of December 31, 2012, the Bank has the credit capacity to borrow up to $173.1 million, from the Federal Home Loan Bank of Atlanta (“FHLB”), with $112.0 million outstanding as of December 31, 2012 and 2011. Outstanding borrowing capacity from correspondent banks and the FHLB would have to be secured prior to funds being advanced.

At December 31, 2012, our outstanding commitments to extend credit consisted of loan commitments of $37.9 million, undisbursed lines of credit of $20.9 million, unused credit card lines of $13.2 million, financial stand-by letters of credit of $416,000 and performance stand-by letters of credit of $2.4 million. We believe that our combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan demand, and deposit maturities and withdrawals in the near term.

At December 31, 2011, our outstanding commitments to extend credit consisted of loan commitments of $43.1 million, undisbursed lines of credit of $19.9 million, unused credit card lines of $13.7 million, financial stand-by letters of credit of $378,000 and performance stand-by letters of credit of $1.7 million.

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Certificates of deposits represented 49.5% of our total deposits at December 31, 2012, a decrease from 61.3% at December 31, 2011. Brokered and out-of-market certificates of deposit totaled $48.2 million at year-end 2012 and $146.3 million at year-end 2011, which comprised 6.9% and 19.6% of total deposits, respectively. Certificates of deposit of $100,000 or more, inclusive of brokered and out-of-market certificates, represented 30.9% of our total deposits at December 31, 2012 and 42.6% at December 31, 2011. Large certificates of deposits are generally considered rate sensitive. While we will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention.

The Company sold $12.0 million aggregate principal amount of subordinated promissory notes to certain accredited investors between May and August 2009.  These notes are due ten years after the date of issuance, beginning May 15, 2019, and the Company is obligated to pay interest at an annualized rate of 8.5% payable in quarterly installments beginning on the third month anniversary of the date of issuance.  The Company may prepay the notes at any time after the fifth anniversary of the date of issuance, subject to compliance with applicable law.

The Company is currently prohibited by the Written Agreement, described in Note K to the Consolidated Financial Statements presented under Item 8 of Part II of this Form 10-K , from paying interest on its subordinated promissory notes and on its subordinated debentures in connection with its trust preferred securities without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for 2012. The Company exercised its right to defer regularly scheduled interest payments on its outstanding subordinated debentures and as of December 31, 2012, $496,000 of interest payments have been accrued for and deferred pursuant to the terms of the indenture governing the subordinated debentures.  The Company may not pay any cash dividends on its Common Stock until it is current on interest payments on such subordinated debentures. The Company has not paid any cash dividends on its Common Stock since it suspended dividends in the fourth quarter of 2010. As a bank holding company, the Company's ability to declare and pay dividends also depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.

Recent Developments

On March 22, 2013, the Bank consummated the sale of certain assets to First Bank and the assumption of certain liabilities by First Bank relating to the Bank's branches in Rockingham and Southern Pines. The purchase price for the assets was approximately $18.3 million. In connection with the closing, the Bank sold approximately $57.3 million in deposits, $16.4 million in loans, and $1.9 million in property and equipment.

Impact of Inflation and Changing Prices

The primary effect of inflation on our operations is reflected in increases in the price of goods and services resulting in higher operating expenses. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. 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.  

Recent Accounting Pronouncements

See Note A - Organization and Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements and management's assessment of the potential impact on our consolidated financial statements.

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

45

believe that the allowance for loan losses, other than temporary impairment of investments available for sale, valuation of foreclosed assets and income taxes represent particularly sensitive accounting estimates.

See Note A - Organization and Summary of Significant Accounting Policies, in the accompanying notes to the consolidated financial statements, and other statements set forth elsewhere in this report, for a comprehensive view of significant accounting estimates and policies.

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

Not applicable.

46

Item 8 - Financial Statements and Supplementary Data.

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 (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for each of the years then ended. 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. The Company was not required to have, nor were we 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, as well as 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Raleigh, North Carolina

March 28, 2013

47

Four Oaks Fincorp, Inc.

Consolidated Balance Sheets

As of December 31, 2012 and December 31, 2011

(Amounts in thousands, except per share data)

	2012			2011
ASSETS
Cash and due from banks	$	18,862		$	13,969
Interest-earning deposits	164,288			127,228
Cash and cash equivalents	183,150			141,197
CDs held for investment	26,460			23,769
Investment securities available for sale, at fair value	73,722			92,790
Investment securities held to maturity, at amortized cost	20,329			20,445
Total investment securities	94,051			113,235
Loans held for sale	19,297			—
Loans	497,929			602,232
Allowance for loan losses	(16,549		)	(21,141		)
Net loans	481,380			581,091
Accrued interest receivable	1,869			1,985
Bank premises and equipment held for sale, net	1,901			—
Bank premises and equipment, net	13,382			16,024
FHLB stock	6,415			6,553
Investment in life insurance	14,139			13,827
Foreclosed assets	15,136			12,159
Other assets	8,318			6,796
TOTAL ASSETS	$	865,498		$	916,636
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	189,048		$	138,123
Money market, NOW accounts and savings accounts	164,614			150,185
Time deposits, $100,000 and over	215,984			317,630
Other time deposits	130,210			139,951
Total deposits	699,856			745,889
Borrowings	112,000			112,000
Subordinated debentures	12,372			12,372
Subordinated promissory notes	12,000			12,000
Accrued interest payable	1,736			1,437
Other liabilities	4,858			3,246
TOTAL LIABILITIES	842,822			886,944
Commitments and Contingencies (Notes C, L, O and P)
Shareholders’ equity:
Common stock, $1.00 par value, 20,000,000 shares authorized; 7,815,315 and 7,663,387 shares issued and outstanding at December 31, 2012 and 2011, respectively	7,815			7,663
Additional paid-in capital	34,192			34,048
Accumulated deficit	(20,040		)	(13,071		)
Accumulated other comprehensive income	709			1,052
TOTAL SHAREHOLDERS' EQUITY	22,676			29,692
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	865,498		$	916,636

 See notes to consolidated financial statements.

48

Four Oaks Fincorp, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2012 and 2011

(Amounts in thousands, except per share data)

	2012			2011
Interest and dividend income:
Loans, including fees	$	31,704		$	36,550
Taxable investments	1,710			2,753
Dividends	313			258
Interest-earning deposits	652			443
Total interest and dividend income	34,379			40,004
Interest expense:
Deposits	6,666			8,781
Borrowings	4,076			4,072
Subordinated debentures	227			208
Subordinated promissory notes	1,036			1,035
Total interest expense	12,005			14,096
Net Interest Income	22,374			25,908
Provision for loan losses	7,381			11,440
Net interest income after provision for loan losses	14,993			14,468
Non-interest income:
Service charges on deposit accounts	1,934			2,017
Other service charges, commissions and fees	2,757			2,503
Gains on sale of investment securities, net	1,981			958
Other-than-temporary impairment loss	(79		)	(656		)
Portion of loss recognized in other comprehensive income	79			71
Net impairment loss recognized in earnings	—			(585		)
Income from investment in life insurance	312			379
Other non-interest income	410			97
Total non-interest income	7,394			5,369
Non-interest expenses:
Salaries	10,406			10,514
Employee benefits	1,920			1,885
Occupancy expenses	1,337			1,332
Equipment expenses	1,470			1,645
Professional and consulting fees	2,647			2,242
FDIC assessments	2,168			2,381
Loss on sale or write-down of foreclosed assets	2,750			3,166
Collection expenses	1,313			1,059
Other operating expenses	5,520			4,703
Total non-interest expenses	29,531			28,927
Loss before income taxes	(7,144		)	(9,090		)
Income tax benefit	(175		)	—
Net loss	$	(6,969	)	$	(9,090	)
Basic net loss per common share	$	(0.90	)	$	(1.20	)
Diluted net loss per common share	$	(0.90	)	$	(1.20	)

See notes to consolidated financial statements.

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Four Oaks Fincorp, Inc.

Consolidated Statements of Comprehensive Loss

For the Years Ended December 31, 2012 and 2011

(Amounts in thousands)

	2012			2011
Net loss	$	(6,969	)	$	(9,090	)
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses) on available for sale securities	1,490			5,225
Tax effect	(567		)	(1,977		)
Reclassification of gains recognized in net loss	(1,981		)	(958		)
Tax effect	764			369
Reclassification of impairment loss recognized in net loss	—			585
Tax effect	—			(226		)
Portion of other-than-temporary impairment loss recognized in other comprehensive income	(79		)	(71		)
Tax effect	30			27
Other comprehensive income (loss) net of tax amount	(343		)	2,974
Comprehensive loss	$	(7,312	)	$	(6,116	)

See notes to consolidated financial statements.

50

Four Oaks Fincorp, Inc.

Consolidated Statements of Shareholders’ Equity

For the Years Ended December 31, 2012 and 2011

(Amounts in thousands, except per share data)

	Common stock			Additional paid-in capital		Accumulated deficit			Accumulated other comprehensive income (loss)			Total shareholders' equity
	Shares	Amount
BALANCE, DECEMBER 31, 2010	7,542,601	$	7,543	$	33,815	$	(3,981	)	$	(1,922	)	$	35,455
Net loss	—	—		—		(9,090		)	—			(9,090		)
Other comprehensive income	—	—		—		—			2,974			2,974
Issuance of common stock	120,786	120		138		—			—			258
Stock based compensation	—	—		95		—			—			95
BALANCE, DECEMBER 31, 2011	7,663,387	7,663		34,048		(13,071		)	1,052			29,692
Net loss	—	—		—		(6,969		)	—			(6,969		)
Other comprehensive loss	—	—		—		—			(343		)	(343		)
Issuance of common stock	151,998	152		82		—			—			234
Stock based compensation	—	—		62		—			—			62
BALANCE, DECEMBER 31, 2012	7,815,385	$	7,815	$	34,192	$	(20,040	)	$	709		$	22,676

See notes to consolidated financial statements.

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Four Oaks Fincorp, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2012 and 2011

(Amounts in thousands)

	2012			2011
Cash flows from operating activities:
Net loss	$	(6,969	)	$	(9,090	)
Adjustments to reconcile net loss to net cash provided by operations:
Provision for loan losses	7,381			11,440
Provision for depreciation and amortization	1,142			1,243
Net amortization of bond premiums and discounts	1,876			1,415
Stock based compensation	62			95
Gain on sale of investment securities	(1,981		)	(958		)
Loss on sale of foreclosed assets, net	429			390
Valuation adjustment on foreclosed assets	2,321			2,776
Income from investment in life insurance	(312		)	(379		)
Impairment loss on investment securities available for sale	—			585
Changes in assets and liabilities:
Other assets	(1,296		)	(233		)
FDIC prepaid insurance premium	—			2,052
Accrued interest receivable	116			636
Other liabilities	1,612			(1,400		)
Accrued interest payable	299			(175		)
Net cash provided by operating activities	4,680			8,397
Cash flows from investing activities:
Proceeds from sales and calls of investment securities available for sale	50,414			85,929
Proceeds from paydowns of investment securities available for sale	12,619			12,314
Proceeds from paydowns of investment securities held to maturity	4,861			925
Purchases of investment securities available for sale	(43,855		)	(55,007		)
Purchases of investment securities held to maturity	(5,319		)	(21,486		)
Purchases of CDs held for investment	(2,691		)	(8,820		)
Purchase of bank owned life insurance	—			5,133
Redemption of FHLB stock	138			4,989
Proceeds from sale of loans	—			(1,898		)
Proceeds from loan participation sale	—			194
Net decrease in loans outstanding	60,063			46,183
Purchase of bank premises and equipment	(401		)	(559		)
Proceeds from sales of foreclosed assets	7,254			4,872
Net capitalized expenditures on foreclosed assets	(11		)	(74		)
Net cash provided by investing activities	83,072			72,695
Cash flows from financing activities:
Net repayments from borrowings	—			(271		)
Net decrease in deposit accounts	(46,033		)	(23,327		)
Proceeds from issuance of common stock	234			258
Net cash used in financing activities	(45,799		)	(23,340		)
Net increase in cash and cash equivalents	$	41,953		$	57,752

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Cash and cash equivalents at beginning of period	141,197			83,445
Cash and cash equivalents at end of period	$	183,150		$	141,197
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings	$	11,706		$	14,271
Supplemental disclosures of noncash investing and financing activities:
Unrealized gains (losses) on investment securities available for sale, net of taxes	$	(343	)	$	2,974
Due from broker for investment securities sold	3,333			—
Transfers of loans to foreclosed assets	12,970			11,318
Transfer of loans to loans held for sale	19,297			—
Transfer from premises and equipment to premises and equipment held for sale	1,901			—

See notes to consolidated financial statements.

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Four Oaks Fincorp, Inc.

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Four Oaks Fincorp, Inc (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 subsidiaries, Four Oaks Bank & Trust Company, Inc. (the "Bank") and Four Oaks Mortgage Services, L.L.C. The Bank operates sixteen 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.

Basis of Presentation

The consolidated financial statements include the accounts and transactions of the Company, a bank holding company incorporated under the laws of the State of North Carolina, and its wholly owned subsidiaries, the Bank, and Four Oaks Mortgage Services, L.L.C., which became inactive on September 30, 2012. All significant intercompany transactions have been eliminated. In March 2006, the Company formed Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing Trust Preferred Securities (as defined in Note H - Trust Preferred Securities).  The Trust is not included in the consolidated financial statements of the Company.

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, fair value of impaired loans, fair value of foreclosed assets, other than temporary impairment of investment securities available for sale and held to maturity, and the valuation allowance against deferred tax assets.

Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. During 2012, the Company experienced significant losses, rapidly escalating impaired loans and declining capital levels. Notwithstanding these negative factors, management believes that its current operations and its cash availability are sufficient for the Company to discharge its liabilities and meet its commitments in the normal course of business. While management does not anticipate further significant deterioration in the Bank's loan portfolio and has performed stress tests and financial modeling under various potential scenarios in determining that the Company and the Bank will maintain at least adequate capitalization under federal regulatory guidelines, no assurances regarding these expectations can be made. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

The banking industry continues to operate in a challenging and volatile economic environment, which has adversely impacted the Company's and the Bank's results of operations and capital levels. Continued losses in 2012, primarily related to the elevated provision for loan losses, continue to reduce the Company's and the Bank's capital levels. The loan loss provision for 2012 was $7.4 million compared to $11.4 million for 2011, net charge offs for the year 2012 were $12.0 million compared to $12.4 million for the comparable period in 2011. At December 31, 2012 the Company's total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.2%, 5.9%, and 3.3%, respectively, compared to 10.3%, 6.97% and 4.4%, respectively, at December 31, 2011. At December 31, 2012, the Bank's total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 10.2%, 8.9% and 5.0%, respectively, compared to 9.8%, 8.5%, and 5.4%, respectively, at December 31, 2011.

54

In response to the difficult operating conditions that exist within the Bank's marketing area, the Bank committed substantial additional resources to management in an effort to accelerate resolution of non-performing and other problem assets over the course of 2012. This resolution activity has included bulk asset sales, short sales (settlements with borrowers at less than the residual principal balance of the loan), increasing the variety and scope of asset marketing activities, negotiating and entering into forbearance agreements in order to minimize loan losses and engaging in other programs to facilitate the reduction of the level of problem assets.

As a result of these activities, the level of non-performing assets has declined by 29.3% from a recorded investment of $72.4 million as of December 31, 2011 to a current level of $51.1 million. Impaired loans declined by 36.8%, from a recorded investment of $93.1 million as of December 31, 2011 to $58.9 million as of December 31, 2012. Net charge-offs over the course of the reporting period totaled $12.0 million, or 19.8% of the average recorded investment in non-performing loans of $60.5 million. This is in comparison to net charge-offs during the 2011 fiscal year of $12.4 million or 14.5% of the average recorded investment in non-performing loans of $85.3 million.

Foreclosed assets increased from $12.2 million as of December 31, 2011 to $15.1 million as of December 31, 2012, reflecting a transfer of foreclosed loans with a recorded investment of $13.0 million over the period. Sales of foreclosed assets increased from $4.9 million in fiscal year 2011 to $7.3 million during the course of fiscal year 2012 while write downs decreased from $2.8 million as of December 31, 2011 to $2.3 million as of December 31, 2012.

The Bank continues to maintain its commitment to resolve its non-performing assets and will continue to explore other additional resolution options which are determined to be both effective and result in the minimization of additional losses and expense.

The Company and the Bank entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”) that imposes certain restrictions on the Company and the Bank, as described in Notes H - Trust Preferred Securities and Note K - Regulatory Restrictions. A material failure to comply with the Written Agreement's terms could subject the Company to additional regulatory actions and further restrictions on its business, which may have a material adverse effect on the Company's future results of operations and financial condition.

In order for the Company and the Bank to maintain its well capitalized position under federal banking agencies' guidelines, management believes that the Company may need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets.   Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity. The Company is also working to reduce its balance sheet to improve capital ratios and is actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2013.

Cash and cash equivalents at December 31, 2012 were approximately $183.2 million, of which approximately $10.9 million has been earmarked for scheduled broker deposit maturities during 2013. Based on our liquidity analysis, management anticipates that the Company will be able to meet its obligations as they become due. If unanticipated market factors emerge, or if the Company is not successful in its efforts to comply with the requirements set forth in the Written Agreement, the FRB and/or the NCCOB may take further enforcement or other actions.  These actions might include greater restrictions on the Company's operations, or a revocation of its charter and the placement of the Bank into receivership if the situation materially deteriorates.

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, 2012, the daily average gross reserve requirement was $3.4 million.

Investment Securities

Investment securities are classified into three categories:

55

(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. The Company began using this category in 2011.

(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. The Company does not use this category.

(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 until 2011. 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.

Other Than Temporary Impairment

Each investment security in a loss position is evaluated for other-than-temporary impairment on at least a quarterly basis. The review includes an analysis of the facts and circumstances of each individual investment such as (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.

Regardless of these factors, if we have developed a plan to sell the security or it is likely that we will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related to all other factors. The amount of the total other-than- temporary impairment related to the credit loss is recognized in earnings, and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.

Loans Held for Sale

Loans held for sale generally represent single-family, residential first mortgage loans on a pre-sold basis originated by our mortgage division. Generally, commitments to sell these loans are made after the intent to proceed with mortgage applications are initiated with borrowers, and all necessary components of the loan are approved according to secondary market underwriting standards of the investor that purchases the loan. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. Loans held for sale are subsequently measured at the lower of cost or fair value on an aggregated basis within the consolidated balance sheet under the caption “loans held for sale”.

Additionally, we have identified certain loans that will be sold as part of a branch sale (See Note S-Branch Sale). These loans are also identified within the consolidated balance sheet under the caption “loans held for sale”.

Rate Lock Commitments

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). As required by ASC 815, Derivatives and Hedging, rate lock commitments related to the origination of mortgage loans held for sale and the corresponding forward loan sale commitments are considered to be derivatives. The commitments are generally for periods of 60 days and are at market rates.

In order to mitigate the risk from interest rate fluctuations, the Company enters into forward loan sale commitments on a “best efforts” basis while the loan is in the pipeline. Interest rate lock commitments and forward sales commitments are not material to the financial statements for any period presented.

Loans

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

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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.

Purchased loans acquired in a business combination, which include loans purchased in the Nuestro Banco (“Nuestro”) acquisition, are recorded at estimated fair value on their purchase date; the purchaser cannot carry over the related allowance for loan losses for acquisitions subsequent to January 1, 2009. Purchased loans are accounted for under Financial Accounting Standards Board (“FASB") Accounting Standard Codification ("ASC') 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-3), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status. Generally, acquired loans that meet the Company’s definition for nonaccrual status fall within the scope of FASB ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. For all other acquired loans that do not fall under the definition of ASC 310-30, the Company will account for these loans as described in the previous paragraphs.

For all classes of loans, 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.

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.

Allowance for Loan Losses

The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses.  Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed.  Management evaluates the adequacy of our allowance for loan losses on a monthly basis.  The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations.  Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.

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Management has developed a model for evaluating the adequacy of the allowance for loan losses.  The model uses the Company’s internal grading system to quantify the risk of each loan.  The grade is initially assigned by the lending officer and/or the credit administration function.  The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm.  The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due loans and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. Additionally, regulatory agencies review the adequacy of the risk grades assigned as well as the risk grade process and may require changes based on judgments that differ from those of management that could impact the allowance for loan losses.

The grading system is comprised of seven risk categories for active loans.  Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan.  Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan.  Grade 6 loans are considered sub-standard and are generally impaired, however, certain of these loans continue to accrue interest and are not TDRs and are not considered impaired.    Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Loans can also be classified as non-accrual, troubled debt restructure, or otherwise impaired, all of which are considered impaired and evaluated for specific reserve under FASB ASC 310-10 regardless of the risk grade assigned.

When the Bank determines that a loan is impaired an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal.  Each loan is analyzed to determine the net value of collateral and an estimate of potential loss.  The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal.  If collection is deemed to be collateral dependent then the deficiency is generally charged off unless the deficiency is less than 10% of the balance, there has not been a prior charge-off, and the amount of such items in aggregate is immaterial. If the collection of the loan is not collateral dependent then a specific reserve is established for the deficiency. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value.  Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and prior charge-offs.

Loans that are not assessed for specific reserves under FASB ASC 310-10 are reserved for under FASB ASC 450.  The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels for each call report category. The qualitative factor addresses loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations.   Together these two components comprise the ASC 450, or general reserve.    

The Bank previously determined the quantitative ASC 450 reserve using either the three year historical charge-offs, the two year historical charge-offs, or the last twelve months historical charge-offs.  Depending on the economic cycle and where we were in the cycle, one of these methods was chosen as most representative of the expectations for losses that are in the portfolio which were unidentified. The Bank evaluated the reserve results under the prior reserve methodology utilizing each of the three historical charge-off periods and, although it appropriately captured the improving trends, the results were considered less than prudent given the Bank's current level of non-performing loans and non-performing assets. As such, the Bank chose to utilize a new charge-off metric of the greater of (i) the charge-off rate from the most recent 8 quarters (rolling two years) or (ii) the charge-off rate from the most recent 12 quarters (rolling three years). This provides for the highest base charge-off rate regardless of whether the historical charge-offs are improving or declining. In addition, the Bank felt it was an appropriate time to move to a risk grade approach to determining the quantitative reserve. This approach assigns a different percentage ("multiplier") of the base charge-off rate to the balances for each risk grade within a loan category to reflect the varied risk of charge-off for each. The standard multipliers range from 0% for a risk grade 1 to 300% for a risk grade 6. In addition, categories that have a concentrated level of charge-offs associated with a particular risk grade could have an additional reserve factor of 50% to 100% added to that particular risk grade. Lastly, categories that have had historically high charge-offs also have an additional reserve factor between 25% to 100% added to the risk grade 5s and 6s to account for the additional risk in those categories. The reserve amount by risk grade is calculated and then combined for a blended quantitative reserve factor for each loan category.

The Bank also made changes to the qualitative factor for charge-off trends to provide a more objective and consistent result from quarter to quarter. The factors evaluated were not changed significantly but how the reserve is assigned is now determined by objective evaluation of those factors and the number of those improving and declining. An additional factor was added to take into consideration the significance of the change in charge-offs from period to period.

The net effect of all changes, compared to the prior model as of December 31, 2012, is shown in the chart below (amounts in thousands, except ratios:)

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Methodology	ASC 450 Quantitative		ASC 450 Qualitative		Total ASC 450		Total Reserve
Prior Model $	8,330		911		9,241		14,629
Current Model $	9,516		1,469		10,985		16,549
Prior Model %	1.82	%	0.2	%	2.02	%	2.83	%
Current Model %	2.17	%	0.33	%	2.5	%	3.32	%

The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business.  While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used.  We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance.  Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above.  Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.

Using the data gathered during the quarterly evaluation process, the model calculates an acceptable level for the allowance for loan losses.  Management and the Board of Directors are responsible for determining the appropriate level of the allowance for loan losses based on the model results.

Bank Premises and Equipment Held for Sale

Premises and equipment held for sale are stated at book value which approximates fair market value. The value of the assets to be sold at December 31, 2012 was approximately $1.9 million in property and equipment.

Bank Premises and Equipment

Land is carried at cost. Buildings, furniture, 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 buildings. Expenditures for repairs and maintenance are charged to expense as incurred.

Stock in Federal Home Loan Bank of Atlanta

The Company owned Federal Home Loan Bank of Atlanta (“FHLB”) stock totaling $6.4 million at December 31, 2012 and $6.6 million at December 31, 2011. On October 30 2012, FHLB announced that it would pay an annualized dividend rate of 2.43% percent for the third quarter of 2012. Based on the continued payment of dividends and that redemption of this stock has historically been at par, management believes that its investment in FHLB stock was not other-than-temporarily impaired as of December 31, 2012 or December 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the FHLB stock held by the Company.

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.

Income Taxes

Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of “other assets” in the consolidated balance sheets. The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination.

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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. These temporary differences consist primarily of the allowance for loan losses, differences in the financial statement and income tax basis in premises and equipment and differences in financial statement and income tax basis in accrued liabilities. 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 fully realized.

Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset. As of December 31, 2012, a $21.7 million valuation allowance has been established primarily due to the possibility that all of the deferred tax asset associated with the allowance for loan losses may not be realized.

From time to time, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company’s income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes.

Stock Compensation Plans

The Company accounts for stock based awards granted to employees using the fair value method. The cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period).  The cost of employee services received in exchange for an award is based on the grant-date fair value of the award.  Excess tax benefits are reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

Comprehensive Income (Loss)

Comprehensive income (loss) 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 (loss) 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.

Accumulated other comprehensive income at December 31, 2012 and 2011 consists of the following (amounts in thousands):

	2012			2011
Unrealized holding gains - investment securities available for sale	$	989		$	1,560
Deferred income taxes	(280		)	(508		)
Net unrealized holding gains - investment securities available for sale	709			1,052
Total accumulated other comprehensive income	$	709		$	1,052

Net Loss Per Common Share and Common Shares Outstanding

Basic loss per share represents loss available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss 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. Potential common shares that may be issued by the Company relate solely to outstanding stock options.

Basic and diluted net loss per common share have been computed based upon net loss 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: 

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	2012	2011
Weighted average number of common shares used in computing basic net loss per share	7,745,342	7,599,666
Effect of dilutive stock options	—	—
Weighted average number of commons shares and dilutive potential common shares used in computing diluted net loss per share	7,745,342	7,599,666

Stock options that have exercise prices greater than the average market price of the common shares or stock options outstanding do not have a dilutive effect and are considered antidilutive. Outstanding antidilutive options of 253,680 and 337,106 in 2012 and 2011, respectively, had no dilutive effect because the Company reported a net loss for these years.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, Fair Value Measurement (Topic 820). The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The new ASU provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The Company has fully adopted all of the provisions within this ASU and has provided all required disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends Comprehensive Income (Topic 220). The amendments require that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The objective is to improve the comparability, consistency and transparency of financial reporting, and to increase the prominence of items reported in other comprehensive income. These amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Disclosures required by ASU 2011-05 are included in Consolidated Statements of Comprehensive Income (Loss). The adoption of the disclosure requirements had no material impact on the Company's consolidated financial position, results of operations, and earnings per share. In December 2011, the FASB issued ASU 2011-12, Presentation of Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, to allow time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Adoption of this ASU did not have any impact on the Company's consolidated financial statements or results of operations.

In December 2011, The FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment is effective for annual and interim periods beginning on or after January 1, 2013, and the Company has not yet determined the financial statement impact.

In July 2012, the FASB issued an update ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment which permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this guidance to have a material impact on our financial statements.

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update seeks to to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income, if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. For public entities, the amendments

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are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this amendment is not expected to have a material effect on the Company's consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

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.

NOTE B - INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available for sale as of December 31, 2012 and 2011 are as follows (amounts in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
2012
Taxable municipal securities	$	5,459	$	454	$	—	$	5,913
Mortgage-backed securities
GNMA	60,056		704		17		60,743
FNMA	5,872		10		2		5,880
Trust preferred securities	1,175		—		169		1,006
Equity securities	170		11		1		180
Total	$	72,732	$	1,179	$	189	$	73,722

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
2011
Taxable municipal securities	$	17,046	$	873	$	—	$	17,919
Mortgage-backed securities - GNMA	72,839		841		51		73,629
Trust preferred securities	1,175		—		90		1,085
Equity securities	170		2		15		157
Total	$	91,230	$	1,716	$	156	$	92,790

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities held to maturity as of December 31, 2012 and 2011 are as follows (amounts in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Held to Maturity
2012
Mortgage-backed securities - GNMA	$	20,329	$	339	$	—	$	20,668
Total	$	20,329	$	339	$	—	$	20,668

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Held to Maturity
2011
Mortgage-backed securities - GNMA	$	20,445	$	48	$	37	$	20,456
Total	$	20,445	$	48	$	37	$	20,456

Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.

The unrealized gains and losses on debt securities at December 31, 2012 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Two of sixteen GNMA collateralized mortgage obligations, one of thirty MBS pass-through securities, and two trust preferred securities contained unrealized losses at December 31, 2012. Management identified no impairment related to credit quality.  At December 31, 2012 management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary.  As a result, no other than temporary impairment losses were recognized during the twelve months ended December 31, 2012.

The unrealized gains and losses on equity securities at December 31, 2012 resulted from changes in market values and available third party valuations. One of ten equity securities contains unrealized losses at December 31, 2012. Management has identified no other-than-temporary impairment in equity securities value that remains unrecognized.

A trust preferred security, with unrealized losses at December 31, 2012 was previously deemed other than temporarily impaired as of and for the year-ended December 31, 2011. As a result of management's determination that $75,000 of the $146,000 unrealized losses at December 31, 2011 related to credit quality of the security, the basis in the investment was adjusted from $750,000 to $675,000. As of December 31, 2012, the fair value of the trust preferred security was $603,750, which resulted in an aggregate unrealized loss on the trust preferred security of $71,250. Management continued to monitor the creditworthiness of the issuer during the fourth quarter of 2012 in considering key factors such as the levels of nonperforming assets and loan concentrations, regulatory capital levels, brokered deposit reliance and stability of core deposits. In its previous determination of the credit loss related to this investment, including the probability of repayment of principal and interest, management considered and evaluated the deteriorating credit profile/rating for this issuer over a prolonged period of time consisting of six quarters. As of the most recently available financial information, the issuer's income, margin, capital, liquidity, asset quality, and credit rating have all maintained satisfactory and stable or improved. Based on this information and knowledge of the current market environment, management has concluded that the unrealized loss for this trust preferred security as of December 31, 2012 is not credit related and will therefore be recognized in other comprehensive income for the twelve months ended December 31, 2012.

A trust preferred security, with an unrealized loss of $97,500 at December 31, 2012, is deemed to be other than temporarily impaired as the duration of the unrealized loss position is greater than 12 months. As of December 31, 2012, the basis of the trust preferred security was $500,000 and the fair value was $402,500. Management continued to monitor the creditworthiness of the issuer during the fourth quarter of 2012 in considering key factors such as the issuer's income, margin, capital, credit rating, and asset quality have all remained satisfactory and stable. All interest payments have been made and no deferrals have been announced to management's knowledge. The entity's credit rating has been stable over recent quarters. Based on this information and knowledge of the current market environment, management has concluded that the unrealized loss for this trust preferred security as of December 31, 2012 is not credit related and will therefore be recognized in other comprehensive income for the twelve months ended December 31, 2012.

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The following tables reflect the gross unrealized losses and fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented, there were no unrealized losses in the held to maturity portfolio (amounts in thousands):

	2012
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available for sale:
Taxable municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities
GNMA	5,132		17		—		—		5,132		17
FNMA	1,998		2						1,998		2
Trust preferred securities	—		—		—		—		—		—
Equity securities	—		—		2		1		2		1
Total temporarily impaired securities	$	7,130	$	19	$	2	$	1	$	7,132	$	20
Other than temporary impairment
Trust preferred securities	$	—	$	—	1,006		169		1,006		169
Total other than temporarily impaired securities	$	—	$	—	$	1,006	$	169	$	1,006	$	169

	2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available for sale:
Taxable municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities - GNMA	12,100		51		—		—		12,100		51
Trust preferred securities	—		—		481		19		481		19
Equity securities	170		15		—		—		170		15
Total temporarily impaired securities	$	12,270	$	66	$	481	$	19	$	12,751	$	85
Other than temporary impairment
Trust preferred securities	$	—	$	—	604		71		604		71
Total other than temporarily impaired securities	$	—	$	—	$	604	$	71	$	604	$	71

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	2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities Held to Maturity:
Mortgage-backed securities - GNMA	$	8,043	$	37	$	—	$	—	$	8,043	$	37
Total temporarily impaired securities	$	8,043	$	37	$	—	$	—	$	8,043	$	37

The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (amounts in thousands):

	2012		2011
Balance of credit losses on debt securities at the beginning of the period	$	75	$	—
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized	—		75
Balance of credit losses on debt securities at the end of the period	$	75	$	75

The amortized cost and fair value of available for sale, and held to maturity securities at December 31, 2012 by contractual maturities are shown below(amounts in thousands).  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.

	Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	Taxable municipal securities				Mortgage-backed securities -GNMA				Mortgage-backed securities -FNMA
Due within one year	$	—	$	—	$	—	$	—	$	—	$	—
Due after one year through five years	257		270		39,000		39,470		5,872		5,880
Due after five years through ten years	4,679		5,078		17,463		17,640		—		—
Due after ten years	523		565		3,593		3,633		—		—
Total securities	$	5,459	$	5,913	$	60,056	$	60,743	$	5,872	$	5,880
Trust preferred securities	$	1,175	$	1,006
Equity securities	170		180
Total other securities	$	1,345	$	1,186
					Held to Maturity
					Amortized Cost		Fair Value
					Mortgage-backed securities -GNMA
Due within one year					$	—	$	—
Due after one year through five years					$	17,949	$	18,253
Due after five years through ten years					$	2,380	$	2,415
Due after ten years					$	—	$	—
Total held to maturity securities					$	20,329	$	20,668

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Securities with a carrying value of approximately $93.2 million and $112.0 million at December 31, 2012 and 2011, 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 2012 and 2011 of $50.4 million and $85.9 million generated gross realized gains of $2.0 million and $1.1 million , respectively, and gross realized losses of $0 and $157,000, respectively.

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NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES

The classification of loan segments as of December 31, 2012 and 2011 are summarized as follows (amounts in thousands):

	2012			2011
Commercial loans	$	29,563		$	40,345
Commercial construction and land development	90,899			113,762
Commercial real estate	181,194			214,740
Residential construction	20,445			26,707
Residential mortgage	165,009			192,972
Consumer	9,664			11,451
Other	1,278			2,330
	498,052			602,307
Less:
Net deferred loan fees	(123		)	(75		)
Allowance for loan losses	(16,549		)	(21,141		)
Total Loans	$	481,380		$	581,091
Loans held for sale	$	19,297		$	—

Nonperforming assets

Nonperforming assets at December 31, 2012 and 2011 consist of the following (amounts in thousands):

	2012		2011
Loans past due ninety days or more and still accruing	$	32	$	60
Nonaccrual loans	35,970		60,141
Foreclosed assets	15,136		12,159
Total	$	51,138	$	72,360

Purchased Loans

The population of purchased impaired loans at December 31, 2012 and 2011 includes one loan with a fair value of $134,000 and $186,000 for which no further credit deterioration was noted.  Therefore no additional allowance for loan loss reserves has been established because the originally determined credit discounts for such purchased impaired loans was deemed sufficient.  The amount of, and changes within, the accretable difference was deemed immaterial for the years ended December 31, 2011 and 2012.

Related Party Loans

The Company 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 as of December 31, 2012 and 2011. The following is a reconciliation of loans directly outstanding to executive officers, directors, and their affiliates at (amounts in thousands):

	2012			2011
Beginning balance	$	6,191		7,048
New loans	—			—
New loans - new Board of Director members	2,773			—
Principal repayments	(826		)	(857	)
Ending balance	$	8,138		6,191

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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, 2012 the Company had pre-approved but unused lines of credit totaling $1.7 million to executive officers, directors and their affiliates.

Credit Risk

We use an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan. The credit grades have been defined as follows:

• Grade 1 - Lowest Risk

Loans secured by properly margined liquid collateral such as certificates of deposit, government securities, cash value of life insurance, stock actively traded on one of the major stock exchanges, etc. Repayment is definite and being handled as agreed. Maintains a strong, liquid financial condition as evidenced by a current financial statement in the Bank. Repayment agreement is definite, realistic, and being handled as agreed.

• Grade 2 - Satisfactory Quality

Loans secured by properly margined collateral with a definite repayment agreement in effect. Unsecured loans with repayment agreements that are definite, realistic, and are being handled as agreed. Repayment source well defined by proven income, cash flow, trade asset turn, etc. Multiple repayment sources exist. Individual and businesses will typically have a sound financial condition.

• Grade 3 – Satisfactory - Merits Attention

Loans being repaid as agreed that require close following because of complexity, information or underwriting deficiencies, emerging signs of weakness or non-standard terms. Secured loans repaying as agreed where collateral value or marketability are questionable but do not materially affect risk. Repayment sources well defined by proven income, cash flow, trade asset turn, etc., but may be weaker than Grade 2. Loans to weak individuals or business borrowers with a strong endorser or guarantor. Fully collectible, unsecured loans or loans secured by other than approved collateral for which an acceptable repayment agreement has not been established.

• Grade 4 - Low Satisfactory

New Loans - Applicants with excessive minor exceptions as defined by the Risk Grade forms. Applicants with major credit history or Beacon score issues as defined by the Risk Grade forms. Applicants with two or more major exceptions with mitigating factors identified on the Fair Lending form.

Existing Loans - Borrower’s ability to repay from primary (intended) repayment sources is not clearly sufficient to ensure performance as contracted; but the loan is performing as contracted, and secondary repayment sources are clearly sufficient to protect against the risk of principal or income loss; and it is reasonable to expect that the circumstances causing repayment capacity to be uncertain will be resolved within six months. Access to alternative financing sources exists but may be limited to institutions specializing in higher risk financing.

• Grade 5 - Special Mention

Special Mention risk loans include the following characteristics: Loans currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Potential weaknesses exist, generally the result of deviations from prudent lending practices, such as over advances on collateral or unproven primary repayment sources. Loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do increase the level of risk may also warrant this rating. Such trends may be in the borrower’s options, credit quality or financial strength. New loans with exceptions where no mitigating factors are justified, however, loans are not typically made if the grade is Special Mention at inception without management approval.

• Grades 6-8 - Substandard (Grade 6), Doubtful (Grade 7) and Loss (Grade 8)

A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Loans classified as Loss are considered uncollectable and of such little value that their continuance

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as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Loans are not typically made if graded Substandard or worse at inception without management's approval.

The following table illustrates credit risk profile by creditworthiness class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	Commercial and Industrial		Commercial Construction and Land Development		Commercial Real Estate- Other		Residential - Construction		Residential -  Mortgage		Consumer - Other		Other - Loans		Total
1 - Lowest Risk	$	2,446	$	—	$	—	—		51		1,372		13		3,882
2 - Satisfactory Quality	441		595		2,429		109		10,595		288		—		14,457
3 - Satisfactory Quality - Merits Attention	10,222		22,278		51,384		1,337		58,140		4,526		1,091		148,978
4 - Low Satisfactory	13,558		35,502		104,652		17,008		68,148		1,019		125		240,012
5 - Special mention	323		9,064		6,228		356		9,720		91		49		25,831
6 - Substandard or worse	1,387		23,460		16,501		1,635		18,355		103		—		61,441
	$	28,377	$	90,899	$	181,194	$	20,445	$	165,009	$	7,399	$	1,278	$	494,601

	December 31, 2011
	Commercial and Industrial	Commercial Construction and Land Development	Commercial Real Estate- Other	Residential - Construction	Residential - Mortgage	Consumer - Other	Other - Loans	Total
1 - Lowest Risk	2,421	—	—	—	136	1,952	40	4,549
2 - Satisfactory Quality	483	974	2,942	497	12,720	288	6	17,910
3 - Satisfactory Quality - Merits Attention	10,696	26,907	63,887	1,971	68,172	5,183	298	177,114
4 - Low Satisfactory	20,070	36,852	98,007	20,756	68,668	1,515	1,984	247,852
5 - Special mention	2,593	8,673	22,311	1,849	15,226	165	2	50,819
6 - Substandard or worse	3,066	40,356	27,593	1,634	28,050	256	—	100,955
	39,329	113,762	214,740	26,707	192,972	9,359	2,330	599,199

Total loans within risk grade categories 5 (Special Mention) and 6 (Substandard) were $87.3 million at December 31, 2012, compared to $151.8 million at December 31, 2011. This represents a 42.5% reduction in these specific categories.

The following table illustrates the credit card portfolio exposure as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012				December 31, 2011
	Consumer - Credit Card		Business- Credit Card		Consumer - Credit Card		Business- Credit Card
Performing	$	2,233	$	1,186	$	2,082	$	991
Non Performing	32		—		10		25
	$	2,265	$	1,186	$	2,092	$	1,016

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Nonaccruals

The following table represents the loans on nonaccrual status as of December 31, 2012 and 2011 by loan class (amounts in thousands):

	2012		2011
Commercial & industrial	$	664	$	779
Commercial construction and land development	15,941		29,538
Commercial real estate	9,091		14,830
Residential construction	833		1,469
Residential mortgage	9,408		13,466
Consumer	33		59
Other	—		—
Total	$	35,970	$	60,141

The following table illustrates the age analysis of past due loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	30-89 Days Past Due		Nonaccruals and Greater than 90 Days Past Due (1)		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	119	$	664	$	783	$	27,594	$	28,377	$	—
Commercial construction and land development	819		15,941		16,760		74,139		90,899		—
Commercial real estate	499		9,091		9,590		171,604		181,194		—
Residential construction	—		833		833		19,612		20,445		—
Residential mortgage	1,076		9,408		10,484		154,525		165,009		—
Consumer	34		33		67		7,332		7,399		—
Consumer credit cards	67		32		99		2,166		2,265		32
Business credit cards	12		—		12		1,174		1,186		—
Other loans	—		—		—		1,278		1,278		—
Total	$	2,626	$	36,002	$	38,628	$	459,424	$	498,052	$	32

(1) Nonaccruals and Greater than 90 Days Past Due is comprised of $32,000 of loans that were past due more than 90 days and still accruing interest, as well as $36.0 million of loans in nonaccrual status. 

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	December 31, 2011
	30-89 Days Past Due	Nonaccruals and Greater than 90 Days Past Due (1)	Total Past Due	Current	Total Loans	Recorded Investment > 90 Days and Accruing
Commercial & industrial	129	779	908	38,421	39,329	—
Commercial construction and Land Development	1,221	29,538	30,759	83,003	113,762	—
Commercial real estate	1,647	14,830	16,477	198,263	214,740	—
Residential construction	180	1,469	1,649	25,058	26,707	—
Residential mortgage	3,479	13,466	16,945	176,027	192,972	—
Consumer	103	59	162	9,197	9,359	—
Consumer credit cards	62	35	97	1,995	2,092	35
Business credit cards	15	25	40	976	1,016	25
Other loans	—	—	—	2,330	2,330	—
Total	6,836	60,201	67,037	535,270	602,307	60

(1) Nonaccruals and Greater than 90 Days Past Due is comprised of $60,000 of loans that were past due more than 90 days and still accruing interest, as well as $60.1 million of loans in nonaccrual status. 

Impaired Loans

Impaired loans are those loans for which the Bank does not expect full repayment of all principal and accrued interest due either under the terms of the original loan agreement or within reasonably modified contractual terms. If the loan has been restructured such as in the case of a TDR, the loan continues to be considered impaired if all principal and interest is not to be repaid as specified by the original terms of the loan agreement. Whereas loans which are classified as Substandard (Risk Grade 6) are not necessarily impaired, all loans which are classified as Doubtful (Risk Grade 7) are considered impaired.

Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of a number of available methods; a calculation of the net present value of the expected future cash flows of the loan discounted by the effective interest rate of the loan, through the observable market value of the loan or should the loan be collateral dependent, upon the fair market value of the underlying assets securing the loan. If a deficit is calculated, the amount of the measured impairment results in the establishment of a specific valuation allowance or reserve or charge-off, and is incorporated into the Bank's allowance for loan and lease losses.

When a loan has been designated as impaired and full collection of principal and interest under the contractual terms is not assured, the impaired loan will be placed into nonaccrual status and interest income will not be recognized. Payments received against such loans are initially applied fully to the principal balance of the note until the principal balance is satisfied. Subsequent payments are thereupon applied to the accrued interest balance which only then results in the recognition of interest income. Payments received against accruing impaired loans are applied in the same manner as that of accruing loans which have not been deemed impaired. The recorded investment in impaired notes does not include deferred fees or accrued interest and management deems this amount to be immaterial.

The following table illustrates the impaired loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

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	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	498	$	686	$	—	$	484	$	1
Commercial construction and land development	11,266		15,889		—		13,008		22
Commercial real estate other	12,865		14,263		—		12,328		64
Residential construction	340		340		—		162		—
Residential mortgage	10,106		11,542		—		9,937		132
Consumer	25		42		—		26		—
Subtotal:	$	35,100	$	42,762	$	—	$	35,945	$	219
With an allowance recorded:
Commercial and industrial	$	939	$	956	$	636	$	528	$	11
Commercial construction and land development	9,619		13,033		1,693		10,003		36
Commercial real estate other	4,877		6,852		640		5,623		46
Residential construction	833		1,134		86		884		—
Residential mortgage	7,467		8,081		2,334		7,493		44
Consumer	25		34		—		25		—
Subtotal:	$	23,760	$	30,090	$	5,389	$	24,556	$	137
Totals:
Commercial	40,064		51,679		2,969		41,974		180
Consumer	50		76		—		51		—
Residential	18,746		21,097		2,420		18,476		176
Grand Total	$	58,860	$	72,852	$	5,389	$	60,501	$	356

At December 31, 2012, the recorded investment in loans considered impaired totaled $58.9 million. Of the total investment in loans considered impaired, $23.8 million were found to show specific impairment for which $5.4 million in valuation allowance was recorded; the remaining $35.1 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance. For the year ended December 31, 2012, the average recorded investment in impaired loans was approximately $60.5 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $356,000.

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	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	992	$	1,459	$	—	$	1,262	$	11
Commercial construction and land development	23,049		28,958		—		22,315		167
Commercial real estate other	18,325		20,601		—		14,128		157
Residential construction	98		98		—		98		—
Residential mortgage	16,152		18,528		—		12,681		167
Consumer	77		132		—		90		—
Subtotal:	$	58,693	$	69,776	$	—	$	50,574	$	502
With an allowance recorded:
Commercial and industrial	$	1,427	$	1,597	$	1,237	$	967	$	18
Commercial construction and land development	14,873		20,999		2,942		18,136		45
Commercial real estate other	7,750		9,289		1,448		6,805		72
Residential construction	1,144		1,363		114		1,363		—
Residential mortgage	9,175		10,366		1,617		7,493		76
Consumer	9		16		1		4		—
Subtotal:	$	34,378	$	43,630	$	7,359	$	34,768	$	211
Totals:
Commercial	66,416		82,903		5,627		63,613		470
Consumer	86		148		1		94		—
Residential	26,569		30,355		1,731		21,635		243
Grand Total:	$	93,071	$	113,406	$	7,359	$	85,342	$	713

At December 31, 2011, the recorded investment in loans considered impaired totaled $93.1 million. Of the total investment in loans considered impaired, $34.4 million were found to show specific impairment for which $7.4 million in valuation allowance was recorded; no valuation allowance for the other impaired loans was considered necessary. For the year ended December 31, 2011, the average recorded investment in impaired loans was approximately $85.3 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $713,000.

Troubled Debt Restructurings

Loans are classified as a TDR when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.

Loans in the process of renewal or modification are reviewed by the Bank to determine if the risk grade assigned is accurate based on updated information. All loans identified by the Bank's internal loan grading system to pose a heightened level of risk at or prior to renewal or modification are additionally reviewed to determine if the loan should be classified as a TDR. The Bank's knowledge of the borrower's situation and any updated financial information obtained is first used to determine whether the borrower is experiencing financial difficulty. Once this is determined, the Bank reviews the modification terms to determine whether a concession has been granted. If the Bank determines that both conditions have been met, the loan will be classified as a TDR. If the Bank determines that both conditions have not been met, the loan is not classified as a TDR, but would typically

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then be monitored for any additional deterioration. Documentation to support this determination of TDR classification is maintained within the credit file.

For the year ended December 31, 2012, the Bank modified 15 loans totaling $1.7 million which were deemed TDRs. The following table presents a breakdown of these TDRs by loan class and the type of concession made to the borrower (amounts in thousands, except number of loans):

		For the Year Ended
		December 31, 2012
		Number of loans	Pre-Classification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
	Residential mortgage	1	$	395	$	395
	Subtotal	1	$	395	$	395
Extended payment terms:
	Commercial real estate	4	$	513	$	513
	Residential mortgage	2	66		66
	Consumer	1	19		19
	Subtotal	7	$	598	$	598
Other:
	Commercial real estate	5	$	695	$	695
	Consumer	2	49		49
	Subtotal	7	$	744	$	744
	Total	15	$	1,737	$	1,737

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		For the Year Ended
		December 31, 2011
		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate:
	Commercial real estate	12	$	2,920	$	2,870
	Residential mortgage	2	310		310
	Subtotal	14	$	3,230	$	3,180
Extended payment terms:
	Commercial & industrial	5	$	485	$	485
	Commercial real estate	14	5,727		5,727
	Residential construction	1	165		165
	Residential mortgage	11	1,526		1,531
	Subtotal	31	$	7,903	$	7,908
Other:
	Commercial & industrial	2	$	146	$	146
	Commercial real estate	2	290		290
	Consumer	2	235		235
	Residential mortgage	2	735		735
	Subtotal	8	$	1,406	$	1,406
	Total	53	$	12,539	$	12,494

The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default for the year ended December 31, 2012andDecember 31, 2011 ,(amounts in thousands, except number of loans):

		For the Year Ended
		December 31, 2012
		Number of loans	Recorded Investment
Other
	Commercial real estate	1	$	28
	Consumer	2	49
		3	$	77
	Total	3	$	77

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		Year Ended
		December 31, 2011
		Number of loans	Recorded Investment
Below market interest rate
	Commercial real estate	1	$	19
	Residential mortgage	2	271
	Subtotal	3	$	290
Extended payment terms
	Commercial & industrial	3	$	52
	Commercial real estate	8	4,033
	Residential mortgage	5	528
	Subtotal	16	$	4,613
Other
	Commercial & industrial	4	$	—
	Subtotal	4	$	—
	Total	23	$	4,903

The table below details the progression of troubled debt restructurings which have been entered into during the previous 12 months(amounts in thousands, except number of loans):

	December 31, 2012
	Paid in full			Paying as restructured			Converted to non-accrual			Foreclosure/Default
	Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment
Below market interest rate	—	—		1	$	395	—	$	—	—	$	—
Extended payment terms	—	—		7	598		—	—		—	—
Forgiveness of principal	—	—		—	—		—	—		—	—
Other	—	—		4	667		1	28		2	49
Total	—	$	—	12	$	1,660	1	$	28	2	$	49

Allowance for Loan Losses and Recorded Investment in Loans

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on a monthly basis during which time those loans that are identified as impaired are evaluated individually.

To provide greater transparency on non-performing assets, additional disclosures required by ASU 2010-20 have been included below.  Allowance for loan losses is reported by portfolio segment and further detail of credit quality indicators are provided by class of loans.

Following is an analysis of the allowance for loan losses by loan segment for the years ended December 31, 2012 and 2011(amounts in thousands):

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December 31, 2012
				Real Estate
	Commercial and Industrial			Commercial construction and land development			Commercial real estate			Residential construction			Residential mortgage			Consumer			Other		Totals
Balance, beginning of period	$	2,730		$	8,799		$	3,800		$	740		$	4,630		$	413		$	29	$	21,141
Provision for loan losses	(1,464		)	5,205			2,486			(214		)	1,184			143			41		7,381
Loans charged-off	(703		)	(7,929		)	(3,691		)	(103		)	(1,801		)	(516		)	—		(14,743		)
Recoveries	622			1,176			366			—			458			148			—		2,770
Net (charge-offs) recoveries	(81		)	(6,753		)	(3,325		)	(103		)	(1,343		)	(368		)	—		(11,973		)
Balance, end of period	$	1,185		$	7,251		$	2,961		$	423		$	4,471		$	188		$	70	$	16,549
Ending Balance: individually    evaluated for impairment	$	636		$	1,693		$	640		$	86		$	2,334		$	—		$	—	$	5,389
Ending balance: collectively    evaluated for impairment	549			5,558			2,321			337			2,137			188			70		11,160
Financing Receivables:
Ending Balance	$	29,563		$	90,899		$	181,194		$	20,445		$	165,009		$	9,664		$	1,278	$	498,052
Ending Balance: individually    evaluated for impairment	$	1,437		$	20,885		$	17,742		$	1,173		$	17,573		$	50		$	—	$	58,860
Ending balance: collectively    evaluated for impairment	$	28,126		$	70,014		$	163,452		$	19,272		$	147,436		$	9,614		$	1,278	$	439,192

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December 31, 2011
				Real Estate
	Commercial and Industrial			Commercial construction and land development			Commercial real estate			Residential construction			Residential mortgage			Consumer			Other			Totals
Balance, beginning of period	$	2,049		$	8,375		$	4,038		$	2,848		$	4,291		$	415		$	84		$	22,100
Provision for loan losses	2,443			7,755			1,079			(1,811		)	1,694			335			(55		)	11,440
Loans charged-off	(2,181		)	(7,735		)	(1,802		)	(588		)	(2,126		)	(477		)	—			(14,909		)
Recoveries	419			404			485			291			771			140			—			2,510
Net (charge-offs) recoveries	(1,762		)	(7,331		)	(1,317		)	(297		)	(1,355		)	(337		)	—			(12,399		)
Balance, end of period	$	2,730		$	8,799		$	3,800		$	740		$	4,630		$	413		$	29		$	21,141
Ending Balance: individually    evaluated for impairment	$	1,237		$	2,942		$	1,448		$	114		$	1,618		$	—		$	—		$	7,359
Ending balance: collectively    evaluated for impairment	1,493			5,857			2,352			626			3,012			413			29			13,782
Financing Receivables:
Ending Balance	$	40,345		$	113,762		$	214,740		$	26,707		$	192,972		$	11,451		$	2,330		$	602,307
Ending Balance: individually    evaluated for impairment	$	2,419		$	37,922		$	26,075		$	1,242		$	25,327		$	86		$	—		$	93,071
Ending balance: collectively    evaluated for impairment	$	37,926		$	75,840		$	188,665		$	25,465		$	167,645		$	11,365		$	2,330		$	509,236

NOTE D - BANK PREMISES AND EQUIPMENT

Company premises and equipment at December 31, 2012 and 2011 are as follows (amounts in thousands):

	2012			2011
Land	$	4,884		$	4,520
Buildings and leasehold improvements	11,139			13,508
Furniture and equipment	11,586			11,628
	27,609			29,656
Less accumulated depreciation	(14,227		)	(13,632		)
	$	13,382		$	16,024

Depreciation expense was $1.1 million and $1.2 million for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, the Company had a total of $1.9 million in premises and equipment which were classified as held for sale.

NOTE E - OTHER INTANGIBLES

The following is a summary of other intangible assets at December 31, 2012 and 2011(amounts in thousands):

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	2012		2011
Other intangibles – gross	$	494	$	494
Less accumulated amortization	491		187
Other intangibles – net	$	3	$	307

The other intangibles acquired in connection with the LongLeaf Community Bank merger were written off at the end of 2012 due to the sale of those deposits to First Bank, which is expected to close in the first quarter of 2013. Other intangibles amortization expense for the years ended December 31, 2012 and 2011 amounted to $300,000 and $53,000, respectively.  Estimated amortization expense for other intangibles for future years are as follows (amounts in thousands):

	2012
2013	$	2
2014	1
Total estimated amortization expense	$	3

NOTE F - DEPOSITS

At December 31, 2012, the scheduled maturities of time deposits are as follows (amounts in thousands):

	Less than $100,000		$100,000 or more		Total
2013	$	79,613	$	120,191	$	199,804
2014	26,563		39,436		65,999
2015	16,053		29,536		45,589
2016	4,805		16,253		21,058
2017	2,892		8,095		10,987
2018 and beyond	284		2,473		2,757
Total time deposits	$	130,210	$	215,984	$	346,194

NOTE G - BORROWINGS

At December 31, 2012 and 2011, borrowed funds included the following FHLB advances (amounts in thousands):

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Maturity	Interest Rate			2012		2011
May 25, 2016	4.46	%	Fixed	$	5,000	$	5,000
November 17, 2016	4.11	%	Fixed	5,000		5,000
November 30, 2016	4.09	%	Fixed	7,000		7,000
June 5, 2017	4.35	%	Fixed	10,000		10,000
July 3, 2017	4.36	%	Fixed	13,000		13,000
July 24, 2017	4.34	%	Fixed	5,000		5,000
July 31, 2017	4.35	%	Fixed	5,000		5,000
August 14, 2017	4.08	%	Fixed	5,000		5,000
August 14, 2017	3.94	%	Fixed	5,000		5,000
October 4, 2017	3.95	%	Fixed	7,000		7,000
February 5, 2018	2.06	%	Fixed	10,000		10,000
June 5, 2018	2.25	%	Fixed	5,000		5,000
June 5, 2018	2.55	%	Fixed	5,000		5,000
June 5, 2018	3.03	%	Fixed	5,000		5,000
September 10, 2018	3.14	%	Fixed	10,000		10,000
September 18, 2018	2.71	%	Fixed	10,000		10,000
				$	112,000	$	112,000

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, 2012, the Company has available lines of credit totaling $173.1 million with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at December 31, 2012 and 2011 were 3.58%.

In addition to the above advances, the Company has lines of credit of $16.0 million from various financial institutions to purchase federal funds on a short-term basis.  The Company has no federal fund purchases outstanding as of December 31, 2012.

NOTE H - TRUST PREFERRED SECURITIES

On March 30, 2006, $12.0 million of trust preferred securities (“Trust Preferred Securities”) were placed through the Trust.  The Trust has invested the net proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the “Debentures”) issued by the Company and recorded in borrowings on the accompanying consolidated balance sheets.  The Trust Preferred Securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to three month LIBOR plus 1.35%.  The dividends paid to holders of the Trust Preferred Securities, which will be recorded as interest expense, are deductible for income tax purposes.  The Trust Preferred Securities are redeemable on June 15, 2011 or afterwards in whole or in part, on any June 15, September 15, December 15, or March 15.  Redemption is mandatory by June15, 2036.  The Company has fully and unconditionally guaranteed the Trust Preferred Securities through the combined operation of the Debentures and other related documents.  The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.  The Trust Preferred Securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.  We have the right to defer payment of interest on the Debentures at any time and from time to time for a period not exceeding five years, provided that no deferral period extends beyond the stated maturities of the Debentures. Such deferral of interest payments by the Company will result in a deferral of distribution payments on the related Trust Preferred Securities. Whenever we defer the payment of interest on the Debentures, the Company will be precluded from the payment of cash dividends to shareholders.  In January 2011, the Company elected to defer the regularly scheduled interest payments on the Debentures related to our outstanding Trust Preferred Securities.

The Company is currently prohibited by the Written Agreement, described in Note K - Regulatory Restrictions, of these Notes to Consolidated Financial Statements, from paying interest on its Debentures without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company exercised its right to defer regularly scheduled interest payments on the Debentures and as of December 31, 2012, $496,000 of interest payments have been accrued for and deferred pursuant to the terms of the indenture governing the Debentures. 

NOTE I – SUBORDINATED PROMISSORY NOTES

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The Company sold $12.0 million aggregate principal amount of subordinated promissory notes to certain accredited investors between May and August 2009.  These notes are due 10 years after the date of issuance, beginning May 15, 2019, and the Company is obligated to pay interest at an annualized rate of 8.5% payable in quarterly installments beginning on the third month anniversary of the date of issuance.  The Company may prepay the notes at any time after the fifth anniversary of the date of issuance, subject to compliance with applicable law. The Company is currently prohibited by the Written Agreement, described in Note K - Regulatory Restrictions, of these Notes to Consolidated Financial Statements, from paying interest on its subordinated promissory notes without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for 2012.

NOTE J - INCOME TAXES

Allocation of income tax expense between current and deferred portions is as follows (amounts in thousands):

	Years Ended December 31,
	2012			2011
Current tax expense:
Federal	$	(175	)	$	—
State	—			—
	(175		)	—
Deferred tax expense:
Federal	(2,617		)	(2,876		)
State	(444		)	(531		)
	(3,061		)	(3,407		)
Provision for income tax expense before adjustment to    deferred tax asset	(3,236		)	(3,407		)
Valuation allowance	3,061			3,407
	$	(175	)	$	—

The reconciliation of expected income tax at the statutory federal rate of 34% with income tax expense is as follows (amounts in thousands):

	Years Ended December 31,
	2012			2011
Expense computed at statutory rate of 34%	$	(2,429	)	$	(2,915	)
Effect of state income taxes, net of federal benefit	(36		)	(351		)
Tax exempt income	(293		)	(55		)
Bank owned life insurance income	(106		)	(129		)
Valuation allowance	3,061			3,407
Other, net	(372		)	43
	$	(175	)	$	—

Deferred income taxes consist of the following (amounts in thousands):

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	Years Ended December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	6,335		$	8,106
Non-qualified stock options	365			341
OTTI	623			623
Net deferred loan fees	43			29
Net operating loss	12,818			7,591
FMV adjustment on purchased assets	136			99
SERP accrual	162			141
Other	2,071			2,608
Total deferred tax assets	22,553			19,538
Less valuation allowance	(21,669		)	(18,608		)
Net deferred tax assets	884			930
Deferred tax liabilities:
Property and equipment	$	528		$	628
Unrealized gain on securities	280			507
Prepaid expense	333			282
Other	23			20
Total deferred tax liabilities	1,164			1,437
Net deferred tax liability, included in other liabilities	$	(280	)	$	(507	)

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.   Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  For the years ended December 31, 2012 and 2011, there were no uncertain tax positions taken by the Company. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Fiscal years ending December 31, 2009 and thereafter are subject to IRS examination.

We calculate income taxes in accordance with accounting principles generally accepted in the United States (“US GAAP”), which requires the use of the asset and liability method. The largest components of our net deferred tax asset at December 31, 2012 were related to the activity in our allowance for loan losses and net operating loss carryforwards. In accordance with US GAAP, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. Based upon our analysis of our tax position, including taxes paid in prior years available through carryback and the use of tax planning strategies, at December 31, 2012 and 2011 we recognized a valuation allowance of $21.7 million and $18.6 million, respectively, to properly state our ability to realize this deferred tax asset. The total valuation allowance as of December 31, 2012 was $21.7 million resulting in a net deferred tax liability of $280,000. Our analysis of our tax position did not include future taxable earnings. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it may require the future occurrence of circumstances that cannot be predicted with certainty.

As a result of the net operating loss carry forward of $33.6 million at December 31, 2012, which will begin to expire beginning with $1.5 million in 2030 and the $21.7 million deferred tax asset valuation allowance, the Company will not record tax expense or tax benefit until positive operating earnings utilizing existing tax loss carry forwards result in exhibited positive performance which would support the partial or full reinstatement of deferred tax assets.

NOTE K - REGULATORY RESTRICTIONS

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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. No dividends were paid to the Company by the Bank during 2012.

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%. To be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. At December 31, 2012 the Bank was classified as well capitalized for regulatory capital purposes since it met the well capitalized requirements.

In spite of the net loss reported for the 2012 period, the Bank is well capitalized. If the Bank was not well capitalized, it could not accept brokered deposits without prior FDIC approval and, if approval was granted, could not offer an effective yield in excess of 75 basis points on interest rates paid on deposits of comparable size and maturity in the Bank’s normal market area for deposits accepted from within its normal market area, or the national rate paid on deposits of comparable size and maturity for deposits accepted outside the Bank’s normal market area.  With respect to non-brokered deposits, as a well capitalized institution, the Bank is permitted to offer interest rates that are significantly higher than the prevailing rates in its normal market area.

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

	Actual				Minimum for Capital Adequacy Purposes				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2012:
Total Capital (to Risk Weighted Assets)	$	50,044	10.2	%	$	39,246	8.0	%	$	49,057	10.0	%
Tier I Capital (to Risk Weighted Assets)	43,797		8.9	%	19,623		4.0	%	29,434		6.0	%
Tier I Capital (to Average Assets)	43,797		5.0	%	34,949		4.0	%	43,687		5.0	%
As of December 31, 2011:
Total Capital (to Risk Weighted Assets)	$	56,733	9.8	%	$	46,584	8.0	%	$	58,230	10.0	%
Tier I Capital (to Risk Weighted Assets)	49,283		8.5	%	23,292		4.0	%	34,938		6.0	%
Tier I Capital (to Average Assets)	49,283		5.4	%	36,514		4.0	%	45,642		5.0	%

The Company is also subject to capital requirements, that differ from the Bank. In order for the Company to be well capitalized, total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets must be 8.0%, 4.0% and 4.0%, respectively. At December 31, 2012 and 2011, the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 10.2%, 5.9% and 3.3% and 10.3%, 7.0%, and 4.4%, respectively.

In late May 2011, the Company and the Bank, entered into the Written Agreement with the FRB and the NCCOB.  Under the terms of the Written Agreement, the Bank developed and submitted for approval, within the time periods specified, plans to:

• revise lending and credit administration policies and procedures at the Bank and provide relevant training;

• enhance the Bank's real estate appraisal policies and procedures;

• enhance the Bank's loan grading and independent loan review programs;

• improve the Bank's position with respect to loans, relationships, or other assets in excess of $750,000, which are now or in the future become past due more than 90 days, are on the Bank's problem loan list, or adversely classified in any report of examination of the Bank; and

• review and revise the Bank's current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance.

In addition, the Bank has agreed that it will:

• refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement;

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• eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB; and

• take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB.

In addition, the Company has agreed that it will:

• refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval;

• refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; and

• refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB.

Under the terms of the Written Agreement, both the Company and the Bank have agreed to:

• submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis;

• notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's minimum ratios;

• refrain from declaring or paying any dividends absent prior regulatory approval;

• comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments; and

• submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement.

The Company is committed to expeditiously addressing and resolving the issues raised in the Written Agreement. As such, the Board of Directors has established an Enforcement Action Committee that meets regularly to monitor the Bank's progress on compliance with the Written Agreement. The Bank has made progress on multiple provisions included in the Written Agreement and continues to aggressively work to implement any necessary changes to policies and procedures. Several control changes have been implemented to address the financial reporting material weaknesses, identified as of December 31, 2010, of identification and valuation of impaired loans, the support and validation of the allowance for loan losses, and the valuation of foreclosed assets. Additionally, the Bank has implemented additional controls around obtaining updated collateral valuations as required by regulation and has established new policies to further reduce Commercial Real Estate concentrations, ensure current financial information is evaluated, and control interest only loans. Other areas also addressed included the adequacy of credit resources, portfolio risk management and reporting,and consistency and compliance when dealing with loan workouts. A material failure to comply with the terms of the Written Agreement could subject the Company to additional regulatory actions and further restrictions on its business. These regulatory actions and resulting restrictions on the Company's business may have a material adverse effect on its future results of operations and financial condition.

Since the Company and the Bank entered the Written Agreement, management has had frequent and regular communication with the FRB and NCCOB. This communication has involved:

• updates on the progress involving each of the actions outlined in the Written Agreement;

• specific steps taken by the Company to remain in compliance with the Written Agreement; and

• communications, verbally and via interim internal reports, regarding the financial status of the Company including, but not limited to, the Company's key capital ratios.

To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated. Nor has the Company received any indication that additional measures are required beyond those contained in the Written Agreement. Despite the actions taken thus far, there is no assurance that additional measures or actions will not be required by the regulatory authorities in the future.

NOTE L - COMMITMENTS AND CONTINGENCIES

The Company 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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, 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.

At December 31, 2012 and 2011, financial instruments whose contract amounts represent credit risk were (amounts in thousands) :

	2012		2011
Commitments to extend credit	$	37,920	$	43,052
Undisbursed lines of credit	20,852		19,876
Financial stand-by letters of credit	416		378
Performance stand-by letters of credit	2,422		1,659
Legally binding commitments	61,610		64,965
Credit card lines	13,152		13,718
Total	$	74,762	$	78,683

Litigation Proceedings

We are party to certain other legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.

NOTE M – FAIR VALUE MEASUREMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. ASC 820 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, ASC 820 does not expand the use of fair value in any new circumstances. ASC 825 provides companies with an option to report selected financial assets and liabilities at fair value. As of December 31, 2012, the Company had not elected to measure any financial assets or liabilities using the fair value option under ASC 825; therefore the adoption of ASC 825 had no effect on the Company’s financial condition or results of operations.

The Company records securities available for sale at fair value on a recurring basis. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.

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ASC 820 establishes a fair value hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. ASC 820 clarifies fair value in terms of the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the fair value hierarchy established by ASC 820 to the Company’s financial assets that are carried at fair value.

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions.

Fair Value on a Recurring Basis.  The Company measures certain assets at fair value on a recurring basis, as described below.

Investment Securities Available for Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include equity securities traded on an active exchange, such as the New York Stock Exchange. Level 2 securities include taxable municipalities, and mortgage-backed securities issued by government sponsored entities, and certain equity securities.  The Company’s mortgage-backed securities were primarily issued by the Government National Mortgage Association (“GNMA”), with additional mortgage-backed securities issued by and the Federal National Mortgage Association (“FNMA”).  As of December 31, 2012, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities.  Securities classified as Level 3 include trust preferred securities in less liquid markets.

Below are tables that present information about assets measured at fair value on a recurring basis at December 31, 2012 and 2011 (amounts in thousands):

					Fair Value Measurements at December 31, 2012, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	2012		2012		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	5,913	$	5,913	$	—	$	5,913	$	—
Mortgage-backed securities
GNMA	60,743		60,743		—		60,743		—
FNMA	5,880		5,880		—		5,880		—
Trust preferred securities	1,006		1,006		—		—		1,006
Equity securities	180		180		56		124		—
Total available for sale securities	$	73,722	$	73,722	$	56	$	72,660	$	1,006

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					Fair Value Measurements at December 31, 2011 Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	2011		2011		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	17,919	$	17,919	$	—	$	17,919	$	—
Mortgage-backed securities GNMA	73,629		73,629		—		73,629		—
Trust preferred securities	1,085		1,085		—		—		1,085
Equity securities	157		157		157		—		—
Total available for sale    securities	$	92,790	$	92,790	$	157	$	91,548	$	1,085

The table below presents reconciliation for the years ended December 31, 2012 and 2011 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands). During the year ended December 31, 2012, no securities were transferred from Level 3 to Level 2.

	Available-for-sale Securities
	2012			2011
Beginning Balance	$	1,085		$	1,299
Total realized and unrealized gains or (losses):
Included in earnings	—			(575		)
Included in other comprehensive income	(79		)	361
Purchases, issuances and settlements	—			—
Transfers in (out) of Level 3	—			—
Ending Balance	$	1,006		$	1,085

Fair Value on a Nonrecurring Basis. The Company measures certain assets at fair value on a nonrecurring basis, as described below.

Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables” and ASC 450, “Contingencies”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with ASC 820, impaired loans with an allowance established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value that relies upon comparable values from identical sources, the Company records the impaired loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans totaled $58.9 million at December 31, 2012.  Of such loans, $23.8 million had specific loss allowances aggregating $5.4 million at that date for a net fair value of $18.4 million.  Of those specific allowances, all were determined using Level 3 inputs. Of the remaining balance of impaired loans, the Company has determined that no specific allowance remains.

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loans losses based upon the fair value of the underlying collateral or discounted cash flows at December 31, 2012 and December 31, 2011 (amounts in thousands):

87

	December 31, 2012					December 31, 2011
	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	—	$	23,761		$	—	$	34,378
Specific valuation allowance allocations	—		(5,389		)	—		(7,359		)
	$	—	$	18,372		$	—	$	27,019

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3. At December 31, 2012, fair value adjustments of $2.3 million were recorded to the foreclosed real estate of $15.1 million.  At December 31, 2011, there were $2.8 million fair value adjustments required after transfer related to foreclosed real estate of $12.2 million.

Assets measured at fair value on a non-recurring basis are included in the table below at December 31, 2012 and 2011(amounts in thousands):

					Fair Value Measurements at December 31, 2012, Using
Description	Total Carrying Amount in the Consolidated Balance Sheet 2012		Assets Measured at Fair Value 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans	$	18,372	$	18,372	$	—	$	—	$	18,372
Foreclosed assets	$	15,136	$	15,136	$	—	$	—	$	15,136

					Fair Value Measurements at December 31, 2011, Using
Description	Total Carrying Amount in the Consolidated Balance Sheet 2011		Assets Measured at Fair Value 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans	$	27,019	$	27,019	$	—	$	—	$	27,019
Foreclosed assets	$	12,159	$	12,159	$	—	$	—	$	12,159

Quantitative Information about Level 3 Fair Value Measurements

88

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring and nonrecurring basis at December 31, 2012(amounts in thousands, except percentages):

	Total Carrying Amount in the Consolidated Balance Sheet
	December 31, 2012
Nonrecurring measurements:
Impaired loans	$	18,372	Collateral discounts	15-70%
Foreclosed assets	$	15,136	Discounted appraisals	10-30%
Recurring measurement:
Trust preferred securities	$	1,006	Probability of default	10-20%
			Loss given default	100%

Collateral discounts to the principal balances of impaired loans varies widely and are a result from the consideration of a number of factors including the age of the most recent appraisal (i.e. an appraisal dating from an earlier period of real estate speculation would require as much as a 30% to 40% discount), the type of asset serving as collateral, the expected marketability of the asset, its material or environmental condition, and comparisons to actual sales data of similar assets from both internal and external sources.

The following table reflects the general range of collateral discounts for impaired loans by segment:

Loan Segment	Range of Percentages
Commercial construction and land development	30% - 60%
Commercial real estate other	40% -70%
Residential construction	30% - 50%
Residential mortgage	15% - 40%
All other segments	15% - 30%

As foreclosed assets are brought into other real estate owned through a process which requires a fair market valuation, further discounts typically reflect market conditions specific to the asset. These conditions are usually captured in subsequent appraisals which are required on an annual basis, and depending upon asset type and marketability demonstrate a more restrained variance as noted above.

NOTE N - 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 1,542,773 shares of common stock. Options are granted at the discretion of the Company’s Board of Directors at an exercise price approximating market value, as determined by a committee of Board members. All options granted subsequent to a 1997 amendment will be 100% vested after either one or two years from the grant date and will expire after such a period as is determined by the Board at the time of grant. Options granted in 2011 and 2012 have a two year vesting provision.

A summary of option activity under the Plan for the year ended December 31, 2012, is presented below:

89

	Shares	Option Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012	337,106	$	10.11
Granted	59,325	1.70
Exercised	—	—
Forfeited	27,764	9.43
Expired	114,987	12.79
Balance at December 31, 2012	253,680	$	7.00	2.82	$	—
Exercisable at December 31, 2012	141,549	$	10.71	2.14	$	—

The weighted average exercise price of all exercisable options at December 31, 2012 is $10.71. There were 328,520 shares reserved for future issuance under the Company’s stock option plan at December 31, 2012.

A summary of the status of the Company's non-vested options as of December 31, 2012 and changes during the year then ended is presented below:

	Shares	Weighted average grant date fair value
Non-vested - December 31, 2011	110,531	$	1.59
Granted	58,700	0.87
Vested	625	1.34
Forfeited/Expired	56,475	1.85
Non-vested - December 31, 2012	112,131	$	1.09

As of December 31, 2012 and 2011, there was $61,493 and $44,583 of unrecognized compensation cost related to non-vested share-based compensation arrangements, respectively.

Additional information concerning the Company’s stock options at December 31, 2012 is as follows:

Exercise Price	Number Outstanding	Contractual Life (Years)	Number Exercisable
1.70 - 2.99	58,700	4.16	—
3.00 - 5.49	53,400	3.16	—
5.50 - 8.63	52,550	2.15	52,523
8.64 - 10.91	49,600	1.15	49,599
10.92 - 40.78	27,125	2.59	27,122
40.79	12,305	5.07	12,305
	253,680	2.82	141,549

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 2012 and 2011:

	2012		2011
Dividend yield	—	%	—	%
Expected volatility	60.40	%	48.80	%
Risk free interest rate	.84	%	2.13	%
Expected life	5 years		5 years

90

The weighted average fair value of options granted during 2012 and 2011, was $0.87 and $1.34, respectively.

NOTE O - OTHER EMPLOYEE BENEFITS

Supplemental Retirement

In 1998, the Bank 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. SERP 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 SERP plan amounts to $420,000 and $366,000 at December 31, 2012 and 2011, respectively.  During 2012 and 2011, the expense attributable to the SERP amounted to $55,000 and $49,000 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 and key employees to provide them with severance pay 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 of 1986, as amended (the “Code”).  The plans provide for employee contributions up to $16,500 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, 2012 and 2011 were $145,000 and $146,000, 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 the Company, owners of stock in the Company.  The Four Oaks Bank & Trust Company’s Employee Stock Ownership Plan 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 did not issue new shares in conjunction with this plan in 2012 and 2011.

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. The Board of Directors determined that, due to the financial results for 2012 and 2011, no contributions would be made to the plan for 2012 and 2011.

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 Code.

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 five percent (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.

91

As of December 31, 2012, 368,544 shares of the Company’s common stock had been reserved for issuance under the Purchase Plan, and 324,654 shares had been purchased.  During the years ended December 31, 2012 and 2011, 31,189 and 31,769 shares, respectively, were purchased under the Purchase Plan.

NOTE P - LEASES

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

Leases
2013	$	320
2014	276
2015	276
2016	215
2017	171
2018 and beyond	755
	$	2,013

In addition, the Company has leased a building from one of its former directors for approximately $1,138 per month in 2012 and $1,081 per month in 2011, under an operating lease on a month-to-month basis.

Total rental expense under operating leases for the years ended December 31, 2012 and 2011 amounted to $367,000 and $364,000, respectively.

NOTE Q- PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Four Oaks Fincorp, Inc. at December 31, 2012 and 2011, and for the years ended December 31, 2012 and 2011 is presented below (amounts in thousands):

	2012		2011
Condensed Balance Sheets
Assets:
Cash and cash equivalents	$	784	$	1,427
Equity investment in subsidiaries	45,025		51,120
Investment securities available for sale	1,186		1,241
Other assets	587		593
Total assets	$	47,582	$	54,381
Liabilities and Shareholders’ Equity:
Other liabilities	$	534	$	317
Subordinated debentures	12,372		12,372
Subordinated promissory notes	12,000		12,000
Shareholders' equity	22,676		29,692
Total liabilities and shareholders’ equity	$	47,582	$	54,381

92

	For the Years Ended December 31,
	2012			2011
Condensed Statements of Operations
Equity in undistributed loss of subsidiaries	$	(5,848	)	$	(7,556	)
Interest income	113			147
Gain on sale of investments, available for sale	—			109
Impairment loss on investment securities available for sale	—			(585		)
Other income	154			140
Other expenses	(1,388		)	(1,345		)
Net loss	$	(6,969	)	$	(9,090	)

	2012			2011
Condensed Statements of Cash Flows
Operating activities:
Net income (loss)	$	(6,969	)	$	(9,090	)
Equity in undistributed loss of subsidiaries	5,848			7,556
Stock based compensation	62			95
Impairment loss on investment securities available for sale	—			585
Gain on sale of investments	—			(109		)
Decrease in other assets	5			118
Increase in other liabilities	217			305
Net cash used in operating activities	(837		)	(540		)
Investing activities:
Investment in subsidiaries	(40		)	(24		)
Net cash used in investing activities	(40		)	(24		)
Financing activities:
Proceeds from issuance of common stock	234			259
Net cash provided by financing activities	234			259
Net decrease in cash and cash equivalents	(643		)	(305		)
Cash and cash equivalents, beginning of year	1,427			1,732
Cash and cash equivalents, end of year	$	784		$	1,427

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 825-10-65-1 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

93

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

CDs Held for Investment

The fair values are based on discounting expected cash flows at the interest rate for certificates of deposit with the same or similar remaining maturity.

Investment Securities

Fair values of investment securities 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

The fair value of loans has been estimated utilizing the net present value of future cash flows based upon contractual balances, prepayment assumptions, and applicable weighted average interest rates, adjusted for a 5% current liquidity and market discount assumption. 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.

Loans Held For Sale

The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.

FHLB Stock

The carrying amount of FHLB stock approximates fair value.

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, Subordinated Debentures and Subordinated Promissory Notes

The fair value of subordinated debentures and subordinated promissory notes is based on discounting expected cash flows at the interest rate from debt with the same or similar remaining maturities and collection requirements.  The fair value of borrowings as of December 31, 2012 is based on the monthly Mark to Market schedule published by the lender FHLB which is indicative of current rates for similar borrowings of comparable remaining duration. 

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair value.

The following table presents information for financial assets and liabilities as of December 31, 2012 and 2011(amounts in thousands):

94

	Carrying Value		Estimated  Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	183,150	$	183,150	$	183,150	$	—	$	—
CDs held for investment	26,460		26,460		—		26,460		—
Securities available for sale	73,722		73,722		56		72,660		1,006
Securities held to maturity	20,329		20,668		—		20,668		—
Loans held for sale	19,297		19,297		—		—		19,297
Loans, net	462,083		460,422		—		—		460,422
FHLB stock	6,415		6,415		—		6,415		—
Premises and equipment, held for sale	1,901		1,901		—		—		1,901
Accrued interest receivable	1,869		1,869		—		1,869		—
Financial liabilities:
Deposits	$	699,856	$	694,184	$	407,387	$	286,797	$	—
Subordinated debentures and subordinated promissory notes	24,372		15,598		—		—		15,598
Borrowings	112,000		126,738		—		126,738		—
Accrued interest payable	1,736		1,736		—		1,736		—

	December 31, 2011
	Carrying Value		Estimated  Fair Value
Financial assets:
Cash and cash equivalents	$	141,197	$	141,197
CDs held for investment	23,769		23,769
Securities available for sale	92,790		92,790
Securities held to maturity	20,445		20,456
Loans, net	581,091		554,624
FHLB stock	6,553		6,553
Accrued interest receivable	1,985		1,985
Financial liabilities:
Deposits	$	745,889	$	742,959
Subordinated debentures and subordinated promissory notes	24,372		15,598
Borrowings	112,000		126,313
Accrued interest payable	1,437		1,437

NOTE S - BRANCH SALE

On September 26, 2012, the Bank, and First Bank entered into a Purchase and Assumption Agreement, pursuant to which First Bank will purchase certain assets and assume certain liabilities of two branch offices of the Bank located in Rockingham, North Carolina and Southern Pines, North Carolina. The purchase price of the assets was computed as the sum of (i) a premium of 1% on the deposits at the branches, (ii) the aggregate value of the acquired loans, (iii) the aggregate net book value of the real property and related tangible personal property at the Rockingham branch, and (iv) the aggregate face value of the cash on hand at the Rockingham branch. The value at December 31, 2012 of the deposits was approximately $62.1 million, loans to be acquired was approximately $18.7 million, and are classified as held for sale, and property and equipment was approximately $1.9 million. The actual amount of deposits at the time of closing on March 22, 2013 was $57.3 million, loans acquired $16.4 million and property and equipment of $1.9 million. The Bank and First Bank closed the branch sale on March 22, 2013.

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

95

None

Item 9A - Controls and Procedures.

Disclosure Controls and Procedures

As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report.   As defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Annual Report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods required by the SEC's rules and forms.

Management's Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting, based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting as of December 31, 2012.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of 2012 that the Company believes have materially affected or are likely to materially affect, its internal control over financial reporting.

Item 9B - Other Information.

Not applicable.

PART III

96

The information called for in Items 10 through 14 is incorporated by reference from the definitive proxy statement for the Company's 2013 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, Executive Officers and Corporate Governance.

Item 11 - Executive Compensation.

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

Item 13 - Certain Relationships and Related Transactions, and Director Independence.

Item 14 - Principal Accounting Fees and Services.

Item 15 – Exhibits, Financial Statement Schedules.

(a)(1)  Financial Statements.  The following financial statements and supplementary data are included in Item 8 of Part II of this Annual Report on Form 10-K.

TABLE OF CONTENTS
Financial Statements	Form 10-K Page
Report of Independent Registered Public Accounting Firm	47
Consolidated Balance Sheets as of December 31, 2012 and 2011	48
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	49
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012 and 2011	50
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012 and 2011	51
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	52
Notes to Consolidated Financial Statements	54

(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.

Exhibit No.	Description of Exhibit
2.1	Merger Agreement, dated as of December 10, 2007, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and LongLeaf Community Bank (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on December 13, 2007)
2.2	List of Schedules Omitted from Merger Agreement included as Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on December 13, 2007)
2.3	Merger Agreement, dated April 29, 2009, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and Nuestro Banco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on May 1, 2009)

97

2.4	List of Schedules Omitted from Merger Agreement included as Exhibit 2.3 above (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on May 1, 2009)
2.5	First Amendment to Merger Agreement, dated as of October 26, 2009, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and Nuestro Banco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on October 27, 2009)
2.6	Second Amendment to Merger Agreement, dated as of November 24, 2009, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and Nuestro Banco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on November 30, 2009)
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 year ended December 31, 2008)
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	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)
10.2	Amendment No. 1, effective September 1, 2009 to Amended and Restated Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement)
10.3	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)
10.4	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)
10.5	Form of Stock Option Agreement (Non-Employee Director) (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement)
10.6	Form of Stock Option Agreement (Employee) (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement)
10.7	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)
10.8	Amendment No. 1, effective September 1, 2009 to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.2 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement)
10.9	Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2009) (management contract or compensatory plan, contract or arrangement)
10.10	Fourth Amended and Restated Dividend Reinvestment and Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-175771) filed with the SEC on July 25, 2011)
10.11	Amended and Restated Declaration of Trust of Four Oaks Statutory Trust I, dated as of March 30, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006)
10.12	Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of March 30, 2006 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006)
10.13	Indenture, dated as of March 30, 2006 by and between Four Oaks Fincorp, Inc. and Wilmington Trust Company, as Trustee, relating to Junior Subordinated Debt Securities due June 15, 2036 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006)
10.14	Consulting Agreement with John W. Bullard (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2008)

98

10.15	Amended and Restated Executive Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.16	Amended and Restated Executive Employment Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.17	Amended and Restated Executive Employment Agreement with Jeff D. Pope (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.18	Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.19	Written Agreement, effective May 24, 2011, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011)
10.20	Purchase and Assumption Agreement, dated as of September 26, 2012, between Four Oaks Bank & Trust Company and First Bank (incorporated by reference to Exhibit 10.b to First Bancorp's (File No. 000-15572) Quarterly Report on Form 10-Q for the period ended September 30, 2012)
21	Subsidiaries of Four Oaks Fincorp, Inc.
23	Consent of Dixon Hughes Goodman LLP
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
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
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
101	The following materials from Four Oaks Fincorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Loss; (iv) Consolidated Statements of Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. *

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.

99

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:	March 28, 2013	By:	/s/ Ayden R. Lee, Jr.
			Ayden R. Lee, Jr. Chairman, 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:	March 28, 2013	/s/ Ayden R. Lee, Jr.
		Ayden R. Lee, Jr. Chairman, President and Chief Executive Officer

Date:	March 28, 2013	/s/ Nancy S. Wise
		Nancy S. Wise Executive Vice President and Chief Financial Officer

Date:	March 28, 2013	/s/ William J. Edwards
		William J. Edwards Director

Date:	March 28, 2013	/s/ Warren L. Grimes
		Warren L. Grimes Director

Date:	March 28, 2013	/s/ Dr. R. Max Raynor, Jr.
		Dr. R. Max Raynor, Jr. Director

Date:	March 28, 2013	/s/ Paula Canaday Bowman
		Paula Canaday Bowman Director

Date:	March 28, 2013	/s/ Percy Y. Lee
		Percy Y. Lee Director

Date:	March 28, 2013	/s/ John W. Bullard
		John W. Bullard Director

Date:	March 28, 2013	/s/ Michael A. Weeks
		Michael A. Weeks Director

Date:	March 28, 2013	/s/ John Lampe II
		John Lampe II Director

Date:	March 28, 2013	/s/ Robert G. Rabon
		Robert G. Rabon Director

100

EXHIBIT INDEX

Exhibit No.	Description of Exhibit
2.1	Merger Agreement, dated as of December 10, 2007, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and LongLeaf Community Bank (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on December 13, 2007)
2.2	List of Schedules Omitted from Merger Agreement included as Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on December 13, 2007)
2.3	Merger Agreement, dated April 29, 2009, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and Nuestro Banco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on May 1, 2009)
2.4	List of Schedules Omitted from Merger Agreement included as Exhibit 2.3 above (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on May 1, 2009)
2.5	First Amendment to Merger Agreement, dated as of October 26, 2009, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and Nuestro Banco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on October 27, 2009)
2.6	Second Amendment to Merger Agreement, dated as of November 24, 2009, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and Nuestro Banco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on November 30, 2009)
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 year ended December 31, 2008)
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	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)
10.2	Amendment No. 1, effective September 1, 2009 to Amended and Restated Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement)
10.3	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)
10.4	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)
10.5	Form of Stock Option Agreement (Non-Employee Director) (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement)
10.6	Form of Stock Option Agreement (Employee) (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 2009) (management contract or compensatory plan, contract or arrangement)
10.7	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)
10.8	Amendment No. 1, effective September 1, 2009 to Amended and Restated Employee Stock Purchase and Bonus Plan (incorporated by reference to Exhibit 10.2 to the Company's Amendment No. 1 to Current Report on Form 8-K/A filed with the SEC on September 29, 2009) (management contract or compensatory plan, contract or arrangement)
10.9	Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2009) (management contract or compensatory plan, contract or arrangement)
10.10	Fourth Amended and Restated Dividend Reinvestment and Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 333-175771) filed with the SEC on July 25, 2011)

101

10.11	Amended and Restated Declaration of Trust of Four Oaks Statutory Trust I, dated as of March 30, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006)
10.12	Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of March 30, 2006 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006)
10.13	Indenture, dated as of March 30, 2006 by and between Four Oaks Fincorp, Inc. and Wilmington Trust Company, as Trustee, relating to Junior Subordinated Debt Securities due June 15, 2036 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2006)
10.14	Consulting Agreement with John W. Bullard (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2008)
10.15	Amended and Restated Executive Employment Agreement with Ayden R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.16	Amended and Restated Executive Employment Agreement with Clifton L. Painter (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.17	Amended and Restated Executive Employment Agreement with Jeff D. Pope (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.18	Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed with the SEC on December 16, 2008) (management contract or compensatory plan, contract or arrangement)
10.19	Written Agreement, effective May 24, 2011, by and among Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 26, 2011)
10.20	Purchase and Assumption Agreement, dated as of September 26, 2012, between Four Oaks Bank & Trust Company and First Bank (incorporated by reference to Exhibit 10.b to First Bancorp's (File No. 000-15572) Quarterly Report on Form 10-Q for the period ended September 30, 2012)
21	Subsidiaries of Four Oaks Fincorp, Inc.
23	Consent of Dixon Hughes Goodman LLP
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
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
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
101	The following materials from Four Oaks Fincorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Loss; (iv) Consolidated Statements of Shareholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. *

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.

102

EX-23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Four Oaks Fincorp, Inc.

Four Oaks, North Carolina

We consent to the incorporation by reference in the registration statements of Four Oaks Fincorp, Inc. (the “Company”) on Form S-1 (File No. 333-175771), Form S-3 (File No. 333-33527) and Form S-8 (File Nos. 333-30677, 333-69792, 333-152159, 333-162200, 333-162202, and 333-165829) of our report dated March 28, 2013 with respect to the consolidated financial statements of the Company as of December 31, 2012 and 2011 and for each of the years then ended, which report appears in the Company's 2012 Annual Report on Form 10-K.

/s/ Dixon Hughes Goodman LLP

Raleigh, North Carolina

March 28, 2013

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Rule 13a-14(a) or Rule 15d-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Ayden R. Lee, Jr., certify that:

(1) I have reviewed this annual report on Form 10-K of Four Oaks Fincorp, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	March 28, 2013	/s/ Ayden R. Lee, Jr.
		Ayden R. Lee, Jr.
		Chairman, President and
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to Rule 13a-14(a) or Rule 15d-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Nancy S. Wise, certify that:

(1) I have reviewed this annual report on Form 10-K of Four Oaks Fincorp, Inc.;     

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	March 28, 2013	/s/ Nancy S. Wise
		Nancy S. Wise
		Executive Vice President and
		Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification by the Chief Executive Officer Pursuant to 18. U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-K filed by Four Oaks Fincorp, Inc. (the “Issuer”) for the year ended December 31, 2012 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

		FOUR OAKS FINCORP, INC.
Date:	March 28, 2013	By:	/s/ Ayden R. Lee, Jr.
			Ayden R. Lee, Jr.
			Chairman, President and
			Chief Executive Officer

This Certification is being furnished solely to accompany this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed “filed” by the Issuer for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Issuer under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 has been provided to the Issuer and will be retained by the Issuer and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification by the Chief Financial Officer Pursuant to 18. U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned hereby certifies that, to his or her knowledge, (i) the Form 10-K filed by Four Oaks Fincorp, Inc. (the “Issuer”) for the year ended December 31, 2012 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.

		FOUR OAKS FINCORP, INC.
Date:	March 28, 2013	By:	/s/ Nancy S. Wise
			Nancy S. Wise
			Executive Vice President and
			Chief Financial Officer

This Certification is being furnished solely to accompany this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed “filed” by the Issuer for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Issuer under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 has been provided to the Issuer and will be retained by the Issuer and furnished to the Securities and Exchange Commission or its staff upon request.

XML

STOCK OPTION PLAN (Tables)

12 Months Ended

Dec. 31, 2012

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Summary of Option Activity

A summary of option activity under the Plan for the year ended December 31, 2012, is presented below:

	Shares	Option Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012	337,106	$	10.11
Granted	59,325	1.70
Exercised	—	—
Forfeited	27,764	9.43
Expired	114,987	12.79
Balance at December 31, 2012	253,680	$	7.00	2.82	$	—
Exercisable at December 31, 2012	141,549	$	10.71	2.14	$	—

Schedule of Shares Authorized under Stock Option Plans, by Exercise Price Range

Additional information concerning the Company’s stock options at December 31, 2012 is as follows:

Exercise Price	Number Outstanding	Contractual Life (Years)	Number Exercisable
1.70 - 2.99	58,700	4.16	—
3.00 - 5.49	53,400	3.16	—
5.50 - 8.63	52,550	2.15	52,523
8.64 - 10.91	49,600	1.15	49,599
10.92 - 40.78	27,125	2.59	27,122
40.79	12,305	5.07	12,305
	253,680	2.82	141,549

Schedule of Stock Options, Valuation Assumptions

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 2012 and 2011:

	2012		2011
Dividend yield	—	%	—	%
Expected volatility	60.40	%	48.80	%
Risk free interest rate	.84	%	2.13	%
Expected life	5 years		5 years

Stock Options [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Summary of Non-vested Options

A summary of the status of the Company's non-vested options as of December 31, 2012 and changes during the year then ended is presented below:

	Shares	Weighted average grant date fair value
Non-vested - December 31, 2011	110,531	$	1.59
Granted	58,700	0.87
Vested	625	1.34
Forfeited/Expired	56,475	1.85
Non-vested - December 31, 2012	112,131	$	1.09

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Nonperforming Assets) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Loans and Leases Receivable Disclosure [Abstract]
Loans past due ninety days or more and still accruing	$ 32	$ 60
Nonaccrual loans	35,970	60,141
Foreclosed assets	15,136	12,159
Total	$ 51,138	$ 72,360

XML

INVESTMENT SECURITIES (Held to Maturity Securities) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	$ 20,329	$ 20,445
Gross Unrealized Gains	339	48
Gross Unrealized Losses	0	37
Fair Value	20,668	20,456
Mortgage-backed Securities GNMA [Member]
Schedule of Held-to-maturity Securities [Line Items]
Amortized Cost	20,329	20,445
Gross Unrealized Gains	339	48
Gross Unrealized Losses	0	37
Fair Value	$ 20,668	$ 20,456

XML

TRUST PREFERRED SECURITIES (Details) (USD $)	0 Months Ended
	Mar. 30, 2006	Dec. 31, 2012	Dec. 31, 2011
Trust Preferred Securities
Trust preferred securities	$ 12,000,000
Interest Payable		1,736,000	1,437,000
Subordinated Debt [Member] | Trust Preferred Securities [Member]
Trust Preferred Securities
Interest Payable		$ 496,000
London Interbank Offered Rate (LIBOR) [Member] | Subordinated Debt [Member] | Trust Preferred Securities [Member]
Trust Preferred Securities
Trust preferred securities, basis spread on variable rate		1.35%

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Related Party Loans) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Loans and Leases Receivable, Related Parties [Roll Forward]
Balance at beginning of period	$ 6,191	$ 7,048
Principal repayments	(826)	(857)
Balance at end of period	8,138	6,191
Existing Board of Director [Member]
Loans and Leases Receivable, Related Parties [Roll Forward]
New loans	0	0
New Board of Director [Member]
Loans and Leases Receivable, Related Parties [Roll Forward]
New loans	$ 2,773	$ 0

XML

FAIR VALUE MEASUREMENT (Assets Measured at Fair Value on Recurring Basis) (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	$ 73,722,000	$ 92,790,000
Taxable Municipal Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,913,000	17,919,000
Mortgage-backed Securities GNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	60,743,000	73,629,000
Mortgage-backed Securities FNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,880,000
Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	180,000	157,000
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	56,000
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member] | Recurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	56,000	157,000
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member] | Recurring Basis [Member] | Taxable Municipal Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	0	0
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member] | Recurring Basis [Member] | Mortgage-backed Securities GNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities		0
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member] | Recurring Basis [Member] | Trust Preferred Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	0	0
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member] | Recurring Basis [Member] | Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	56,000	157,000
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	72,660,000
Significant Other Observable Inputs (Level 2) [Member] | Recurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	72,660,000	91,548,000
Significant Other Observable Inputs (Level 2) [Member] | Recurring Basis [Member] | Taxable Municipal Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,913,000	17,919,000
Significant Other Observable Inputs (Level 2) [Member] | Recurring Basis [Member] | Mortgage-backed Securities GNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	60,743,000	73,629,000
Significant Other Observable Inputs (Level 2) [Member] | Recurring Basis [Member] | Mortgage-backed Securities FNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,880,000
Significant Other Observable Inputs (Level 2) [Member] | Recurring Basis [Member] | Trust Preferred Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	0	0
Significant Other Observable Inputs (Level 2) [Member] | Recurring Basis [Member] | Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	124,000	0
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	1,006,000
Significant Unobservable Inputs (Level 3) [Member] | Recurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	1,006,000	1,085,000
Significant Unobservable Inputs (Level 3) [Member] | Recurring Basis [Member] | Taxable Municipal Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	0	0
Significant Unobservable Inputs (Level 3) [Member] | Recurring Basis [Member] | Mortgage-backed Securities GNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities		0
Significant Unobservable Inputs (Level 3) [Member] | Recurring Basis [Member] | Trust Preferred Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	1,006,000	1,085,000
Significant Unobservable Inputs (Level 3) [Member] | Recurring Basis [Member] | Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	0	0
Assets Measured at Fair Value [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	73,722,000	92,790,000
Assets Measured at Fair Value [Member] | Recurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	73,722,000	92,790,000
Assets Measured at Fair Value [Member] | Recurring Basis [Member] | Taxable Municipal Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,913,000	17,919,000
Assets Measured at Fair Value [Member] | Recurring Basis [Member] | Mortgage-backed Securities GNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	60,743,000	73,629,000
Assets Measured at Fair Value [Member] | Recurring Basis [Member] | Mortgage-backed Securities FNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,880,000
Assets Measured at Fair Value [Member] | Recurring Basis [Member] | Trust Preferred Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	1,006,000	1,085,000
Assets Measured at Fair Value [Member] | Recurring Basis [Member] | Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	180,000	157,000
Total Carrying Amount in the Consolidated Balance Sheet [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	73,722,000	92,790,000
Total Carrying Amount in the Consolidated Balance Sheet [Member] | Recurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	73,722,000	92,790,000
Total Carrying Amount in the Consolidated Balance Sheet [Member] | Recurring Basis [Member] | Taxable Municipal Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,913,000	17,919,000
Total Carrying Amount in the Consolidated Balance Sheet [Member] | Recurring Basis [Member] | Mortgage-backed Securities GNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	60,743,000	73,629,000
Total Carrying Amount in the Consolidated Balance Sheet [Member] | Recurring Basis [Member] | Mortgage-backed Securities FNMA [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	5,880,000
Total Carrying Amount in the Consolidated Balance Sheet [Member] | Recurring Basis [Member] | Trust Preferred Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	1,006,000	1,085,000
Total Carrying Amount in the Consolidated Balance Sheet [Member] | Recurring Basis [Member] | Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available for sale securities	$ 180,000	$ 157,000

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Net Loss Per Common Share and Common Shares Outstanding) (Details)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Weighted average number of common shares outstanding:
Weighted average number of common shares used in computing basic net loss per common share	7,745,342	7,599,666
Effect of dilutive stock options	0	0
Weighted average number of common shares and dilutive potential common shares used in computing diluted net loss per share	7,745,342	7,599,666

XML

DEPOSITS (Tables)

12 Months Ended

Dec. 31, 2012

Banking and Thrift [Abstract]

Schedule of Maturities of Time Deposits

At December 31, 2012, the scheduled maturities of time deposits are as follows (amounts in thousands):

	Less than $100,000		$100,000 or more		Total
2013	$	79,613	$	120,191	$	199,804
2014	26,563		39,436		65,999
2015	16,053		29,536		45,589
2016	4,805		16,253		21,058
2017	2,892		8,095		10,987
2018 and beyond	284		2,473		2,757
Total time deposits	$	130,210	$	215,984	$	346,194

XML

FAIR VALUE MEASUREMENT (Level 3 Assets Measured at Fair Value on Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Level 3 Assets Measured at Fair Value on a Recurring Basis [Roll Forward]
Beginning Balance	$ 1,085	$ 1,299
Total realized and unrealized gains or (losses) included in earnings	0	(575)
Total realized and unrealized gains or (losses) included in other comprehensive income	(79)	361
Purchases, issuances and settlements	0	0
Transfers in (out) of Level 3	0	0
Ending Balance	$ 1,006	$ 1,085

XML

INCOME TAXES (Income Tax Reconciliation) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Statutory federal rate	34.00%
Expense computed at statutory rate of 34%	$ (2,429)	$ (2,915)
Effect of state income taxes, net of federal benefit	(36)	(351)
Tax exempt income	(293)	(55)
Bank owned life insurance income	(106)	(129)
Valuation allowance	3,061	3,407
Other, net	(372)	43
Income tax expense (benefit)	$ (175)	$ 0

XML

STOCK OPTION PLAN (Valuation Assumptions) (Details) (Stock Options [Member])	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stock Options [Member]
Valuation Assumptions [Line Items]
Dividend yield	0.00%	0.00%
Expected volatility	60.40%	48.80%
Risk free interest rate	0.84%	2.13%
Expected life	5 years	5 years

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Loans on Nonaccrual Status) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	$ 35,970	$ 60,141
Commercial and Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	664	779
Commercial Construction and Land Development [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	15,941	29,538
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	9,091	14,830
Residential Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	833	1,469
Residential Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	9,408	13,466
Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	33	59
Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	$ 0	$ 0

XML

REGULATORY RESTRICTIONS (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	May 31, 2011
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Maximum effective yield for brokered deposits, with FDIC approval	7.50%
Four Oaks Bank & Trust Company (the “Bank”) [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Dividends paid to the Company by the Bank	$ 0
Minimum individual amount of over 90 days past due loans, relationships, or other assets position to be improved			750,000
Total Capital (to Risk Weighted Assets), Amount
Total Capital (to Risk Weighted Assets), Amount, Actual	50,044,000	56,733,000
Total Capital (to Risk Weighted Assets), Amount, Minimum for Capital Adequacy Purposes	39,246,000	46,584,000
Total Capital (to Risk Weighted Assets), Amount, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	49,057,000	58,230,000
Tier I Capital (to Risk Weighted Assets), Amount
Tier I Capital (to Risk Weighted Assets), Amount, Actual	43,797,000	49,283,000
Tier I Capital (to Risk Weighted Assets), Amount, Minimum for Capital Adequacy Purposes	19,623,000	23,292,000
Tier I Capital (to Risk Weighted Assets), Amount, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	29,434,000	34,938,000
Tier I Capital (to Average Assets), Amount
Tier I Capital (to Average Assets), Amount, Actual	43,797,000	49,283,000
Tier I Capital (to Average Assets), Amount, Minimum for Capital Adequacy Purposes	34,949,000	36,514,000
Tier I Capital (to Average Assets), Amount, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	$ 43,687,000	$ 45,642,000
Total Capital and Tier I Capital (to Risk Weighted Assets), Ratio
Total Capital (to Risk Weighted Assets), Ratio, Actual	10.20%	9.80%
Total Capital (to Risk Weighted Assets), Ratio, Minimum for Capital Adequacy Purposes	8.00%	8.00%
Total Capital (to Risk Weighted Assets), Ratio, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	10.00%	10.00%
Tier I Capital (to Risk Weighted Assets), Ratio, Actual	8.90%	8.50%
Tier I Capital (to Risk Weighted Assets), Ratio, Minimum for Capital Adequacy Purposes	4.00%	4.00%
Tier I Capital (to Risk Weighted Assets), Ratio, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	6.00%	6.00%
Tier I Capital (to Average Assets), Ratio
Tier I Capital (to Average Assets), Ratio, Actual	5.00%	5.40%
Tier I Capital (to Average Assets), Ratio, Minimum for Capital Adequacy Purposes	4.00%	4.00%
Tier I Capital (to Average Assets), Ratio, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	5.00%	5.00%
Parent Company [Member]
Total Capital and Tier I Capital (to Risk Weighted Assets), Ratio
Total Capital (to Risk Weighted Assets), Ratio, Actual	10.20%	10.30%
Total Capital (to Risk Weighted Assets), Ratio, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	8.00%
Tier I Capital (to Risk Weighted Assets), Ratio, Actual	5.90%	7.00%
Tier I Capital (to Risk Weighted Assets), Ratio, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	4.00%
Tier I Capital (to Average Assets), Ratio
Tier I Capital (to Average Assets), Ratio, Actual	3.30%	4.40%
Tier I Capital (to Average Assets), Ratio, Minimum to be Well Capitalized under Prompt Corrective Action Provisions	4.00%

XML

STOCK OPTION PLAN (Option Activity Rollforward) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012
Options, Outstanding [Roll Forward]
Outstanding at beginning of period	337,106,000
Granted	59,325,000
Exercised	0
Forfeited	27,764,000
Expired	114,987,000
Outstanding at end of period	253,680,000
Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Outstanding at beginning of period (in usd per share)	$ 10.11
Granted (in usd per share)	$ 1.70
Exercised (in usd per share)	$ 0.00
Forfeited (in usd per share)	$ 9.43
Expired (in usd per share)	$ 12.79
Outstanding at end of period (in usd per share)	$ 7.00
Options, Additional Disclosures
Weighted-Average Remaining Contractual Term	2 years 9 months 26 days
Aggregate Intrinsic Value	$ 0
Options, Exercisable (in shares)	141,549,000
Options, Exercisable (in usd per share)	$ 10.71
Options, Exercisable, Weighted Average Remaining Contractual Term	2 years 1 month 21 days
Options, Exercisable, Intrinsic Value	$ 0

XML

FAIR VALUE MEASUREMENT (Assets Measured at Fair Value on Nonrecurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Nonrecurring Basis [Member] | Total Carrying Amount in the Consolidated Balance Sheet [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 18,372	$ 27,019
Foreclosed assets	15,136	12,159
Nonrecurring Basis [Member] | Assets Measured at Fair Value [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	18,372	27,019
Foreclosed assets	15,136	12,159
Quoted Prices in Active Markets for Identical Asset (Level 1) [Member] | Nonrecurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Foreclosed assets	0	0
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Significant Other Observable Inputs (Level 2) [Member] | Nonrecurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Foreclosed assets	0	0
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	18,372	27,019
Significant Unobservable Inputs (Level 3) [Member] | Nonrecurring Basis [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	18,372	27,019
Foreclosed assets	$ 15,136	$ 12,159

XML

STOCK OPTION PLAN (Non-vested Options) (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Options, Nonvested, Weighted Average Grant Date Fair Value [Roll Forward]
Non-vested - beginning of period (in usd per share)	$ 1.59
Granted (in usd per share)	$ 0.87	$ 1.34
Vested (in usd per share)	$ 1.34
Forfeited/Expired (in usd per share)	$ 1.85
Non-vested - end of period (in usd per share)	$ 1.09	$ 1.59
Options, Nonvested, Number of Shares [Roll Forward] [Roll Forward]
Non-vested - beginning of period	110,531
Granted	59,325,000
Vested	625
Forfeited/Expired	56,475
Non-vested - end of period	112,131	110,531
Non-vested Stock Options [Member]
Options, Nonvested, Number of Shares [Roll Forward] [Roll Forward]
Granted	58,700

XML

COMMITMENTS AND CONTINGENCIES (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Loan Commitments [Line Items]
Loan commitments	$ 74,762	$ 78,683
Legally Binding Commitments [Member]
Loan Commitments [Line Items]
Loan commitments	61,610	64,965
Commitments to Extend Credit [Member]
Loan Commitments [Line Items]
Loan commitments	37,920	43,052
Undisbursed Lines of Credit [Member]
Loan Commitments [Line Items]
Loan commitments	20,852	19,876
Financial Stand-by Letters of Credit [Member]
Loan Commitments [Line Items]
Loan commitments	416	378
Performance Stand-by Letters of Credit [Member]
Loan Commitments [Line Items]
Loan commitments	2,422	1,659
Credit Card Lines [Member]
Loan Commitments [Line Items]
Loan commitments	$ 13,152	$ 13,718

XML

SUBORDINATED PROMISSORY NOTES (Details) (USD $) In Millions, unless otherwise specified	4 Months Ended	12 Months Ended
	Aug. 31, 2009	Dec. 31, 2012
Subordinated Debt [Abstract]
Aggregate principal amount of subordinated promissory notes sold	$ 12.0
Subordinated debt, maturity period	10 years
Subordinated debt, interest rate		8.50%

XML

FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 825-10-65-1 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.

CDs Held for Investment

The fair values are based on discounting expected cash flows at the interest rate for certificates of deposit with the same or similar remaining maturity.

Investment Securities

Fair values of investment securities 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

The fair value of loans has been estimated utilizing the net present value of future cash flows based upon contractual balances, prepayment assumptions, and applicable weighted average interest rates, adjusted for a 5% current liquidity and market discount assumption. 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.

Loans Held For Sale

The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.

FHLB Stock

The carrying amount of FHLB stock approximates fair value.

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, Subordinated Debentures and Subordinated Promissory Notes

The fair value of subordinated debentures and subordinated promissory notes is based on discounting expected cash flows at the interest rate from debt with the same or similar remaining maturities and collection requirements.  The fair value of borrowings as of December 31, 2012 is based on the monthly Mark to Market schedule published by the lender FHLB which is indicative of current rates for similar borrowings of comparable remaining duration. 

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair value.

The following table presents information for financial assets and liabilities as of December 31, 2012 and 2011(amounts in thousands):

	Carrying Value		Estimated  Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	183,150	$	183,150	$	183,150	$	—	$	—
CDs held for investment	26,460		26,460		—		26,460		—
Securities available for sale	73,722		73,722		56		72,660		1,006
Securities held to maturity	20,329		20,668		—		20,668		—
Loans held for sale	19,297		19,297		—		—		19,297
Loans, net	462,083		460,422		—		—		460,422
FHLB stock	6,415		6,415		—		6,415		—
Premises and equipment, held for sale	1,901		1,901		—		—		1,901
Accrued interest receivable	1,869		1,869		—		1,869		—
Financial liabilities:
Deposits	$	699,856	$	694,184	$	407,387	$	286,797	$	—
Subordinated debentures and subordinated promissory notes	24,372		15,598		—		—		15,598
Borrowings	112,000		126,738		—		126,738		—
Accrued interest payable	1,736		1,736		—		1,736		—

	December 31, 2011
	Carrying Value		Estimated  Fair Value
Financial assets:
Cash and cash equivalents	$	141,197	$	141,197
CDs held for investment	23,769		23,769
Securities available for sale	92,790		92,790
Securities held to maturity	20,445		20,456
Loans, net	581,091		554,624
FHLB stock	6,553		6,553
Accrued interest receivable	1,985		1,985
Financial liabilities:
Deposits	$	745,889	$	742,959
Subordinated debentures and subordinated promissory notes	24,372		15,598
Borrowings	112,000		126,313
Accrued interest payable	1,437		1,437

XML

INVESTMENT SECURITIES (Roll Forward of Credit Losses on Debt Securities) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Roll forward of credit losses recognized on debt securities held with OTTI recognized in OCI:
Balance of credit losses on debt securities at the beginning of the period	$ 75	$ 0
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized	0	75
Balance of credit losses on debt securities at the end of the period	$ 75	$ 75

XML

FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Information for Financial Assets and Liabilities

The following table presents information for financial assets and liabilities as of December 31, 2012 and 2011(amounts in thousands):

	Carrying Value		Estimated  Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	183,150	$	183,150	$	183,150	$	—	$	—
CDs held for investment	26,460		26,460		—		26,460		—
Securities available for sale	73,722		73,722		56		72,660		1,006
Securities held to maturity	20,329		20,668		—		20,668		—
Loans held for sale	19,297		19,297		—		—		19,297
Loans, net	462,083		460,422		—		—		460,422
FHLB stock	6,415		6,415		—		6,415		—
Premises and equipment, held for sale	1,901		1,901		—		—		1,901
Accrued interest receivable	1,869		1,869		—		1,869		—
Financial liabilities:
Deposits	$	699,856	$	694,184	$	407,387	$	286,797	$	—
Subordinated debentures and subordinated promissory notes	24,372		15,598		—		—		15,598
Borrowings	112,000		126,738		—		126,738		—
Accrued interest payable	1,736		1,736		—		1,736		—

	December 31, 2011
	Carrying Value		Estimated  Fair Value
Financial assets:
Cash and cash equivalents	$	141,197	$	141,197
CDs held for investment	23,769		23,769
Securities available for sale	92,790		92,790
Securities held to maturity	20,445		20,456
Loans, net	581,091		554,624
FHLB stock	6,553		6,553
Accrued interest receivable	1,985		1,985
Financial liabilities:
Deposits	$	745,889	$	742,959
Subordinated debentures and subordinated promissory notes	24,372		15,598
Borrowings	112,000		126,313
Accrued interest payable	1,437		1,437

XML

INCOME TAXES (Narrative) (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Deferred tax assets, valuation allowance	$ (21,669,000)	$ (18,608,000)
Net deferred tax liability	(280,000)	(507,000)
Net operating loss carry forward	33,600,000
Net operating loss carry forward, expiration amount	$ 1,500,000

XML

COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

Schedule of Loan Commitments

At December 31, 2012 and 2011, financial instruments whose contract amounts represent credit risk were (amounts in thousands) :

	2012		2011
Commitments to extend credit	$	37,920	$	43,052
Undisbursed lines of credit	20,852		19,876
Financial stand-by letters of credit	416		378
Performance stand-by letters of credit	2,422		1,659
Legally binding commitments	61,610		64,965
Credit card lines	13,152		13,718
Total	$	74,762	$	78,683

XML

INVESTMENT SECURITIES (Narrative) (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2012 Collateralized Mortgage Obligations, Issued by GNMA [Member] securities	Dec. 31, 2012 MBS, Pass-through Securities [Member] securities	Dec. 31, 2012 Trust Preferred Securities [Member] securities	Sep. 30, 2012 Equity Securities [Member] securities	Dec. 31, 2011 Available-for-sale Securities [Member] Trust Preferred Security 1 [Member]	Dec. 31, 2010 Available-for-sale Securities [Member] Trust Preferred Security 1 [Member]	Dec. 31, 2012 Temporarily Impaired Securities [Member]	Dec. 31, 2011 Temporarily Impaired Securities [Member]	Dec. 31, 2012 Temporarily Impaired Securities [Member] Trust Preferred Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of positions				2	1	2	1
Number of debt securities held				16	30		10
Other than temporary impairment, credit losses on debt securities	$ 75,000	$ 75,000	$ 0					$ 75,000
Aggregate unrealized losses								146,000,000		20,000	85,000	71,250
Basis in investment								675,000	750,000
Fair value	73,722,000	92,790,000				402,500						603,750
Unrealized loss position greather than 12 months						97,500				1,000	19,000
Amortized cost basis	72,732,000	91,230,000				500,000
Carrying value of securities	93,200,000	112,000,000
Proceeds from sales and calls of investment securities available for sale	50,414,000	85,929,000
Gross realized gains	2,000,000	1,100,000
Gross realized losses	$ 0	$ 157,000

XML

OTHER INTANGIBLES (Intangible Assets Estimated Amortization Expense) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Goodwill and Intangible Assets Disclosure [Abstract]
Other intangibles amortization expese	$ 300	$ 53
Estimated Amortization, 2013	2
Estimated Amortization, 2014	1
Other intangibles – net	$ 3	$ 307

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Troubled Debt Restructurings with Subsequent Payment Defaults) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012 loans	Dec. 31, 2011 loans
Financing Receivable, Modifications [Line Items]
Number of loans	3	23
Recorded investment	$ 77	$ 4,903
Below Market Interest Rate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		3
Recorded investment		290
Below Market Interest Rate [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		1
Recorded investment		19
Below Market Interest Rate [Member] | Residential Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		2
Recorded investment		271
Extended Payment Terms [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		16
Recorded investment		4,613
Extended Payment Terms [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		8
Recorded investment		4,033
Extended Payment Terms [Member] | Residential Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		5
Recorded investment		528
Extended Payment Terms [Member] | Commercial and Industrial [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		3
Recorded investment		52
Other [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	3	4
Recorded investment	77	0
Other [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1
Recorded investment	28
Other [Member] | Consumer [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	2
Recorded investment	49
Other [Member] | Commercial and Industrial [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		4
Recorded investment		$ 0

XML

INVESTMENT SECURITIES (Available for Sale Securities) (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 72,732,000	$ 91,230,000
Gross Unrealized Gains	1,179,000	1,716,000
Gross Unrealized Losses	189,000	156,000
Available for sale, Fair value, Total securities	73,722,000	92,790,000
Taxable Municipal Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	5,459,000	17,046,000
Gross Unrealized Gains	454,000	873,000
Gross Unrealized Losses	0	0
Available for sale, Fair value, Total securities	5,913,000	17,919,000
Mortgage-backed Securities GNMA [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	60,056,000	72,839,000
Gross Unrealized Gains	704,000	841,000
Gross Unrealized Losses	17,000	51,000
Available for sale, Fair value, Total securities	60,743,000	73,629,000
Mortgage-backed Securities FNMA [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	5,872,000
Gross Unrealized Gains	10,000
Gross Unrealized Losses	2,000
Available for sale, Fair value, Total securities	5,880,000
Trust Preferred Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	1,175,000	1,175,000
Gross Unrealized Gains	0	0
Gross Unrealized Losses	169,000	90,000
Available for sale, Fair value, Total securities	1,006,000	1,085,000
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	170,000	170,000
Gross Unrealized Gains	11,000	2,000
Gross Unrealized Losses	1,000	15,000
Available for sale, Fair value, Total securities	$ 180,000	$ 157,000

XML

INVESTMENT SECURITIES

12 Months Ended

Dec. 31, 2012

Investments, Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES

INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available for sale as of December 31, 2012 and 2011 are as follows (amounts in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
2012
Taxable municipal securities	$	5,459	$	454	$	—	$	5,913
Mortgage-backed securities
GNMA	60,056		704		17		60,743
FNMA	5,872		10		2		5,880
Trust preferred securities	1,175		—		169		1,006
Equity securities	170		11		1		180
Total	$	72,732	$	1,179	$	189	$	73,722

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
2011
Taxable municipal securities	$	17,046	$	873	$	—	$	17,919
Mortgage-backed securities - GNMA	72,839		841		51		73,629
Trust preferred securities	1,175		—		90		1,085
Equity securities	170		2		15		157
Total	$	91,230	$	1,716	$	156	$	92,790

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities held to maturity as of December 31, 2012 and 2011 are as follows (amounts in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Held to Maturity
2012
Mortgage-backed securities - GNMA	$	20,329	$	339	$	—	$	20,668
Total	$	20,329	$	339	$	—	$	20,668

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Held to Maturity
2011
Mortgage-backed securities - GNMA	$	20,445	$	48	$	37	$	20,456
Total	$	20,445	$	48	$	37	$	20,456

Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not that the Company will be required to sell the securities.  If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors.  In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality.  If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined.  If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.

The unrealized gains and losses on debt securities at December 31, 2012 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Two of sixteen GNMA collateralized mortgage obligations, one of thirty MBS pass-through securities, and two trust preferred securities contained unrealized losses at December 31, 2012. Management identified no impairment related to credit quality.  At December 31, 2012 management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary.  As a result, no other than temporary impairment losses were recognized during the twelve months ended December 31, 2012.

The unrealized gains and losses on equity securities at December 31, 2012 resulted from changes in market values and available third party valuations. One of ten equity securities contains unrealized losses at December 31, 2012. Management has identified no other-than-temporary impairment in equity securities value that remains unrecognized.

A trust preferred security, with unrealized losses at December 31, 2012 was previously deemed other than temporarily impaired as of and for the year-ended December 31, 2011. As a result of management's determination that $75,000 of the $146,000 unrealized losses at December 31, 2011 related to credit quality of the security, the basis in the investment was adjusted from $750,000 to $675,000. As of December 31, 2012, the fair value of the trust preferred security was $603,750, which resulted in an aggregate unrealized loss on the trust preferred security of $71,250. Management continued to monitor the creditworthiness of the issuer during the fourth quarter of 2012 in considering key factors such as the levels of nonperforming assets and loan concentrations, regulatory capital levels, brokered deposit reliance and stability of core deposits. In its previous determination of the credit loss related to this investment, including the probability of repayment of principal and interest, management considered and evaluated the deteriorating credit profile/rating for this issuer over a prolonged period of time consisting of six quarters. As of the most recently available financial information, the issuer's income, margin, capital, liquidity, asset quality, and credit rating have all maintained satisfactory and stable or improved. Based on this information and knowledge of the current market environment, management has concluded that the unrealized loss for this trust preferred security as of December 31, 2012 is not credit related and will therefore be recognized in other comprehensive income for the twelve months ended December 31, 2012.

A trust preferred security, with an unrealized loss of $97,500 at December 31, 2012, is deemed to be other than temporarily impaired as the duration of the unrealized loss position is greater than 12 months. As of December 31, 2012, the basis of the trust preferred security was $500,000 and the fair value was $402,500. Management continued to monitor the creditworthiness of the issuer during the fourth quarter of 2012 in considering key factors such as the issuer's income, margin, capital, credit rating, and asset quality have all remained satisfactory and stable. All interest payments have been made and no deferrals have been announced to management's knowledge. The entity's credit rating has been stable over recent quarters. Based on this information and knowledge of the current market environment, management has concluded that the unrealized loss for this trust preferred security as of December 31, 2012 is not credit related and will therefore be recognized in other comprehensive income for the twelve months ended December 31, 2012.

The following tables reflect the gross unrealized losses and fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented, there were no unrealized losses in the held to maturity portfolio (amounts in thousands):

	2012
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available for sale:
Taxable municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities
GNMA	5,132		17		—		—		5,132		17
FNMA	1,998		2						1,998		2
Trust preferred securities	—		—		—		—		—		—
Equity securities	—		—		2		1		2		1
Total temporarily impaired securities	$	7,130	$	19	$	2	$	1	$	7,132	$	20
Other than temporary impairment
Trust preferred securities	$	—	$	—	1,006		169		1,006		169
Total other than temporarily impaired securities	$	—	$	—	$	1,006	$	169	$	1,006	$	169

	2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available for sale:
Taxable municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities - GNMA	12,100		51		—		—		12,100		51
Trust preferred securities	—		—		481		19		481		19
Equity securities	170		15		—		—		170		15
Total temporarily impaired securities	$	12,270	$	66	$	481	$	19	$	12,751	$	85
Other than temporary impairment
Trust preferred securities	$	—	$	—	604		71		604		71
Total other than temporarily impaired securities	$	—	$	—	$	604	$	71	$	604	$	71

	2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
	(Amounts in thousands)
Securities Held to Maturity:
Mortgage-backed securities - GNMA	$	8,043	$	37	$	—	$	—	$	8,043	$	37
Total temporarily impaired securities	$	8,043	$	37	$	—	$	—	$	8,043	$	37

The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (amounts in thousands):

	2012		2011
Balance of credit losses on debt securities at the beginning of the period	$	75	$	—
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized	—		75
Balance of credit losses on debt securities at the end of the period	$	75	$	75

The amortized cost and fair value of available for sale, and held to maturity securities at December 31, 2012 by contractual maturities are shown below(amounts in thousands).  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.

	Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	Taxable municipal securities				Mortgage-backed securities -GNMA				Mortgage-backed securities -FNMA
Due within one year	$	—	$	—	$	—	$	—	$	—	$	—
Due after one year through five years	257		270		39,000		39,470		5,872		5,880
Due after five years through ten years	4,679		5,078		17,463		17,640		—		—
Due after ten years	523		565		3,593		3,633		—		—
Total securities	$	5,459	$	5,913	$	60,056	$	60,743	$	5,872	$	5,880
Trust preferred securities	$	1,175	$	1,006
Equity securities	170		180
Total other securities	$	1,345	$	1,186
					Held to Maturity
					Amortized Cost		Fair Value
					Mortgage-backed securities -GNMA
Due within one year					$	—	$	—
Due after one year through five years					$	17,949	$	18,253
Due after five years through ten years					$	2,380	$	2,415
Due after ten years					$	—	$	—
Total held to maturity securities					$	20,329	$	20,668

Securities with a carrying value of approximately $93.2 million and $112.0 million at December 31, 2012 and 2011, 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 2012 and 2011 of $50.4 million and $85.9 million generated gross realized gains of $2.0 million and $1.1 million , respectively, and gross realized losses of $0 and $157,000, respectively.

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Status of Troubled Debt Restructurings) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012 loans
Paid in Full [member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	$ 0
Paying as Restructured [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	12
Recorded investment	1,660
Converted to Non-accrual [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1
Recorded investment	28
Foreclosure/Default [Member]
Financing Receivable, Modifications [Line Items]
Number of loans foreclosed	2
Recorded investment foreclosed	49
Below Market Interest Rate [Member] | Paid in Full [member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Below Market Interest Rate [Member] | Paying as Restructured [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1
Recorded investment	395
Below Market Interest Rate [Member] | Converted to Non-accrual [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Below Market Interest Rate [Member] | Foreclosure/Default [Member]
Financing Receivable, Modifications [Line Items]
Number of loans foreclosed	0
Recorded investment foreclosed	0
Extended Payment Terms [Member] | Paid in Full [member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Extended Payment Terms [Member] | Paying as Restructured [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	7
Recorded investment	598
Extended Payment Terms [Member] | Converted to Non-accrual [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Extended Payment Terms [Member] | Foreclosure/Default [Member]
Financing Receivable, Modifications [Line Items]
Number of loans foreclosed	0
Recorded investment foreclosed	0
Forgiveness of Principal [Member] | Paid in Full [member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Forgiveness of Principal [Member] | Paying as Restructured [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Forgiveness of Principal [Member] | Converted to Non-accrual [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Forgiveness of Principal [Member] | Foreclosure/Default [Member]
Financing Receivable, Modifications [Line Items]
Number of loans foreclosed	0
Recorded investment foreclosed	0
Other [Member] | Paid in Full [member]
Financing Receivable, Modifications [Line Items]
Number of loans	0
Recorded investment	0
Other [Member] | Paying as Restructured [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	4
Recorded investment	667
Other [Member] | Converted to Non-accrual [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1
Recorded investment	28
Other [Member] | Foreclosure/Default [Member]
Financing Receivable, Modifications [Line Items]
Number of loans foreclosed	2
Recorded investment foreclosed	$ 49

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Narrative) (Details) (USD $)	0 Months Ended	12 Months Ended
	Oct. 30, 2012	Dec. 31, 2012 branch_offices	Dec. 31, 2011	Dec. 31, 2010
Nature of Operations:
Number of offices		16
Going Concern Consideration:
Provision for loan losses		$ 7,381,000	$ 11,440,000
Allowance for loan losses, net charge-offs		11,973,000	12,399,000
Decline in the level of non-performing assets		29.30%
Recorded investment of non-erforming assets		51,100,000	72,400,000
Decrease in recorded investment in impaired loans		36.80%
Impaired loans		58,860,000	93,071,000
Ratio of net charge-offs to average recorded investment on nonperforming Loans		19.80%	14.50%
Average recorded investment of nonperforming loans		60,500,000	85,300,000
Foreclosed assets		15,136,000	12,159,000
Transfer of loans to foreclosed assets		13,000,000
Proceeds from sales of foreclosed assets		7,254,000	4,872,000
Write-downs of foreclosed assets		(2,321,000)	(2,776,000)
Cash and cash equivalents		183,150,000	141,197,000	83,445,000
Cash and Cash Equivalents:
Daily average gross reserve requirement		3,400,000
Stock in Federal Home Loan Bank of Atlanta:
FHLB stock		6,415,000	6,553,000
Annualized dividend rate on FHLB	2.43%
Income Taxes:
Valuation allowance		21,669,000	18,608,000
Net Loss Per Common Share and Common Shares Outstanding:
Outstanding antidilutive options (in shares)		253,680	337,106
Building [Member]
Bank Premises and Equipment:
Bank premises and equipment, useful life		40 years
Minimum [Member]
Allowance for Loan Losses:
Additional reserve factor for categories with concentrated level of charge-offs		50.00%
Minimum [Member] | Furniture and Equipment [Member]
Bank Premises and Equipment:
Bank premises and equipment, useful life		5 years
Maximum [Member]
Allowance for Loan Losses:
Additional reserve factor for categories with concentrated level of charge-offs		100.00%
Maximum [Member] | Furniture and Equipment [Member]
Bank Premises and Equipment:
Bank premises and equipment, useful life		10 years
Rockingham, North Carolina and Southern Pines, North Carolina [Member] | Deposits [Member]
Bank Premises and Equipment:
Long lived assets held-for-sale		62,100,000
Rockingham, North Carolina and Southern Pines, North Carolina [Member] | Loans [Member]
Bank Premises and Equipment:
Long lived assets held-for-sale		18,700,000
Rockingham, North Carolina and Southern Pines, North Carolina [Member] | Property, Plant and Equipment [Member]
Bank Premises and Equipment:
Long lived assets held-for-sale		1,900,000
2013 [Member]
Going Concern Consideration:
Cash and cash equivalents earmarked for scheduled broker deposit maturities during 2012		$ 10,900,000
Parent Company [Member]
Going Concern Consideration:
Total capital to risk weighted assets		10.20%	10.30%
Tier 1 capital to risk weighted assets		5.90%	7.00%
Tier 1 capital to average assets		3.30%	4.40%
Four Oaks Bank & Trust Company (the “Bank”) [Member]
Going Concern Consideration:
Total capital to risk weighted assets		10.20%	9.80%
Tier 1 capital to risk weighted assets		8.90%	8.50%
Tier 1 capital to average assets		5.00%	5.40%
Risk Grade 1 [Member] | Minimum [Member]
Allowance for Loan Losses:
Standard multipliers		0.00%
Risk Grade 6 [Member] | Maximum [Member]
Allowance for Loan Losses:
Standard multipliers		300.00%
Risk Grade 5s and 6s [Member] | Minimum [Member]
Allowance for Loan Losses:
Additional reserve factor for categories with historically high charge-offs		25.00%
Risk Grade 5s and 6s [Member] | Maximum [Member]
Allowance for Loan Losses:
Additional reserve factor for categories with historically high charge-offs		100.00%
Prior Model [Member] | Three Year Historical Charge-offs [Member] | Quantitative [Member]
Allowance for Loan Losses:
Charge-off rate, period		3 years
Prior Model [Member] | Two Year Historical Charge-offs [Member] | Quantitative [Member]
Allowance for Loan Losses:
Charge-off rate, period		2 years
Prior Model [Member] | Prior Twelve Months Historical Charge-offs [Member] | Quantitative [Member]
Allowance for Loan Losses:
Charge-off rate, period		12 months
Current Model [Member] | Rolling Two Years Charge-offs [Member]
Allowance for Loan Losses:
Charge-off rate, period		2 years
Current Model [Member] | Rolling Three Yeard Charge-offs [Member]
Allowance for Loan Losses:
Charge-off rate, period		3 years
Interest Rate Lock Commitments [Member]
Rate Lock Commitments:
Interest rate lock commitment period		60 days

XML

INVESTMENT SECURITIES (Tables)

12 Months Ended

Dec. 31, 2012

Investments, Debt and Equity Securities [Abstract]

Schedule of Amortized Cost, Gross Unrealized Gains, Gross Unrealized Losses, and Fair Values of Securities Available for Sale

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities available for sale as of December 31, 2012 and 2011 are as follows (amounts in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
2012
Taxable municipal securities	$	5,459	$	454	$	—	$	5,913
Mortgage-backed securities
GNMA	60,056		704		17		60,743
FNMA	5,872		10		2		5,880
Trust preferred securities	1,175		—		169		1,006
Equity securities	170		11		1		180
Total	$	72,732	$	1,179	$	189	$	73,722

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
2011
Taxable municipal securities	$	17,046	$	873	$	—	$	17,919
Mortgage-backed securities - GNMA	72,839		841		51		73,629
Trust preferred securities	1,175		—		90		1,085
Equity securities	170		2		15		157
Total	$	91,230	$	1,716	$	156	$	92,790

Schedule of Amortized Cost, Gross Unrealized Gains, Gross Unrealized Losses, and Fair Values of Securities Held to Maturity

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of securities held to maturity as of December 31, 2012 and 2011 are as follows (amounts in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Held to Maturity
2012
Mortgage-backed securities - GNMA	$	20,329	$	339	$	—	$	20,668
Total	$	20,329	$	339	$	—	$	20,668

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Held to Maturity
2011
Mortgage-backed securities - GNMA	$	20,445	$	48	$	37	$	20,456
Total	$	20,445	$	48	$	37	$	20,456

Schedule of Unrealized Losses and Fair Values of Investment Securities

The following tables reflect the gross unrealized losses and fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented, there were no unrealized losses in the held to maturity portfolio (amounts in thousands):

	2012
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available for sale:
Taxable municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities
GNMA	5,132		17		—		—		5,132		17
FNMA	1,998		2						1,998		2
Trust preferred securities	—		—		—		—		—		—
Equity securities	—		—		2		1		2		1
Total temporarily impaired securities	$	7,130	$	19	$	2	$	1	$	7,132	$	20
Other than temporary impairment
Trust preferred securities	$	—	$	—	1,006		169		1,006		169
Total other than temporarily impaired securities	$	—	$	—	$	1,006	$	169	$	1,006	$	169

	2011
	Less Than 12 Months				12 Months or More				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available for sale:
Taxable municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities - GNMA	12,100		51		—		—		12,100		51
Trust preferred securities	—		—		481		19		481		19
Equity securities	170		15		—		—		170		15
Total temporarily impaired securities	$	12,270	$	66	$	481	$	19	$	12,751	$	85
Other than temporary impairment
Trust preferred securities	$	—	$	—	604		71		604		71
Total other than temporarily impaired securities	$	—	$	—	$	604	$	71	$	604	$	71

Roll Forward of Credit Losses on Debt Securities

The following table shows a roll forward of the amount related to credit losses recognized on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (amounts in thousands):

	2012		2011
Balance of credit losses on debt securities at the beginning of the period	$	75	$	—
Additional increase related to the credit loss for which an other-than-temporary impairment was previously recognized	—		75
Balance of credit losses on debt securities at the end of the period	$	75	$	75

Investment Securities Classified by Contractual Maturities

The amortized cost and fair value of available for sale, and held to maturity securities at December 31, 2012 by contractual maturities are shown below(amounts in thousands).  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.

	Available for Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	Taxable municipal securities				Mortgage-backed securities -GNMA				Mortgage-backed securities -FNMA
Due within one year	$	—	$	—	$	—	$	—	$	—	$	—
Due after one year through five years	257		270		39,000		39,470		5,872		5,880
Due after five years through ten years	4,679		5,078		17,463		17,640		—		—
Due after ten years	523		565		3,593		3,633		—		—
Total securities	$	5,459	$	5,913	$	60,056	$	60,743	$	5,872	$	5,880
Trust preferred securities	$	1,175	$	1,006
Equity securities	170		180
Total other securities	$	1,345	$	1,186
					Held to Maturity
					Amortized Cost		Fair Value
					Mortgage-backed securities -GNMA
Due within one year					$	—	$	—
Due after one year through five years					$	17,949	$	18,253
Due after five years through ten years					$	2,380	$	2,415
Due after ten years					$	—	$	—
Total held to maturity securities					$	20,329	$	20,668

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Loan Losses Reserve Estimate, Effect of Changes in Methodology

The net effect of all changes, compared to the prior model as of December 31, 2012, is shown in the chart below (amounts in thousands, except ratios:)

Methodology	ASC 450 Quantitative		ASC 450 Qualitative		Total ASC 450		Total Reserve
Prior Model $	8,330		911		9,241		14,629
Current Model $	9,516		1,469		10,985		16,549
Prior Model %	1.82	%	0.2	%	2.02	%	2.83	%
Current Model %	2.17	%	0.33	%	2.5	%	3.32	%

Schedule of Accumulated Other Comprehensive Income

Accumulated other comprehensive income at December 31, 2012 and 2011 consists of the following (amounts in thousands):

	2012			2011
Unrealized holding gains - investment securities available for sale	$	989		$	1,560
Deferred income taxes	(280		)	(508		)
Net unrealized holding gains - investment securities available for sale	709			1,052
Total accumulated other comprehensive income	$	709		$	1,052

Schedule of Weighted Average Number of Shares

Basic and diluted net loss per common share have been computed based upon net loss 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: 

	2012	2011
Weighted average number of common shares used in computing basic net loss per share	7,745,342	7,599,666
Effect of dilutive stock options	—	—
Weighted average number of commons shares and dilutive potential common shares used in computing diluted net loss per share	7,745,342	7,599,666

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Credit Quality) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	$ 29,563	$ 40,345
Commercial construction and land development	90,899	113,762
Commercial real estate - other	181,194	214,740
Residential - construction	20,445	26,707
Residential - mortgage	165,009	192,972
Consumer - other	9,664	11,451
Other - loans	1,278	2,330
Total loans	498,052	602,307
Credit Card Portfolio Exposure [Member]
Financing Receivable, Recorded Investment [Line Items]
Consumer - credit card	2,265	2,092
Business - credit card	1,186	1,016
Internally Assigned Grade [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	28,377	39,329
Commercial construction and land development	90,899	113,762
Commercial real estate - other	181,194	214,740
Residential - construction	20,445	26,707
Residential - mortgage	165,009	192,972
Consumer - other	7,399	9,359
Other - loans	1,278	2,330
Total loans	494,601	599,199
1 - Lowest Risk [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	2,446	2,421
Commercial construction and land development	0	0
Commercial real estate - other	0	0
Residential - construction	0	0
Residential - mortgage	51	136
Consumer - other	1,372	1,952
Other - loans	13	40
Total loans	3,882	4,549
2 - Satisfactory Quality [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	441	483
Commercial construction and land development	595	974
Commercial real estate - other	2,429	2,942
Residential - construction	109	497
Residential - mortgage	10,595	12,720
Consumer - other	288	288
Other - loans	0	6
Total loans	14,457	17,910
3 - Satisfactory - Merits Attention [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	10,222	10,696
Commercial construction and land development	22,278	26,907
Commercial real estate - other	51,384	63,887
Residential - construction	1,337	1,971
Residential - mortgage	58,140	68,172
Consumer - other	4,526	5,183
Other - loans	1,091	298
Total loans	148,978	177,114
4 - Low Satisfactory [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	13,558	20,070
Commercial construction and land development	35,502	36,852
Commercial real estate - other	104,652	98,007
Residential - construction	17,008	20,756
Residential - mortgage	68,148	68,668
Consumer - other	1,019	1,515
Other - loans	125	1,984
Total loans	240,012	247,852
5 - Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	323	2,593
Commercial construction and land development	9,064	8,673
Commercial real estate - other	6,228	22,311
Residential - construction	356	1,849
Residential - mortgage	9,720	15,226
Consumer - other	91	165
Other - loans	49	2
Total loans	25,831	50,819
6 - Substandard or Worse [Member]
Financing Receivable, Recorded Investment [Line Items]
Commercial and industrial loans	1,387	3,066
Commercial construction and land development	23,460	40,356
Commercial real estate - other	16,501	27,593
Residential - construction	1,635	1,634
Residential - mortgage	18,355	28,050
Consumer - other	103	256
Other - loans	0	0
Total loans	61,441	100,955
Performing [Member] | Credit Card Portfolio Exposure [Member]
Financing Receivable, Recorded Investment [Line Items]
Consumer - credit card	2,233	2,082
Business - credit card	1,186	991
Non Performing [Member] | Credit Card Portfolio Exposure [Member]
Financing Receivable, Recorded Investment [Line Items]
Consumer - credit card	32	10
Business - credit card	$ 0	$ 25

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Effect of Changes in Methodology) (Details) (USD $) In Thousands, unless otherwise specified				12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2012 Prior Model [Member]	Dec. 31, 2012 Current Model [Member]	Dec. 31, 2012 Quantitative [Member] Prior Model [Member]	Dec. 31, 2012 Quantitative [Member] Current Model [Member]	Dec. 31, 2012 Qualitative [Member] Prior Model [Member]	Dec. 31, 2012 Qualitative [Member] Current Model [Member]
Loss Contingencies [Line Items]
Total Reserve	$ 16,549	$ 21,141	$ 22,100	$ 14,629	$ 16,549
ASC 450				$ 9,241	$ 10,985	$ 8,330	$ 9,516	$ 911	$ 1,469
Total Reserve Percentage				2.83%	3.32%
ASC 450 Percentage				2.02%	2.50%	1.82%	2.17%	0.20%	0.33%

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

12 Months Ended

Dec. 31, 2012

Loans and Leases Receivable Disclosure [Abstract]

Summary of Loans Outstanding

The classification of loan segments as of December 31, 2012 and 2011 are summarized as follows (amounts in thousands):

	2012			2011
Commercial loans	$	29,563		$	40,345
Commercial construction and land development	90,899			113,762
Commercial real estate	181,194			214,740
Residential construction	20,445			26,707
Residential mortgage	165,009			192,972
Consumer	9,664			11,451
Other	1,278			2,330
	498,052			602,307
Less:
Net deferred loan fees	(123		)	(75		)
Allowance for loan losses	(16,549		)	(21,141		)
Total Loans	$	481,380		$	581,091
Loans held for sale	$	19,297		$	—

Summary of Nonperforming Assets

Nonperforming assets at December 31, 2012 and 2011 consist of the following (amounts in thousands):

	2012		2011
Loans past due ninety days or more and still accruing	$	32	$	60
Nonaccrual loans	35,970		60,141
Foreclosed assets	15,136		12,159
Total	$	51,138	$	72,360

Schedule of Related Party Loans

The following is a reconciliation of loans directly outstanding to executive officers, directors, and their affiliates at (amounts in thousands):

	2012			2011
Beginning balance	$	6,191		7,048
New loans	—			—
New loans - new Board of Director members	2,773			—
Principal repayments	(826		)	(857	)
Ending balance	$	8,138		6,191

Summary of Segments of Loans by Grade

The following table illustrates credit risk profile by creditworthiness class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	Commercial and Industrial		Commercial Construction and Land Development		Commercial Real Estate- Other		Residential - Construction		Residential -  Mortgage		Consumer - Other		Other - Loans		Total
1 - Lowest Risk	$	2,446	$	—	$	—	—		51		1,372		13		3,882
2 - Satisfactory Quality	441		595		2,429		109		10,595		288		—		14,457
3 - Satisfactory Quality - Merits Attention	10,222		22,278		51,384		1,337		58,140		4,526		1,091		148,978
4 - Low Satisfactory	13,558		35,502		104,652		17,008		68,148		1,019		125		240,012
5 - Special mention	323		9,064		6,228		356		9,720		91		49		25,831
6 - Substandard or worse	1,387		23,460		16,501		1,635		18,355		103		—		61,441
	$	28,377	$	90,899	$	181,194	$	20,445	$	165,009	$	7,399	$	1,278	$	494,601

	December 31, 2011
	Commercial and Industrial	Commercial Construction and Land Development	Commercial Real Estate- Other	Residential - Construction	Residential - Mortgage	Consumer - Other	Other - Loans	Total
1 - Lowest Risk	2,421	—	—	—	136	1,952	40	4,549
2 - Satisfactory Quality	483	974	2,942	497	12,720	288	6	17,910
3 - Satisfactory Quality - Merits Attention	10,696	26,907	63,887	1,971	68,172	5,183	298	177,114
4 - Low Satisfactory	20,070	36,852	98,007	20,756	68,668	1,515	1,984	247,852
5 - Special mention	2,593	8,673	22,311	1,849	15,226	165	2	50,819
6 - Substandard or worse	3,066	40,356	27,593	1,634	28,050	256	—	100,955
	39,329	113,762	214,740	26,707	192,972	9,359	2,330	599,199

Total loans within risk grade categories 5 (Special Mention) and 6 (Substandard) were $87.3 million at December 31, 2012, compared to $151.8 million at December 31, 2011. This represents a 42.5% reduction in these specific categories.

The following table illustrates the credit card portfolio exposure as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012				December 31, 2011
	Consumer - Credit Card		Business- Credit Card		Consumer - Credit Card		Business- Credit Card
Performing	$	2,233	$	1,186	$	2,082	$	991
Non Performing	32		—		10		25
	$	2,265	$	1,186	$	2,092	$	1,016

Schedule of Loans, Non Accrual Status

The following table represents the loans on nonaccrual status as of December 31, 2012 and 2011 by loan class (amounts in thousands):

	2012		2011
Commercial & industrial	$	664	$	779
Commercial construction and land development	15,941		29,538
Commercial real estate	9,091		14,830
Residential construction	833		1,469
Residential mortgage	9,408		13,466
Consumer	33		59
Other	—		—
Total	$	35,970	$	60,141

Age Analysis of Past Due Loans

The following table illustrates the age analysis of past due loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	30-89 Days Past Due		Nonaccruals and Greater than 90 Days Past Due (1)		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	119	$	664	$	783	$	27,594	$	28,377	$	—
Commercial construction and land development	819		15,941		16,760		74,139		90,899		—
Commercial real estate	499		9,091		9,590		171,604		181,194		—
Residential construction	—		833		833		19,612		20,445		—
Residential mortgage	1,076		9,408		10,484		154,525		165,009		—
Consumer	34		33		67		7,332		7,399		—
Consumer credit cards	67		32		99		2,166		2,265		32
Business credit cards	12		—		12		1,174		1,186		—
Other loans	—		—		—		1,278		1,278		—
Total	$	2,626	$	36,002	$	38,628	$	459,424	$	498,052	$	32

(1) Nonaccruals and Greater than 90 Days Past Due is comprised of $32,000 of loans that were past due more than 90 days and still accruing interest, as well as $36.0 million of loans in nonaccrual status. 

	December 31, 2011
	30-89 Days Past Due	Nonaccruals and Greater than 90 Days Past Due (1)	Total Past Due	Current	Total Loans	Recorded Investment > 90 Days and Accruing
Commercial & industrial	129	779	908	38,421	39,329	—
Commercial construction and Land Development	1,221	29,538	30,759	83,003	113,762	—
Commercial real estate	1,647	14,830	16,477	198,263	214,740	—
Residential construction	180	1,469	1,649	25,058	26,707	—
Residential mortgage	3,479	13,466	16,945	176,027	192,972	—
Consumer	103	59	162	9,197	9,359	—
Consumer credit cards	62	35	97	1,995	2,092	35
Business credit cards	15	25	40	976	1,016	25
Other loans	—	—	—	2,330	2,330	—
Total	6,836	60,201	67,037	535,270	602,307	60

(1) Nonaccruals and Greater than 90 Days Past Due is comprised of $60,000 of loans that were past due more than 90 days and still accruing interest, as well as $60.1 million of loans in nonaccrual status. 

Summary of Impaired Loans

The following table illustrates the impaired loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	498	$	686	$	—	$	484	$	1
Commercial construction and land development	11,266		15,889		—		13,008		22
Commercial real estate other	12,865		14,263		—		12,328		64
Residential construction	340		340		—		162		—
Residential mortgage	10,106		11,542		—		9,937		132
Consumer	25		42		—		26		—
Subtotal:	$	35,100	$	42,762	$	—	$	35,945	$	219
With an allowance recorded:
Commercial and industrial	$	939	$	956	$	636	$	528	$	11
Commercial construction and land development	9,619		13,033		1,693		10,003		36
Commercial real estate other	4,877		6,852		640		5,623		46
Residential construction	833		1,134		86		884		—
Residential mortgage	7,467		8,081		2,334		7,493		44
Consumer	25		34		—		25		—
Subtotal:	$	23,760	$	30,090	$	5,389	$	24,556	$	137
Totals:
Commercial	40,064		51,679		2,969		41,974		180
Consumer	50		76		—		51		—
Residential	18,746		21,097		2,420		18,476		176
Grand Total	$	58,860	$	72,852	$	5,389	$	60,501	$	356

At December 31, 2012, the recorded investment in loans considered impaired totaled $58.9 million. Of the total investment in loans considered impaired, $23.8 million were found to show specific impairment for which $5.4 million in valuation allowance was recorded; the remaining $35.1 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance. For the year ended December 31, 2012, the average recorded investment in impaired loans was approximately $60.5 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $356,000.

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	992	$	1,459	$	—	$	1,262	$	11
Commercial construction and land development	23,049		28,958		—		22,315		167
Commercial real estate other	18,325		20,601		—		14,128		157
Residential construction	98		98		—		98		—
Residential mortgage	16,152		18,528		—		12,681		167
Consumer	77		132		—		90		—
Subtotal:	$	58,693	$	69,776	$	—	$	50,574	$	502
With an allowance recorded:
Commercial and industrial	$	1,427	$	1,597	$	1,237	$	967	$	18
Commercial construction and land development	14,873		20,999		2,942		18,136		45
Commercial real estate other	7,750		9,289		1,448		6,805		72
Residential construction	1,144		1,363		114		1,363		—
Residential mortgage	9,175		10,366		1,617		7,493		76
Consumer	9		16		1		4		—
Subtotal:	$	34,378	$	43,630	$	7,359	$	34,768	$	211
Totals:
Commercial	66,416		82,903		5,627		63,613		470
Consumer	86		148		1		94		—
Residential	26,569		30,355		1,731		21,635		243
Grand Total:	$	93,071	$	113,406	$	7,359	$	85,342	$	713

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loans losses based upon the fair value of the underlying collateral or discounted cash flows at December 31, 2012 and December 31, 2011 (amounts in thousands):

	December 31, 2012					December 31, 2011
	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	—	$	23,761		$	—	$	34,378
Specific valuation allowance allocations	—		(5,389		)	—		(7,359		)
	$	—	$	18,372		$	—	$	27,019

Summary of Troubled Debt Restructurings by Loan Class

For the year ended December 31, 2012, the Bank modified 15 loans totaling $1.7 million which were deemed TDRs. The following table presents a breakdown of these TDRs by loan class and the type of concession made to the borrower (amounts in thousands, except number of loans):

		For the Year Ended
		December 31, 2012
		Number of loans	Pre-Classification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
	Residential mortgage	1	$	395	$	395
	Subtotal	1	$	395	$	395
Extended payment terms:
	Commercial real estate	4	$	513	$	513
	Residential mortgage	2	66		66
	Consumer	1	19		19
	Subtotal	7	$	598	$	598
Other:
	Commercial real estate	5	$	695	$	695
	Consumer	2	49		49
	Subtotal	7	$	744	$	744
	Total	15	$	1,737	$	1,737

		For the Year Ended
		December 31, 2011
		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate:
	Commercial real estate	12	$	2,920	$	2,870
	Residential mortgage	2	310		310
	Subtotal	14	$	3,230	$	3,180
Extended payment terms:
	Commercial & industrial	5	$	485	$	485
	Commercial real estate	14	5,727		5,727
	Residential construction	1	165		165
	Residential mortgage	11	1,526		1,531
	Subtotal	31	$	7,903	$	7,908
Other:
	Commercial & industrial	2	$	146	$	146
	Commercial real estate	2	290		290
	Consumer	2	235		235
	Residential mortgage	2	735		735
	Subtotal	8	$	1,406	$	1,406
	Total	53	$	12,539	$	12,494

Summary of Troubled Debt Restructurings with Subsequent Payment Default

The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default for the year ended December 31, 2012andDecember 31, 2011 ,(amounts in thousands, except number of loans):

		For the Year Ended
		December 31, 2012
		Number of loans	Recorded Investment
Other
	Commercial real estate	1	$	28
	Consumer	2	49
		3	$	77
	Total	3	$	77

		Year Ended
		December 31, 2011
		Number of loans	Recorded Investment
Below market interest rate
	Commercial real estate	1	$	19
	Residential mortgage	2	271
	Subtotal	3	$	290
Extended payment terms
	Commercial & industrial	3	$	52
	Commercial real estate	8	4,033
	Residential mortgage	5	528
	Subtotal	16	$	4,613
Other
	Commercial & industrial	4	$	—
	Subtotal	4	$	—
	Total	23	$	4,903

Summary of Successes and Failures of Troubled Debt Restructurings

The table below details the progression of troubled debt restructurings which have been entered into during the previous 12 months(amounts in thousands, except number of loans):

	December 31, 2012
	Paid in full			Paying as restructured			Converted to non-accrual			Foreclosure/Default
	Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment
Below market interest rate	—	—		1	$	395	—	$	—	—	$	—
Extended payment terms	—	—		7	598		—	—		—	—
Forgiveness of principal	—	—		—	—		—	—		—	—
Other	—	—		4	667		1	28		2	49
Total	—	$	—	12	$	1,660	1	$	28	2	$	49

Analysis of the Allowance for Loan Losses by Loan Class

To provide greater transparency on non-performing assets, additional disclosures required by ASU 2010-20 have been included below.  Allowance for loan losses is reported by portfolio segment and further detail of credit quality indicators are provided by class of loans.

Following is an analysis of the allowance for loan losses by loan segment for the years ended December 31, 2012 and 2011(amounts in thousands):

December 31, 2012
				Real Estate
	Commercial and Industrial			Commercial construction and land development			Commercial real estate			Residential construction			Residential mortgage			Consumer			Other		Totals
Balance, beginning of period	$	2,730		$	8,799		$	3,800		$	740		$	4,630		$	413		$	29	$	21,141
Provision for loan losses	(1,464		)	5,205			2,486			(214		)	1,184			143			41		7,381
Loans charged-off	(703		)	(7,929		)	(3,691		)	(103		)	(1,801		)	(516		)	—		(14,743		)
Recoveries	622			1,176			366			—			458			148			—		2,770
Net (charge-offs) recoveries	(81		)	(6,753		)	(3,325		)	(103		)	(1,343		)	(368		)	—		(11,973		)
Balance, end of period	$	1,185		$	7,251		$	2,961		$	423		$	4,471		$	188		$	70	$	16,549
Ending Balance: individually    evaluated for impairment	$	636		$	1,693		$	640		$	86		$	2,334		$	—		$	—	$	5,389
Ending balance: collectively    evaluated for impairment	549			5,558			2,321			337			2,137			188			70		11,160
Financing Receivables:
Ending Balance	$	29,563		$	90,899		$	181,194		$	20,445		$	165,009		$	9,664		$	1,278	$	498,052
Ending Balance: individually    evaluated for impairment	$	1,437		$	20,885		$	17,742		$	1,173		$	17,573		$	50		$	—	$	58,860
Ending balance: collectively    evaluated for impairment	$	28,126		$	70,014		$	163,452		$	19,272		$	147,436		$	9,614		$	1,278	$	439,192

December 31, 2011
				Real Estate
	Commercial and Industrial			Commercial construction and land development			Commercial real estate			Residential construction			Residential mortgage			Consumer			Other			Totals
Balance, beginning of period	$	2,049		$	8,375		$	4,038		$	2,848		$	4,291		$	415		$	84		$	22,100
Provision for loan losses	2,443			7,755			1,079			(1,811		)	1,694			335			(55		)	11,440
Loans charged-off	(2,181		)	(7,735		)	(1,802		)	(588		)	(2,126		)	(477		)	—			(14,909		)
Recoveries	419			404			485			291			771			140			—			2,510
Net (charge-offs) recoveries	(1,762		)	(7,331		)	(1,317		)	(297		)	(1,355		)	(337		)	—			(12,399		)
Balance, end of period	$	2,730		$	8,799		$	3,800		$	740		$	4,630		$	413		$	29		$	21,141
Ending Balance: individually    evaluated for impairment	$	1,237		$	2,942		$	1,448		$	114		$	1,618		$	—		$	—		$	7,359
Ending balance: collectively    evaluated for impairment	1,493			5,857			2,352			626			3,012			413			29			13,782
Financing Receivables:
Ending Balance	$	40,345		$	113,762		$	214,740		$	26,707		$	192,972		$	11,451		$	2,330		$	602,307
Ending Balance: individually    evaluated for impairment	$	2,419		$	37,922		$	26,075		$	1,242		$	25,327		$	86		$	—		$	93,071
Ending balance: collectively    evaluated for impairment	$	37,926		$	75,840		$	188,665		$	25,465		$	167,645		$	11,365		$	2,330		$	509,236

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BANK AND PREMISES EQUIPMENT (Tables)

12 Months Ended

Dec. 31, 2012

Property, Plant and Equipment [Abstract]

Schedule of Premises and Equipment

Company premises and equipment at December 31, 2012 and 2011 are as follows (amounts in thousands):

	2012			2011
Land	$	4,884		$	4,520
Buildings and leasehold improvements	11,139			13,508
Furniture and equipment	11,586			11,628
	27,609			29,656
Less accumulated depreciation	(14,227		)	(13,632		)
	$	13,382		$	16,024

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Four Oaks Fincorp, Inc (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 subsidiaries, Four Oaks Bank & Trust Company, Inc. (the "Bank") and Four Oaks Mortgage Services, L.L.C. The Bank operates sixteen 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.

Basis of Presentation

The consolidated financial statements include the accounts and transactions of the Company, a bank holding company incorporated under the laws of the State of North Carolina, and its wholly owned subsidiaries, the Bank, and Four Oaks Mortgage Services, L.L.C., which became inactive on September 30, 2012. All significant intercompany transactions have been eliminated. In March 2006, the Company formed Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing Trust Preferred Securities (as defined in Note H - Trust Preferred Securities).  The Trust is not included in the consolidated financial statements of the Company.

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, fair value of impaired loans, fair value of foreclosed assets, other than temporary impairment of investment securities available for sale and held to maturity, and the valuation allowance against deferred tax assets.

Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. During 2012, the Company experienced significant losses, rapidly escalating impaired loans and declining capital levels. Notwithstanding these negative factors, management believes that its current operations and its cash availability are sufficient for the Company to discharge its liabilities and meet its commitments in the normal course of business. While management does not anticipate further significant deterioration in the Bank's loan portfolio and has performed stress tests and financial modeling under various potential scenarios in determining that the Company and the Bank will maintain at least adequate capitalization under federal regulatory guidelines, no assurances regarding these expectations can be made. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

The banking industry continues to operate in a challenging and volatile economic environment, which has adversely impacted the Company's and the Bank's results of operations and capital levels. Continued losses in 2012, primarily related to the elevated provision for loan losses, continue to reduce the Company's and the Bank's capital levels. The loan loss provision for 2012 was $7.4 million compared to $11.4 million for 2011, net charge offs for the year 2012 were $12.0 million compared to $12.4 million for the comparable period in 2011. At December 31, 2012 the Company's total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.2%, 5.9%, and 3.3%, respectively, compared to 10.3%, 6.97% and 4.4%, respectively, at December 31, 2011. At December 31, 2012, the Bank's total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 10.2%, 8.9% and 5.0%, respectively, compared to 9.8%, 8.5%, and 5.4%, respectively, at December 31, 2011.

In response to the difficult operating conditions that exist within the Bank's marketing area, the Bank committed substantial additional resources to management in an effort to accelerate resolution of non-performing and other problem assets over the course of 2012. This resolution activity has included bulk asset sales, short sales (settlements with borrowers at less than the residual principal balance of the loan), increasing the variety and scope of asset marketing activities, negotiating and entering into forbearance agreements in order to minimize loan losses and engaging in other programs to facilitate the reduction of the level of problem assets.

As a result of these activities, the level of non-performing assets has declined by 29.3% from a recorded investment of $72.4 million as of December 31, 2011 to a current level of $51.1 million. Impaired loans declined by 36.8%, from a recorded investment of $93.1 million as of December 31, 2011 to $58.9 million as of December 31, 2012. Net charge-offs over the course of the reporting period totaled $12.0 million, or 19.8% of the average recorded investment in non-performing loans of $60.5 million. This is in comparison to net charge-offs during the 2011 fiscal year of $12.4 million or 14.5% of the average recorded investment in non-performing loans of $85.3 million.

Foreclosed assets increased from $12.2 million as of December 31, 2011 to $15.1 million as of December 31, 2012, reflecting a transfer of foreclosed loans with a recorded investment of $13.0 million over the period. Sales of foreclosed assets increased from $4.9 million in fiscal year 2011 to $7.3 million during the course of fiscal year 2012 while write downs decreased from $2.8 million as of December 31, 2011 to $2.3 million as of December 31, 2012.

The Bank continues to maintain its commitment to resolve its non-performing assets and will continue to explore other additional resolution options which are determined to be both effective and result in the minimization of additional losses and expense.

The Company and the Bank entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”) that imposes certain restrictions on the Company and the Bank, as described in Notes H - Trust Preferred Securities and Note K - Regulatory Restrictions. A material failure to comply with the Written Agreement's terms could subject the Company to additional regulatory actions and further restrictions on its business, which may have a material adverse effect on the Company's future results of operations and financial condition.

In order for the Company and the Bank to maintain its well capitalized position under federal banking agencies' guidelines, management believes that the Company may need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets.   Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity. The Company is also working to reduce its balance sheet to improve capital ratios and is actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2013.

Cash and cash equivalents at December 31, 2012 were approximately $183.2 million, of which approximately $10.9 million has been earmarked for scheduled broker deposit maturities during 2013. Based on our liquidity analysis, management anticipates that the Company will be able to meet its obligations as they become due. If unanticipated market factors emerge, or if the Company is not successful in its efforts to comply with the requirements set forth in the Written Agreement, the FRB and/or the NCCOB may take further enforcement or other actions.  These actions might include greater restrictions on the Company's operations, or a revocation of its charter and the placement of the Bank into receivership if the situation materially deteriorates.

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, 2012, the daily average gross reserve requirement was $3.4 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. The Company began using this category in 2011.

(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. The Company does not use this category.

(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 until 2011. 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.

Other Than Temporary Impairment

Each investment security in a loss position is evaluated for other-than-temporary impairment on at least a quarterly basis. The review includes an analysis of the facts and circumstances of each individual investment such as (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.

Regardless of these factors, if we have developed a plan to sell the security or it is likely that we will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related to all other factors. The amount of the total other-than- temporary impairment related to the credit loss is recognized in earnings, and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.

Loans Held for Sale

Loans held for sale generally represent single-family, residential first mortgage loans on a pre-sold basis originated by our mortgage division. Generally, commitments to sell these loans are made after the intent to proceed with mortgage applications are initiated with borrowers, and all necessary components of the loan are approved according to secondary market underwriting standards of the investor that purchases the loan. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. Loans held for sale are subsequently measured at the lower of cost or fair value on an aggregated basis within the consolidated balance sheet under the caption “loans held for sale”.

Additionally, we have identified certain loans that will be sold as part of a branch sale (See Note S-Branch Sale). These loans are also identified within the consolidated balance sheet under the caption “loans held for sale”.

Rate Lock Commitments

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). As required by ASC 815, Derivatives and Hedging, rate lock commitments related to the origination of mortgage loans held for sale and the corresponding forward loan sale commitments are considered to be derivatives. The commitments are generally for periods of 60 days and are at market rates.

In order to mitigate the risk from interest rate fluctuations, the Company enters into forward loan sale commitments on a “best efforts” basis while the loan is in the pipeline. Interest rate lock commitments and forward sales commitments are not material to the financial statements for any period presented.

Loans

Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on all loan classifications 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.

Purchased loans acquired in a business combination, which include loans purchased in the Nuestro Banco (“Nuestro”) acquisition, are recorded at estimated fair value on their purchase date; the purchaser cannot carry over the related allowance for loan losses for acquisitions subsequent to January 1, 2009. Purchased loans are accounted for under Financial Accounting Standards Board (“FASB") Accounting Standard Codification ("ASC') 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-3), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status. Generally, acquired loans that meet the Company’s definition for nonaccrual status fall within the scope of FASB ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. For all other acquired loans that do not fall under the definition of ASC 310-30, the Company will account for these loans as described in the previous paragraphs.

For all classes of loans, 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.

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.

Allowance for Loan Losses

The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses.  Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed.  Management evaluates the adequacy of our allowance for loan losses on a monthly basis.  The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations.  Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.

Management has developed a model for evaluating the adequacy of the allowance for loan losses.  The model uses the Company’s internal grading system to quantify the risk of each loan.  The grade is initially assigned by the lending officer and/or the credit administration function.  The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm.  The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due loans and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. Additionally, regulatory agencies review the adequacy of the risk grades assigned as well as the risk grade process and may require changes based on judgments that differ from those of management that could impact the allowance for loan losses.

The grading system is comprised of seven risk categories for active loans.  Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan.  Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan.  Grade 6 loans are considered sub-standard and are generally impaired, however, certain of these loans continue to accrue interest and are not TDRs and are not considered impaired.    Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Loans can also be classified as non-accrual, troubled debt restructure, or otherwise impaired, all of which are considered impaired and evaluated for specific reserve under FASB ASC 310-10 regardless of the risk grade assigned.

When the Bank determines that a loan is impaired an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal.  Each loan is analyzed to determine the net value of collateral and an estimate of potential loss.  The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal.  If collection is deemed to be collateral dependent then the deficiency is generally charged off unless the deficiency is less than 10% of the balance, there has not been a prior charge-off, and the amount of such items in aggregate is immaterial. If the collection of the loan is not collateral dependent then a specific reserve is established for the deficiency. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value.  Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and prior charge-offs.

Loans that are not assessed for specific reserves under FASB ASC 310-10 are reserved for under FASB ASC 450.  The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels for each call report category. The qualitative factor addresses loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations.   Together these two components comprise the ASC 450, or general reserve.    

The Bank previously determined the quantitative ASC 450 reserve using either the three year historical charge-offs, the two year historical charge-offs, or the last twelve months historical charge-offs.  Depending on the economic cycle and where we were in the cycle, one of these methods was chosen as most representative of the expectations for losses that are in the portfolio which were unidentified. The Bank evaluated the reserve results under the prior reserve methodology utilizing each of the three historical charge-off periods and, although it appropriately captured the improving trends, the results were considered less than prudent given the Bank's current level of non-performing loans and non-performing assets. As such, the Bank chose to utilize a new charge-off metric of the greater of (i) the charge-off rate from the most recent 8 quarters (rolling two years) or (ii) the charge-off rate from the most recent 12 quarters (rolling three years). This provides for the highest base charge-off rate regardless of whether the historical charge-offs are improving or declining. In addition, the Bank felt it was an appropriate time to move to a risk grade approach to determining the quantitative reserve. This approach assigns a different percentage ("multiplier") of the base charge-off rate to the balances for each risk grade within a loan category to reflect the varied risk of charge-off for each. The standard multipliers range from 0% for a risk grade 1 to 300% for a risk grade 6. In addition, categories that have a concentrated level of charge-offs associated with a particular risk grade could have an additional reserve factor of 50% to 100% added to that particular risk grade. Lastly, categories that have had historically high charge-offs also have an additional reserve factor between 25% to 100% added to the risk grade 5s and 6s to account for the additional risk in those categories. The reserve amount by risk grade is calculated and then combined for a blended quantitative reserve factor for each loan category.

The Bank also made changes to the qualitative factor for charge-off trends to provide a more objective and consistent result from quarter to quarter. The factors evaluated were not changed significantly but how the reserve is assigned is now determined by objective evaluation of those factors and the number of those improving and declining. An additional factor was added to take into consideration the significance of the change in charge-offs from period to period.

The net effect of all changes, compared to the prior model as of December 31, 2012, is shown in the chart below (amounts in thousands, except ratios:)

Methodology	ASC 450 Quantitative		ASC 450 Qualitative		Total ASC 450		Total Reserve
Prior Model $	8,330		911		9,241		14,629
Current Model $	9,516		1,469		10,985		16,549
Prior Model %	1.82	%	0.2	%	2.02	%	2.83	%
Current Model %	2.17	%	0.33	%	2.5	%	3.32	%

The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business.  While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used.  We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance.  Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above.  Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.

Using the data gathered during the quarterly evaluation process, the model calculates an acceptable level for the allowance for loan losses.  Management and the Board of Directors are responsible for determining the appropriate level of the allowance for loan losses based on the model results.

Bank Premises and Equipment Held for Sale

Premises and equipment held for sale are stated at book value which approximates fair market value. The value of the assets to be sold at December 31, 2012 was approximately $1.9 million in property and equipment.

Bank Premises and Equipment

Land is carried at cost. Buildings, furniture, 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 buildings. Expenditures for repairs and maintenance are charged to expense as incurred.

Stock in Federal Home Loan Bank of Atlanta

The Company owned Federal Home Loan Bank of Atlanta (“FHLB”) stock totaling $6.4 million at December 31, 2012 and $6.6 million at December 31, 2011. On October 30 2012, FHLB announced that it would pay an annualized dividend rate of 2.43% percent for the third quarter of 2012. Based on the continued payment of dividends and that redemption of this stock has historically been at par, management believes that its investment in FHLB stock was not other-than-temporarily impaired as of December 31, 2012 or December 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not cause a decrease in the value of the FHLB stock held by the Company.

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.

Income Taxes

Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of “other assets” in the consolidated balance sheets. The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination.

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. These temporary differences consist primarily of the allowance for loan losses, differences in the financial statement and income tax basis in premises and equipment and differences in financial statement and income tax basis in accrued liabilities. 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 fully realized.

Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset. As of December 31, 2012, a $21.7 million valuation allowance has been established primarily due to the possibility that all of the deferred tax asset associated with the allowance for loan losses may not be realized.

From time to time, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company’s income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes.

Stock Compensation Plans

The Company accounts for stock based awards granted to employees using the fair value method. The cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period).  The cost of employee services received in exchange for an award is based on the grant-date fair value of the award.  Excess tax benefits are reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

Comprehensive Income (Loss)

Comprehensive income (loss) 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 (loss) 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.

Accumulated other comprehensive income at December 31, 2012 and 2011 consists of the following (amounts in thousands):

	2012			2011
Unrealized holding gains - investment securities available for sale	$	989		$	1,560
Deferred income taxes	(280		)	(508		)
Net unrealized holding gains - investment securities available for sale	709			1,052
Total accumulated other comprehensive income	$	709		$	1,052

Net Loss Per Common Share and Common Shares Outstanding

Basic loss per share represents loss available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss 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. Potential common shares that may be issued by the Company relate solely to outstanding stock options.

Basic and diluted net loss per common share have been computed based upon net loss 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: 

	2012	2011
Weighted average number of common shares used in computing basic net loss per share	7,745,342	7,599,666
Effect of dilutive stock options	—	—
Weighted average number of commons shares and dilutive potential common shares used in computing diluted net loss per share	7,745,342	7,599,666

Stock options that have exercise prices greater than the average market price of the common shares or stock options outstanding do not have a dilutive effect and are considered antidilutive. Outstanding antidilutive options of 253,680 and 337,106 in 2012 and 2011, respectively, had no dilutive effect because the Company reported a net loss for these years.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, Fair Value Measurement (Topic 820). The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The new ASU provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The Company has fully adopted all of the provisions within this ASU and has provided all required disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends Comprehensive Income (Topic 220). The amendments require that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The objective is to improve the comparability, consistency and transparency of financial reporting, and to increase the prominence of items reported in other comprehensive income. These amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Disclosures required by ASU 2011-05 are included in Consolidated Statements of Comprehensive Income (Loss). The adoption of the disclosure requirements had no material impact on the Company's consolidated financial position, results of operations, and earnings per share. In December 2011, the FASB issued ASU 2011-12, Presentation of Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, to allow time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Adoption of this ASU did not have any impact on the Company's consolidated financial statements or results of operations.

In December 2011, The FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment is effective for annual and interim periods beginning on or after January 1, 2013, and the Company has not yet determined the financial statement impact.

In July 2012, the FASB issued an update ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment which permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this guidance to have a material impact on our financial statements.

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update seeks to to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income, if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this amendment is not expected to have a material effect on the Company's consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

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.

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OTHER INTANGIBLES (Tables)

12 Months Ended

Dec. 31, 2012

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Intangible Assets

The following is a summary of other intangible assets at December 31, 2012 and 2011(amounts in thousands):

	2012		2011
Other intangibles – gross	$	494	$	494
Less accumulated amortization	491		187
Other intangibles – net	$	3	$	307

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Estimated amortization expense for other intangibles for future years are as follows (amounts in thousands):

	2012
2013	$	2
2014	1
Total estimated amortization expense	$	3

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FAIR VALUE MEASUREMENT (Range of Collateral Discounts) (Details)	12 Months Ended
	Dec. 31, 2012
Commercial Construction and Land Development [Member] | Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	30.00%
Commercial Construction and Land Development [Member] | Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	60.00%
Commercial Real Estate Other Member] | Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	40.00%
Commercial Real Estate Other Member] | Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	70.00%
Residential Construction [Member] | Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	30.00%
Residential Construction [Member] | Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	50.00%
Residential Mortgage [Member] | Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	15.00%
Residential Mortgage [Member] | Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	40.00%
All Other Segments [Member] | Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	15.00%
All Other Segments [Member] | Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	30.00%

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LEASES (Tables)

12 Months Ended

Dec. 31, 2012

Leases [Abstract]

Schedule of Future Minimum Rental Payments

Future minimum lease payments under the leases for future years are as follows (amounts in thousands):

Leases
2013	$	320
2014	276
2015	276
2016	215
2017	171
2018 and beyond	755
	$	2,013

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Loans Outstanding) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Loans and Leases Receivable Disclosure [Abstract]
Commercial loans	$ 29,563	$ 40,345
Commercial construction and land development	90,899	113,762
Commercial real estate	181,194	214,740
Residential construction	20,445	26,707
Residential mortgage	165,009	192,972
Consumer	9,664	11,451
Other	1,278	2,330
Total loans	498,052	602,307
Net deferred loan fees	(123)	(75)
Allowance for loan losses	(16,549)	(21,141)	(22,100)
Net loans	481,380	581,091
Loans held for sale	$ 19,297	$ 0

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INCOME TAXES (Allocation of Income Tax Expense (Benefit)) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Current tax expense:
Federal	$ (175)	$ 0
State	0	0
Current tax expense	(175)	0
Deferred tax expense:
Federal	(2,617)	(2,876)
State	(444)	(531)
Deferred tax expense	(3,061)	(3,407)
Provision for income tax expense before adjustment to deferred tax asset	(3,236)	(3,407)
Valuation allowance	3,061	3,407
Income tax expense (benefit)	$ (175)	$ 0

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
ASSETS
Cash and due from banks	$ 18,862	$ 13,969
Interest-earning deposits	164,288	127,228
Cash and cash equivalents	183,150	141,197
CDs held for investment	26,460	23,769
Investment securities available for sale, at fair value	73,722	92,790
Investment securities held to maturity, at amortized cost	20,329	20,445
Total investment securities	94,051	113,235
Loans held for sale	19,297	0
Loans	497,929	602,232
Allowance for loan losses	(16,549)	(21,141)
Net loans	481,380	581,091
Accrued interest receivable	1,869	1,985
Bank premises and equipment held for sale, net	1,901	0
Bank premises and equipment, net	13,382	16,024
FHLB stock	6,415	6,553
Investment in life insurance	14,139	13,827
Foreclosed assets	15,136	12,159
Other assets	8,318	6,796
TOTAL ASSETS	865,498	916,636
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand	189,048	138,123
Money market, NOW accounts and savings accounts	164,614	150,185
Time deposits, $100,000 and over	215,984	317,630
Other time deposits	130,210	139,951
Total deposits	699,856	745,889
Borrowings	112,000	112,000
Subordinated debentures	12,372	12,372
Subordinated promissory notes	12,000	12,000
Accrued interest payable	1,736	1,437
Other liabilities	4,858	3,246
TOTAL LIABILITIES	842,822	886,944
Commitments (Notes C, L, O and P)
Common stock, $1.00 par value, 20,000,000 shares authorized; 7,815,315 and 7,663,387 shares issued and outstanding at December 31, 2012 and December 31, 2011 respectively	7,815	7,663
Additional paid-in capital	34,192	34,048
Accumulated deficit	(20,040)	(13,071)
Accumulated other comprehensive income	709	1,052
TOTAL SHAREHOLDERS' EQUITY	22,676	29,692
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 865,498	$ 916,636

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Comprehensive Income (Loss)) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Unrealized holding gains - investment securities available for sale	$ 989	$ 1,560
Deferred income taxes	(280)	(508)
Net unrealized holding gains - investment securities available for sale	709	1,052
Total accumulated other comprehensive income	$ 709	$ 1,052

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
BEGINNING BALANCE at Dec. 31, 2010	$ 35,455	$ 7,543	$ 33,815	$ (3,981)	$ (1,922)
BEGINNING BALANCE (in shares) at Dec. 31, 2010		7,542,601
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	(9,090)			(9,090)
Other comprehensive income (loss)	2,974				2,974
Issuance of common stock (in shares)		120,786
Issuance of common stock	258	120	138
Stock based compensation	95		95
ENDING BALANCE at Dec. 31, 2011	29,692	7,663	34,048	(13,071)	1,052
ENDING BALANCE (in shares) at Dec. 31, 2011		7,663,387
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	(6,969)			(6,969)
Other comprehensive income (loss)	(343)				(343)
Issuance of common stock (in shares)		151,998
Issuance of common stock	234	152	82
Stock based compensation	62		62
ENDING BALANCE at Dec. 31, 2012	$ 22,676	$ 7,815	$ 34,192	$ (20,040)	$ 709
ENDING BALANCE (in shares) at Dec. 31, 2012		7,815,385

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BRANCH SALE (Details) (Rockingham, North Carolina and Southern Pines, North Carolina [Member], USD $) In Millions, unless otherwise specified	0 Months Ended
	Sep. 26, 2012 branch_offices	Dec. 31, 2012 Deposits [Member]	Dec. 31, 2012 Loans [Member]	Dec. 31, 2012 Property, Plant and Equipment [Member]	Mar. 22, 2013 Subsequent Event [Member] Deposits [Member]	Mar. 22, 2013 Subsequent Event [Member] Loans [Member]	Mar. 22, 2013 Subsequent Event [Member] Property, Plant and Equipment [Member]
Subsequent Event [Line Items]
Number of branch offices sold	2
Purchase price component, premium over deposits at branches	1.00%
Long lived assets held-for-sale		$ 62.1	$ 18.7	$ 1.9	$ 57.3	$ 16.4	$ 1.9

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Impaired Loans) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Impaired Loans, Recorded Investment
With no related allowance recorded	$ 35,100	$ 58,693
With an allowance recorded	23,760	34,378
Total	58,860	93,071
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	42,762	69,776
With an allowance recorded	30,090	43,630
Total	72,852	113,406
Impaired Loans, Related Allowance	5,389	7,359
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	35,945	50,574
With an allowance recorded	24,556	34,768
Total	60,501	85,342
Impaired Loans, Interest Income Recognized
With no related allowance recorded	219	502
With an allowance recorded	137	211
Total	356	713
Commercial [Member]
Impaired Loans, Recorded Investment
Total	40,064	66,416
Impaired Loans, Unpaid Principal Balance
Total	51,679	82,903
Impaired Loans, Related Allowance	2,969	5,627
Impaired Loans, YTD Average Recorded Investment
Total	41,974	63,613
Impaired Loans, Interest Income Recognized
Total	180	470
Commercial and Industrial [Member]
Impaired Loans, Recorded Investment
With no related allowance recorded	498	992
With an allowance recorded	939	1,427
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	686	1,459
With an allowance recorded	956	1,597
Impaired Loans, Related Allowance	636	1,237
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	484	1,262
With an allowance recorded	528	967
Impaired Loans, Interest Income Recognized
With no related allowance recorded	1	11
With an allowance recorded	11	18
Commercial Construction and Land Development [Member]
Impaired Loans, Recorded Investment
With no related allowance recorded	11,266	23,049
With an allowance recorded	9,619	14,873
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	15,889	28,958
With an allowance recorded	13,033	20,999
Impaired Loans, Related Allowance	1,693	2,942
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	13,008	22,315
With an allowance recorded	10,003	18,136
Impaired Loans, Interest Income Recognized
With no related allowance recorded	22	167
With an allowance recorded	36	45
Commercial Real Estate [Member]
Impaired Loans, Recorded Investment
With no related allowance recorded	12,865	18,325
With an allowance recorded	4,877	7,750
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	14,263	20,601
With an allowance recorded	6,852	9,289
Impaired Loans, Related Allowance	640	1,448
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	12,328	14,128
With an allowance recorded	5,623	6,805
Impaired Loans, Interest Income Recognized
With no related allowance recorded	64	157
With an allowance recorded	46	72
Residential [Member]
Impaired Loans, Recorded Investment
Total	18,746	26,569
Impaired Loans, Unpaid Principal Balance
Total	21,097	30,355
Impaired Loans, Related Allowance	2,420	1,731
Impaired Loans, YTD Average Recorded Investment
Total	18,476	21,635
Impaired Loans, Interest Income Recognized
Total	176	243
Residential Construction [Member]
Impaired Loans, Recorded Investment
With no related allowance recorded	340	98
With an allowance recorded	833	1,144
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	340	98
With an allowance recorded	1,134	1,363
Impaired Loans, Related Allowance	86	114
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	162	98
With an allowance recorded	884	1,363
Impaired Loans, Interest Income Recognized
With no related allowance recorded	0	0
With an allowance recorded	0	0
Residential Mortgage [Member]
Impaired Loans, Recorded Investment
With no related allowance recorded	10,106	16,152
With an allowance recorded	7,467	9,175
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	11,542	18,528
With an allowance recorded	8,081	10,366
Impaired Loans, Related Allowance	2,334	1,617
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	9,937	12,681
With an allowance recorded	7,493	7,493
Impaired Loans, Interest Income Recognized
With no related allowance recorded	132	167
With an allowance recorded	44	76
Consumer [Member]
Impaired Loans, Recorded Investment
With no related allowance recorded	25	77
With an allowance recorded	25	9
Total	50	86
Impaired Loans, Unpaid Principal Balance
With no related allowance recorded	42	132
With an allowance recorded	34	16
Total	76	148
Impaired Loans, Related Allowance	0	1
Impaired Loans, YTD Average Recorded Investment
With no related allowance recorded	26	90
With an allowance recorded	25	4
Total	51	94
Impaired Loans, Interest Income Recognized
With no related allowance recorded	0	0
With an allowance recorded	0	0
Total	$ 0	$ 0

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit)

Allocation of income tax expense between current and deferred portions is as follows (amounts in thousands):

	Years Ended December 31,
	2012			2011
Current tax expense:
Federal	$	(175	)	$	—
State	—			—
	(175		)	—
Deferred tax expense:
Federal	(2,617		)	(2,876		)
State	(444		)	(531		)
	(3,061		)	(3,407		)
Provision for income tax expense before adjustment to    deferred tax asset	(3,236		)	(3,407		)
Valuation allowance	3,061			3,407
	$	(175	)	$	—

Schedule of Effective Income Tax Rate Reconciliation

The reconciliation of expected income tax at the statutory federal rate of 34% with income tax expense is as follows (amounts in thousands):

	Years Ended December 31,
	2012			2011
Expense computed at statutory rate of 34%	$	(2,429	)	$	(2,915	)
Effect of state income taxes, net of federal benefit	(36		)	(351		)
Tax exempt income	(293		)	(55		)
Bank owned life insurance income	(106		)	(129		)
Valuation allowance	3,061			3,407
Other, net	(372		)	43
	$	(175	)	$	—

Schedule of Deferred Tax Assets

Deferred income taxes consist of the following (amounts in thousands):

	Years Ended December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	6,335		$	8,106
Non-qualified stock options	365			341
OTTI	623			623
Net deferred loan fees	43			29
Net operating loss	12,818			7,591
FMV adjustment on purchased assets	136			99
SERP accrual	162			141
Other	2,071			2,608
Total deferred tax assets	22,553			19,538
Less valuation allowance	(21,669		)	(18,608		)
Net deferred tax assets	884			930
Deferred tax liabilities:
Property and equipment	$	528		$	628
Unrealized gain on securities	280			507
Prepaid expense	333			282
Other	23			20
Total deferred tax liabilities	1,164			1,437
Net deferred tax liability, included in other liabilities	$	(280	)	$	(507	)

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BANK AND PREMISES EQUIPMENT (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	$ 27,609,000	$ 29,656,000
Less accumulated depreciation	(14,227,000)	(13,632,000)
Premises and equipment, net	13,382,000	16,024,000
Depreciation expense	1,100,000	1,200,000
Bank premises and equipment held for sale	1,901,000	0
Land [Member]
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	4,884,000	4,520,000
Buildings and Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	11,139,000	13,508,000
Furniture and Equipment [Member]
Property, Plant and Equipment [Line Items]
Premises and equipment, gross	$ 11,586,000	$ 11,628,000

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OTHER EMPLOYEE BENEFITS

12 Months Ended

Dec. 31, 2012

Compensation and Retirement Disclosure [Abstract]

OTHER EMPLOYEE BENEFITS

OTHER EMPLOYEE BENEFITS

Supplemental Retirement

In 1998, the Bank 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. SERP 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 SERP plan amounts to $420,000 and $366,000 at December 31, 2012 and 2011, respectively.  During 2012 and 2011, the expense attributable to the SERP amounted to $55,000 and $49,000 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 and key employees to provide them with severance pay 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 of 1986, as amended (the “Code”).  The plans provide for employee contributions up to $16,500 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, 2012 and 2011 were $145,000 and $146,000, 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 the Company, owners of stock in the Company.  The Four Oaks Bank & Trust Company’s Employee Stock Ownership Plan 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 did not issue new shares in conjunction with this plan in 2012 and 2011.

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. The Board of Directors determined that, due to the financial results for 2012 and 2011, no contributions would be made to the plan for 2012 and 2011.

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 Code.

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 five percent (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, 2012, 368,544 shares of the Company’s common stock had been reserved for issuance under the Purchase Plan, and 324,654 shares had been purchased.  During the years ended December 31, 2012 and 2011, 31,189 and 31,769 shares, respectively, were purchased under the Purchase Plan.

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REGULATORY RESTRICTIONS (Tables)

12 Months Ended

Dec. 31, 2012

Regulatory Capital Requirements [Abstract]

Schedule of Capital Amounts and Ratios

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

	Actual				Minimum for Capital Adequacy Purposes				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2012:
Total Capital (to Risk Weighted Assets)	$	50,044	10.2	%	$	39,246	8.0	%	$	49,057	10.0	%
Tier I Capital (to Risk Weighted Assets)	43,797		8.9	%	19,623		4.0	%	29,434		6.0	%
Tier I Capital (to Average Assets)	43,797		5.0	%	34,949		4.0	%	43,687		5.0	%
As of December 31, 2011:
Total Capital (to Risk Weighted Assets)	$	56,733	9.8	%	$	46,584	8.0	%	$	58,230	10.0	%
Tier I Capital (to Risk Weighted Assets)	49,283		8.5	%	23,292		4.0	%	34,938		6.0	%
Tier I Capital (to Average Assets)	49,283		5.4	%	36,514		4.0	%	45,642		5.0	%

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PARENT COMPANY FINANCIAL INFORMATION

12 Months Ended

Dec. 31, 2012

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

PARENT COMPANY FINANCIAL INFORMATION

PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Four Oaks Fincorp, Inc. at December 31, 2012 and 2011, and for the years ended December 31, 2012 and 2011 is presented below (amounts in thousands):

	2012		2011
Condensed Balance Sheets
Assets:
Cash and cash equivalents	$	784	$	1,427
Equity investment in subsidiaries	45,025		51,120
Investment securities available for sale	1,186		1,241
Other assets	587		593
Total assets	$	47,582	$	54,381
Liabilities and Shareholders’ Equity:
Other liabilities	$	534	$	317
Subordinated debentures	12,372		12,372
Subordinated promissory notes	12,000		12,000
Shareholders' equity	22,676		29,692
Total liabilities and shareholders’ equity	$	47,582	$	54,381

	For the Years Ended December 31,
	2012			2011
Condensed Statements of Operations
Equity in undistributed loss of subsidiaries	$	(5,848	)	$	(7,556	)
Interest income	113			147
Gain on sale of investments, available for sale	—			109
Impairment loss on investment securities available for sale	—			(585		)
Other income	154			140
Other expenses	(1,388		)	(1,345		)
Net loss	$	(6,969	)	$	(9,090	)

	2012			2011
Condensed Statements of Cash Flows
Operating activities:
Net income (loss)	$	(6,969	)	$	(9,090	)
Equity in undistributed loss of subsidiaries	5,848			7,556
Stock based compensation	62			95
Impairment loss on investment securities available for sale	—			585
Gain on sale of investments	—			(109		)
Decrease in other assets	5			118
Increase in other liabilities	217			305
Net cash used in operating activities	(837		)	(540		)
Investing activities:
Investment in subsidiaries	(40		)	(24		)
Net cash used in investing activities	(40		)	(24		)
Financing activities:
Proceeds from issuance of common stock	234			259
Net cash provided by financing activities	234			259
Net decrease in cash and cash equivalents	(643		)	(305		)
Cash and cash equivalents, beginning of year	1,427			1,732
Cash and cash equivalents, end of year	$	784		$	1,427

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DEPOSITS (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Less than $100,000
2013	$ 79,613
2014	26,563
2015	16,053
2016	4,805
2017	2,892
2018 and beyond	284
Total time deposits	130,210	139,951
$100,000 or more
2013	120,191
2014	39,436
2015	29,536
2016	16,253
2017	8,095
2018 and beyond	2,473
Total time deposits	215,984	317,630
Total
2013	199,804
2014	65,999
2015	45,589
2016	21,058
2017	10,987
2018 and beyond	2,757
Total time deposits	$ 346,194

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities:
Net loss	$ (6,969)	$ (9,090)
Adjustments to reconcile net loss to net cash provided by operations:
Provision for loan losses	7,381	11,440
Provision for depreciation and amortization	1,142	1,243
Net amortization of bond premiums and discounts	1,876	1,415
Stock based compensation	62	95
Gain on sale of investment securities	(1,981)	(958)
Loss on sale of foreclosed assets, net	429	390
Valuation adjustment on foreclosed assets	2,321	2,776
Income from investment in life insurance	(312)	(379)
Impairment loss on investment securities available for sale	0	585
Changes in assets and liabilities:
Other assets	(1,296)	(233)
FDIC prepaid insurance premium	0	2,052
Accrued interest receivable	116	636
Other liabilities	1,612	(1,400)
Accrued interest payable	299	(175)
Net cash (used in) provided by operating activities	4,680	8,397
Cash flows from investing activities:
Proceeds from sales and calls of investment securities available for sale	50,414	85,929
Proceeds from paydowns of investment securities available for sale	12,619	12,314
Proceeds from paydowns of investment securities held to maturity	4,861	925
Purchase of investment securities available for sale	(43,855)	(55,007)
Purchase of investment securities held to maturity	(5,319)	(21,486)
Purchases of CDs held for investment	(2,691)	(8,820)
Purchase of bank owned life insurance	0	5,133
Redemption of FHLB stock	138	4,989
Proceeds from sale of loans	0	(1,898)
Proceeds from loan participation sale	0	194
Net decrease in loans outstanding	60,063	46,183
Purchases of bank premises and equipment	(401)	(559)
Proceeds from sales of foreclosed assets	7,254	4,872
Net capitalized expenditures on foreclosed assets	(11)	(74)
Net cash provided by (used in) investing activities	83,072	72,695
Cash flows from financing activities:
Net repayments from borrowings	0	(271)
Net decrease in deposit accounts	(46,033)	(23,327)
Proceeds from issuance of common stock	234	258
Net cash (used in) provided by financing activities	(45,799)	(23,340)
Net (decrease) increase in cash and cash equivalents	41,953	57,752
Cash and cash equivalents at beginning of period	141,197	83,445
Cash and cash equivalents at end of period	183,150	141,197
Supplemental disclosures of cash flow information:
Interest paid on deposits and borrowings	11,706	14,271
Supplemental disclosures of noncash investing and financing activities:
Unrealized gains (losses) on investment securities available for sale, net of taxes	(343)	2,974
Due from broker for investment securities sold	3,333	0
Transfers of loans to foreclosed assets	12,970	11,318
Transfer of loans to loans held for sale	19,297	0
Transfer from premises and equipment to premises and equipment held for sale	$ 1,901	$ 0

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Stockholders' Equity:
Common stock, par value (in usd per share)	$ 1	$ 1
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	7,785,518	7,663,387
Common stock, shares outstanding	7,785,518	7,663,387

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INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Allocation of income tax expense between current and deferred portions is as follows (amounts in thousands):

	Years Ended December 31,
	2012			2011
Current tax expense:
Federal	$	(175	)	$	—
State	—			—
	(175		)	—
Deferred tax expense:
Federal	(2,617		)	(2,876		)
State	(444		)	(531		)
	(3,061		)	(3,407		)
Provision for income tax expense before adjustment to    deferred tax asset	(3,236		)	(3,407		)
Valuation allowance	3,061			3,407
	$	(175	)	$	—

The reconciliation of expected income tax at the statutory federal rate of 34% with income tax expense is as follows (amounts in thousands):

	Years Ended December 31,
	2012			2011
Expense computed at statutory rate of 34%	$	(2,429	)	$	(2,915	)
Effect of state income taxes, net of federal benefit	(36		)	(351		)
Tax exempt income	(293		)	(55		)
Bank owned life insurance income	(106		)	(129		)
Valuation allowance	3,061			3,407
Other, net	(372		)	43
	$	(175	)	$	—

Deferred income taxes consist of the following (amounts in thousands):

	Years Ended December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	6,335		$	8,106
Non-qualified stock options	365			341
OTTI	623			623
Net deferred loan fees	43			29
Net operating loss	12,818			7,591
FMV adjustment on purchased assets	136			99
SERP accrual	162			141
Other	2,071			2,608
Total deferred tax assets	22,553			19,538
Less valuation allowance	(21,669		)	(18,608		)
Net deferred tax assets	884			930
Deferred tax liabilities:
Property and equipment	$	528		$	628
Unrealized gain on securities	280			507
Prepaid expense	333			282
Other	23			20
Total deferred tax liabilities	1,164			1,437
Net deferred tax liability, included in other liabilities	$	(280	)	$	(507	)

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.   Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  For the years ended December 31, 2012 and 2011, there were no uncertain tax positions taken by the Company. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Fiscal years ending December 31, 2009 and thereafter are subject to IRS examination.

We calculate income taxes in accordance with accounting principles generally accepted in the United States (“US GAAP”), which requires the use of the asset and liability method. The largest components of our net deferred tax asset at December 31, 2012 were related to the activity in our allowance for loan losses and net operating loss carryforwards. In accordance with US GAAP, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. Based upon our analysis of our tax position, including taxes paid in prior years available through carryback and the use of tax planning strategies, at December 31, 2012 and 2011 we recognized a valuation allowance of $21.7 million and $18.6 million, respectively, to properly state our ability to realize this deferred tax asset. The total valuation allowance as of December 31, 2012 was $21.7 million resulting in a net deferred tax liability of $280,000. Our analysis of our tax position did not include future taxable earnings. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it may require the future occurrence of circumstances that cannot be predicted with certainty.

As a result of the net operating loss carry forward of $33.6 million at December 31, 2012, which will begin to expire beginning with $1.5 million in 2030 and the $21.7 million deferred tax asset valuation allowance, the Company will not record tax expense or tax benefit until positive operating earnings utilizing existing tax loss carry forwards result in exhibited positive performance which would support the partial or full reinstatement of deferred tax assets.

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) (USD $)										12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Level 1 [Member]	Dec. 31, 2012 Level 2 [Member]	Dec. 31, 2012 Level 3 [Member]	Dec. 31, 2012 Carrying Value [Member]	Dec. 31, 2011 Carrying Value [Member]	Dec. 31, 2012 Estimated Fair Value [Member]	Dec. 31, 2011 Estimated Fair Value [Member]	Dec. 31, 2012 Loans Receivable [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Adjustment for current liquidity and market discount, rate										5.00%
Financial assets:
Cash and cash equivalents			$ 183,150,000	$ 0	$ 0	$ 183,150,000	$ 141,197,000	$ 183,150,000	$ 141,197,000
CDs held for investment	26,460,000	23,769,000	0	26,460,000	0	26,460,000	23,769,000	26,460,000	23,769,000
Available for sale securities	73,722,000	92,790,000	56,000	72,660,000	1,006,000	73,722,000	92,790,000	73,722,000	92,790,000
Securities held to maturity			0	20,668,000	0	20,329,000	20,445,000	20,668,000	20,456,000
Loans held for sale			0	0	19,297,000	19,297,000		19,297,000
Loans, net			0	0	460,422,000	462,083,000	581,091,000	460,422,000	554,624,000
FHLB stock			0	6,415,000	0	6,415,000	6,553,000	6,415,000	6,553,000
Premises and equipment, held for sale			0	0	1,901,000	1,901,000		1,901,000
Accrued interest receivable			0	1,869,000	0	1,869,000	1,985,000	1,869,000	1,985,000
Financial liabilities:
Deposits			407,387,000	286,797,000	0	699,856,000	745,889,000	694,184,000	742,959,000
Subordinated debentures and promissory notes			0	0	15,598,000	24,372,000	24,372,000	15,598,000	15,598,000
Borrowings			0	126,738,000	0	112,000,000	112,000,000	126,738,000	126,313,000
Accrued interest payable			$ 0	$ 1,736,000	$ 0	$ 1,736,000	$ 1,437,000	$ 1,736,000	$ 1,437,000

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LEASES (Details) (USD $)	12 Months Ended
	Dec. 31, 2012 branch_offices	Dec. 31, 2011
Operating Leased Assets [Line Items]
Number of branch facilities	6
2013	$ 320,000
2014	276,000
2015	276,000
2016	215,000
2017	171,000
2018 and beyond	755,000
Future minimum lease payments	2,013,000
Total rental expense	367,000	364,000
Building [Member]
Operating Leased Assets [Line Items]
Rent expense per month	$ 1,138	$ 1,081

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Mar. 19, 2013	Jun. 30, 2012
Entity Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	FY
Entity Registrant Name	FOUR OAKS FINCORP INC
Entity Central Index Key	0001040799
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		7,843,272
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 14,283,592

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REGULATORY RESTRICTIONS

12 Months Ended

Dec. 31, 2012

Regulatory Capital Requirements [Abstract]

REGULATORY RESTRICTIONS

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. No dividends were paid to the Company by the Bank during 2012.

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%. To be categorized as well capitalized, the Bank must maintain minimum amounts and ratios as set forth in the table below. At December 31, 2012 the Bank was classified as well capitalized for regulatory capital purposes since it met the well capitalized requirements.

In spite of the net loss reported for the 2012 period, the Bank is well capitalized. If the Bank was not well capitalized, it could not accept brokered deposits without prior FDIC approval and, if approval was granted, could not offer an effective yield in excess of 75 basis points on interest rates paid on deposits of comparable size and maturity in the Bank’s normal market area for deposits accepted from within its normal market area, or the national rate paid on deposits of comparable size and maturity for deposits accepted outside the Bank’s normal market area.  With respect to non-brokered deposits, as a well capitalized institution, the Bank is permitted to offer interest rates that are significantly higher than the prevailing rates in its normal market area.

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

	Actual				Minimum for Capital Adequacy Purposes				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2012:
Total Capital (to Risk Weighted Assets)	$	50,044	10.2	%	$	39,246	8.0	%	$	49,057	10.0	%
Tier I Capital (to Risk Weighted Assets)	43,797		8.9	%	19,623		4.0	%	29,434		6.0	%
Tier I Capital (to Average Assets)	43,797		5.0	%	34,949		4.0	%	43,687		5.0	%
As of December 31, 2011:
Total Capital (to Risk Weighted Assets)	$	56,733	9.8	%	$	46,584	8.0	%	$	58,230	10.0	%
Tier I Capital (to Risk Weighted Assets)	49,283		8.5	%	23,292		4.0	%	34,938		6.0	%
Tier I Capital (to Average Assets)	49,283		5.4	%	36,514		4.0	%	45,642		5.0	%

The Company is also subject to capital requirements, that differ from the Bank. In order for the Company to be well capitalized, total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets must be 8.0%, 4.0% and 4.0%, respectively. At December 31, 2012 and 2011, the Company’s total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 10.2%, 5.9% and 3.3% and 10.3%, 7.0%, and 4.4%, respectively.

In late May 2011, the Company and the Bank, entered into the Written Agreement with the FRB and the NCCOB.  Under the terms of the Written Agreement, the Bank developed and submitted for approval, within the time periods specified, plans to:

• revise lending and credit administration policies and procedures at the Bank and provide relevant training;

• enhance the Bank's real estate appraisal policies and procedures;

• enhance the Bank's loan grading and independent loan review programs;

• improve the Bank's position with respect to loans, relationships, or other assets in excess of $750,000, which are now or in the future become past due more than 90 days, are on the Bank's problem loan list, or adversely classified in any report of examination of the Bank; and

• review and revise the Bank's current policy regarding the Bank's allowance for loan and lease losses and maintain a program for the maintenance of an adequate allowance.

In addition, the Bank has agreed that it will:

• refrain from extending, renewing, or restructuring any credit to or for the benefit of any borrower, or related interest, whose loans or other extensions of credit have been criticized in any report of examination of the Bank absent prior approval by the Bank's board of directors or a designated committee of the board in accordance with the restrictions in the Written Agreement;

• eliminate from its books, by charge-off or collection, all assets or portions of assets classified as “loss” in any report of examination of the Bank, unless otherwise approved by the FRB and the NCCOB; and

• take all necessary steps to correct all violations of law or regulation cited by the FRB and the NCCOB.

In addition, the Company has agreed that it will:

• refrain from taking any form of payment representing a reduction in capital from the Bank or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities absent prior regulatory approval;

• refrain from incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; and

• refrain from purchasing or redeeming any shares of its stock without the prior written consent of the FRB.

Under the terms of the Written Agreement, both the Company and the Bank have agreed to:

• submit for approval a joint plan to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis;

• notify the FRB and the NCCOB if the Company's or the Bank's capital ratios fall below the approved capital plan's minimum ratios;

• refrain from declaring or paying any dividends absent prior regulatory approval;

• comply with applicable notice provisions with respect to the appointment of new directors and senior executive officers of the Company and the Bank and legal and regulatory limitations on indemnification and severance payments; and

• submit annual business plans and budgets and quarterly joint written progress reports regarding compliance with the Written Agreement.

The Company is committed to expeditiously addressing and resolving the issues raised in the Written Agreement. As such, the Board of Directors has established an Enforcement Action Committee that meets regularly to monitor the Bank's progress on compliance with the Written Agreement. The Bank has made progress on multiple provisions included in the Written Agreement and continues to aggressively work to implement any necessary changes to policies and procedures. Several control changes have been implemented to address the financial reporting material weaknesses, identified as of December 31, 2010, of identification and valuation of impaired loans, the support and validation of the allowance for loan losses, and the valuation of foreclosed assets. Additionally, the Bank has implemented additional controls around obtaining updated collateral valuations as required by regulation and has established new policies to further reduce Commercial Real Estate concentrations, ensure current financial information is evaluated, and control interest only loans. Other areas also addressed included the adequacy of credit resources, portfolio risk management and reporting,and consistency and compliance when dealing with loan workouts. A material failure to comply with the terms of the Written Agreement could subject the Company to additional regulatory actions and further restrictions on its business. These regulatory actions and resulting restrictions on the Company's business may have a material adverse effect on its future results of operations and financial condition.

Since the Company and the Bank entered the Written Agreement, management has had frequent and regular communication with the FRB and NCCOB. This communication has involved:

• updates on the progress involving each of the actions outlined in the Written Agreement;

• specific steps taken by the Company to remain in compliance with the Written Agreement; and

• communications, verbally and via interim internal reports, regarding the financial status of the Company including, but not limited to, the Company's key capital ratios.

To date, the Company has not received any disagreement from the regulatory authorities regarding actions taken or contemplated. Nor has the Company received any indication that additional measures are required beyond those contained in the Written Agreement. Despite the actions taken thus far, there is no assurance that additional measures or actions will not be required by the regulatory authorities in the future.

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FAIR VALUE MEASUREMENT (Impaired Loans) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Carrying value of impaired loans before allocations	$ 23,760	$ 34,378
Specific valuation allowance allocations	(5,389)	(7,359)
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Carrying value of impaired loans before allocations	0	0
Specific valuation allowance allocations	0	0
Impaired loans	0	0
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Carrying value of impaired loans before allocations	23,761	34,378
Specific valuation allowance allocations	(5,389)	(7,359)
Impaired loans	$ 18,372	$ 27,019

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OTHER EMPLOYEE BENEFITS (Details) (USD $)	12 Months Ended		287 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012
Defined Benefit Plan Disclosure [Line Items]
Maximum annual contribution per employee, amount	$ 16,500
Maximum annual contribution per employee, percent	25.00%
Employer matching contribution, percent	6.00%
Defined contribution plan, expenses	145,000	146,000
ESOP, employee minimum age	21 years
ESOP, employee requisite service period	6 months
President [Member] | SERP [Member]
Defined Benefit Plan Disclosure [Line Items]
Accrued liability	420,000	366,000	420,000
Retirement plan expense	55,000	49,000
Employee Stock Purchase and Bonus Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Maximum employee subscription rate	5.00%		5.00%
Maximum employee subscription amount	1,000		1,000
Share-based Compensation Arrangement by Share-based Payment Award, Employer Matching Percent	50.00%
Share-based Compensation Arrangement by Share-based Payment Award, Employer Matching Amount	$ 500		$ 500
Common stock reserved for future issuance	368,544		368,544
Shares purchased	31,189	31,769	324,654

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Interest and dividend income:
Loans, including fees	$ 31,704	$ 36,550
Taxable investments	1,710	2,753
Dividends	313	258
Interest-earning deposits	652	443
Total interest and dividend income	34,379	40,004
Interest expense:
Deposits	6,666	8,781
Borrowings	4,076	4,072
Subordinated debt	227	208
Subordinated promissory notes	1,036	1,035
Total interest expense	12,005	14,096
Net interest income	22,374	25,908
Provision for loan losses	7,381	11,440
Net interest income (loss) after provision for loan losses	14,993	14,468
Non-interest income:
Service charges on deposit accounts	1,934	2,017
Other service charges, commissions and fees	2,757	2,503
Gains on sale of investment securities, net	1,981	958
Other-than-temporary impairment loss	(79)	(656)
Portion of loss recognized in other comprehensive income	79	71
Net impairment loss recognized in earnings	0	(585)
Income from investment in life insurance	312	379
Other non-interest income	410	97
Total non-interest income	7,394	5,369
Non-interest expenses:
Salaries	10,406	10,514
Employee benefits	1,920	1,885
Occupancy expenses	1,337	1,332
Equipment expenses	1,470	1,645
Professional and consulting fees	2,647	2,242
FDIC assessments	2,168	2,381
Loss on sale or write-down of foreclosed assets	2,750	3,166
Collection expenses	1,313	1,059
Other operating expenses	5,520	4,703
Total non-interest expenses	29,531	28,927
Loss before income taxes	(7,144)	(9,090)
Income tax benefit	(175)	0
Net loss	$ (6,969)	$ (9,090)
Basic net loss per common share (in usd per share)	$ (0.90)	$ (1.20)
Diluted net loss per common share (in usd per share)	$ (0.90)	$ (1.20)

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OTHER INTANGIBLES

12 Months Ended

Dec. 31, 2012

Goodwill and Intangible Assets Disclosure [Abstract]

OTHER INTANGIBLES

OTHER INTANGIBLES

The following is a summary of other intangible assets at December 31, 2012 and 2011(amounts in thousands):

	2012		2011
Other intangibles – gross	$	494	$	494
Less accumulated amortization	491		187
Other intangibles – net	$	3	$	307

The other intangibles acquired in connection with the LongLeaf Community Bank merger were written off at the end of 2012 due to the sale of those deposits to First Bank, which is expected to close in the first quarter of 2013. Other intangibles amortization expense for the years ended December 31, 2012 and 2011 amounted to $300,000 and $53,000, respectively.  Estimated amortization expense for other intangibles for future years are as follows (amounts in thousands):

	2012
2013	$	2
2014	1
Total estimated amortization expense	$	3

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BANK AND PREMISES EQUIPMENT

12 Months Ended

Dec. 31, 2012

Property, Plant and Equipment [Abstract]

BANK PREMISES AND EQUIPMENT

BANK PREMISES AND EQUIPMENT

Company premises and equipment at December 31, 2012 and 2011 are as follows (amounts in thousands):

	2012			2011
Land	$	4,884		$	4,520
Buildings and leasehold improvements	11,139			13,508
Furniture and equipment	11,586			11,628
	27,609			29,656
Less accumulated depreciation	(14,227		)	(13,632		)
	$	13,382		$	16,024

Depreciation expense was $1.1 million and $1.2 million for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, the Company had a total of $1.9 million in premises and equipment which were classified as held for sale.

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LEASES

12 Months Ended

Dec. 31, 2012

Leases [Abstract]

LEASES

LEASES

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

Leases
2013	$	320
2014	276
2015	276
2016	215
2017	171
2018 and beyond	755
	$	2,013

In addition, the Company has leased a building from one of its former directors for approximately $1,138 per month in 2012 and $1,081 per month in 2011, under an operating lease on a month-to-month basis.

Total rental expense under operating leases for the years ended December 31, 2012 and 2011 amounted to $367,000 and $364,000, respectively.

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

The Company 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 Company 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, 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.

At December 31, 2012 and 2011, financial instruments whose contract amounts represent credit risk were (amounts in thousands) :

	2012		2011
Commitments to extend credit	$	37,920	$	43,052
Undisbursed lines of credit	20,852		19,876
Financial stand-by letters of credit	416		378
Performance stand-by letters of credit	2,422		1,659
Legally binding commitments	61,610		64,965
Credit card lines	13,152		13,718
Total	$	74,762	$	78,683

Litigation Proceedings

We are party to certain other legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the ultimate resolution of these matters will not have a material adverse impact on our business, financial condition, results of operations, cash flows or prospects. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations, cash flows and prospects could be adversely affected.

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FAIR VALUE MEASUREMENT (Narrative) (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 58,860,000	$ 93,071,000
Carrying value of impaired loans before allocations	23,760,000	34,378,000
Impaired loans, allowance	5,389,000	7,359,000
Foreclosed assets valuation reductions	2,300,000	2,800,000
Assets measured at fair value:
Foreclosed assets	15,136,000	12,159,000
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Carrying value of impaired loans before allocations	23,761,000	34,378,000
Impaired loans, allowance	5,389,000	7,359,000
Assets measured at fair value:
Impaired loans	$ 18,372,000	$ 27,019,000
Loans Receivable [Member] | Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	30.00%
Loans Receivable [Member] | Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Collateral discounts	40.00%

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TRUST PREFERRED SECURITIES

12 Months Ended

Dec. 31, 2012

Trust Preferred Securities [Abstract]

TRUST PREFERRED SECURITIES

TRUST PREFERRED SECURITIES

On March 30, 2006, $12.0 million of trust preferred securities (“Trust Preferred Securities”) were placed through the Trust.  The Trust has invested the net proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Deferrable Interest Debentures (the “Debentures”) issued by the Company and recorded in borrowings on the accompanying consolidated balance sheets.  The Trust Preferred Securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly, equal to three month LIBOR plus 1.35%.  The dividends paid to holders of the Trust Preferred Securities, which will be recorded as interest expense, are deductible for income tax purposes.  The Trust Preferred Securities are redeemable on June 15, 2011 or afterwards in whole or in part, on any June 15, September 15, December 15, or March 15.  Redemption is mandatory by June15, 2036.  The Company has fully and unconditionally guaranteed the Trust Preferred Securities through the combined operation of the Debentures and other related documents.  The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.  The Trust Preferred Securities qualify as Tier I capital for regulatory capital purposes subject to certain limitations.  We have the right to defer payment of interest on the Debentures at any time and from time to time for a period not exceeding five years, provided that no deferral period extends beyond the stated maturities of the Debentures. Such deferral of interest payments by the Company will result in a deferral of distribution payments on the related Trust Preferred Securities. Whenever we defer the payment of interest on the Debentures, the Company will be precluded from the payment of cash dividends to shareholders.  In January 2011, the Company elected to defer the regularly scheduled interest payments on the Debentures related to our outstanding Trust Preferred Securities.

The Company is currently prohibited by the Written Agreement, described in Note K - Regulatory Restrictions, of these Notes to Consolidated Financial Statements, from paying interest on its Debentures without prior approval of the supervisory authorities. The Company and the Bank are prohibited from declaring or paying dividends without prior approval of the supervisory authorities. The Company exercised its right to defer regularly scheduled interest payments on the Debentures and as of December 31, 2012, $496,000 of interest payments have been accrued for and deferred pursuant to the terms of the indenture governing the Debentures.

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Troubled Debt Restructurings by Loan Class) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012 loans	Dec. 31, 2011 loans
Financing Receivable, Modifications [Line Items]
Number of loans	15	53
Pre-classification outstanding recorded investment	$ 1,737	$ 12,539
Post-modification outstanding recorded investment	1,737	12,494
Below Market Interest Rate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1	14
Pre-classification outstanding recorded investment	395	3,230
Post-modification outstanding recorded investment	395	3,180
Below Market Interest Rate [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		12
Pre-classification outstanding recorded investment		2,920
Post-modification outstanding recorded investment		2,870
Below Market Interest Rate [Member] | Residential Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1	2
Pre-classification outstanding recorded investment	395	310
Post-modification outstanding recorded investment	395	310
Extended Payment Terms [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	7	31
Pre-classification outstanding recorded investment	598	7,903
Post-modification outstanding recorded investment	598	7,908
Extended Payment Terms [Member] | Commercial and Industrial [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		5
Pre-classification outstanding recorded investment		485
Post-modification outstanding recorded investment		485
Extended Payment Terms [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	4	14
Pre-classification outstanding recorded investment	513	5,727
Post-modification outstanding recorded investment	513	5,727
Extended Payment Terms [Member] | Residential Construction [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		1
Pre-classification outstanding recorded investment		165
Post-modification outstanding recorded investment		165
Extended Payment Terms [Member] | Residential Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	2	11
Pre-classification outstanding recorded investment	66	1,526
Post-modification outstanding recorded investment	66	1,531
Extended Payment Terms [Member] | Consumer [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	1
Pre-classification outstanding recorded investment	19
Post-modification outstanding recorded investment	19
Other [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	7	8
Pre-classification outstanding recorded investment	744	1,406
Post-modification outstanding recorded investment	744	1,406
Other [Member] | Commercial and Industrial [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		2
Pre-classification outstanding recorded investment		146
Post-modification outstanding recorded investment		146
Other [Member] | Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	5	2
Pre-classification outstanding recorded investment	695	290
Post-modification outstanding recorded investment	695	290
Other [Member] | Residential Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of loans		2
Pre-classification outstanding recorded investment		735
Post-modification outstanding recorded investment		735
Other [Member] | Consumer [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	2	2
Pre-classification outstanding recorded investment	49	235
Post-modification outstanding recorded investment	$ 49	$ 235

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DEPOSITS

12 Months Ended

Dec. 31, 2012

Banking and Thrift [Abstract]

DEPOSITS

DEPOSITS

At December 31, 2012, the scheduled maturities of time deposits are as follows (amounts in thousands):

	Less than $100,000		$100,000 or more		Total
2013	$	79,613	$	120,191	$	199,804
2014	26,563		39,436		65,999
2015	16,053		29,536		45,589
2016	4,805		16,253		21,058
2017	2,892		8,095		10,987
2018 and beyond	284		2,473		2,757
Total time deposits	$	130,210	$	215,984	$	346,194

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BORROWINGS

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

BORROWINGS

BORROWINGS

At December 31, 2012 and 2011, borrowed funds included the following FHLB advances (amounts in thousands):

Maturity	Interest Rate			2012		2011
May 25, 2016	4.46	%	Fixed	$	5,000	$	5,000
November 17, 2016	4.11	%	Fixed	5,000		5,000
November 30, 2016	4.09	%	Fixed	7,000		7,000
June 5, 2017	4.35	%	Fixed	10,000		10,000
July 3, 2017	4.36	%	Fixed	13,000		13,000
July 24, 2017	4.34	%	Fixed	5,000		5,000
July 31, 2017	4.35	%	Fixed	5,000		5,000
August 14, 2017	4.08	%	Fixed	5,000		5,000
August 14, 2017	3.94	%	Fixed	5,000		5,000
October 4, 2017	3.95	%	Fixed	7,000		7,000
February 5, 2018	2.06	%	Fixed	10,000		10,000
June 5, 2018	2.25	%	Fixed	5,000		5,000
June 5, 2018	2.55	%	Fixed	5,000		5,000
June 5, 2018	3.03	%	Fixed	5,000		5,000
September 10, 2018	3.14	%	Fixed	10,000		10,000
September 18, 2018	2.71	%	Fixed	10,000		10,000
				$	112,000	$	112,000

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, 2012, the Company has available lines of credit totaling $173.1 million with the FHLB for borrowing dependent on adequate collateralization. The weighted average rates for the above borrowings at December 31, 2012 and 2011 were 3.58%.

In addition to the above advances, the Company has lines of credit of $16.0 million from various financial institutions to purchase federal funds on a short-term basis.  The Company has no federal fund purchases outstanding as of December 31, 2012.

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SUBORDINATED PROMISSORY NOTES

12 Months Ended

Dec. 31, 2012

Subordinated Debt [Abstract]

SUBORDINATED PROMISSORY NOTES

SUBORDINATED PROMISSORY NOTES

The Company sold $12.0 million aggregate principal amount of subordinated promissory notes to certain accredited investors between May and August 2009.  These notes are due 10 years after the date of issuance, beginning May 15, 2019, and the Company is obligated to pay interest at an annualized rate of 8.5% payable in quarterly installments beginning on the third month anniversary of the date of issuance.  The Company may prepay the notes at any time after the fifth anniversary of the date of issuance, subject to compliance with applicable law. The Company is currently prohibited by the Written Agreement, described in Note K - Regulatory Restrictions, of these Notes to Consolidated Financial Statements, from paying interest on its subordinated promissory notes without prior approval of the supervisory authorities. The Company obtained approval to pay the interest on its subordinated promissory notes for 2012.

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Narrative) (Details) (USD $)	12 Months Ended
	Dec. 31, 2012 loans	Dec. 31, 2011 loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of loans included in the population of purchased impaired loans	1	1
Fair value of loans included in the population of purchased impaired loans	$ 134,000	$ 186,000
Total loans	498,052,000	602,307,000
Impaired loans, recorded investment	58,860,000	93,071,000
Carrying value of impaired loans before allocations	23,760,000	34,378,000
Impaired loans, allowance	5,389,000	7,359,000
Impaired loans, with no related allowance	35,100,000	58,693,000
Average recorded investment in impaired loans	60,501,000	85,342,000
Interest recognized on impaired loans	356,000	713,000
Number of loans modified	15	53
Pre-classification outstanding recorded investment	1,737,000	12,539,000
Executive Officers, Directors and Affiliates [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Line of Credit, pre-approved but unused	1,700,000
Special Mention and Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans	$ 87,300,000	$ 151,800,000
Reduction in total loans	(42.50%)

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STOCK OPTION PLAN (Narrative) (Details) (USD $)	12 Months Ended						12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Stock Options [Member]	Dec. 31, 2011 Stock Options [Member]	Dec. 31, 2007 Maximum [Member] Stock Options [Member]	Dec. 31, 2012 Maximum [Member] Stock Options [Member]	Dec. 31, 2007 Minimum [Member] Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of options authorized to be issued						1,542,773
Award vesting rights, percentage			100.00%
Award vesting period				2 years	2 years		1 year
Options, exercisable (in usd per share)	$ 10.71
Common stock reserved for future issuance			328,520
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized	$ 61,493	$ 44,583
Granted (in usd per share)	$ 0.87	$ 1.34

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OTHER INTANGIBLES (Other Intangibles Net) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Goodwill and Intangible Assets Disclosure [Abstract]
Other intangibles – gross	$ 494	$ 494
Less accumulated amortization	491	187
Other intangibles – net	$ 3	$ 307

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Allowance for Loan Losses by Loan Class) (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Allowance for loan losses:
Balance, beginning of period	$ 21,141	$ 22,100
Provision for loan losses	7,381	11,440
Loans charged-off	(14,743)	(14,909)
Recoveries	2,770	2,510
Net (charge-offs) recoveries	(11,973)	(12,399)
Balance, end of period	16,549	21,141
Ending Balance, individually evaluated for impairment	5,389	7,359
Ending Balance, collectively evaluated for impairment	11,160	13,782
Financing Receivables:
Total loans	498,052	602,307
Ending Balance, individually evaluated for impairment	58,860	93,071
Ending Balance, collectively evaluated for impairment	439,192	509,236
Commercial and Industrial [Member]
Allowance for loan losses:
Balance, beginning of period	2,730	2,049
Provision for loan losses	(1,464)	2,443
Loans charged-off	(703)	(2,181)
Recoveries	622	419
Net (charge-offs) recoveries	(81)	(1,762)
Balance, end of period	1,185	2,730
Ending Balance, individually evaluated for impairment	636	1,237
Ending Balance, collectively evaluated for impairment	549	1,493
Financing Receivables:
Total loans	29,563	40,345
Ending Balance, individually evaluated for impairment	1,437	2,419
Ending Balance, collectively evaluated for impairment	28,126	37,926
Commercial Construction and Land Development [Member]
Allowance for loan losses:
Balance, beginning of period	8,799	8,375
Provision for loan losses	5,205	7,755
Loans charged-off	(7,929)	(7,735)
Recoveries	1,176	404
Net (charge-offs) recoveries	(6,753)	(7,331)
Balance, end of period	7,251	8,799
Ending Balance, individually evaluated for impairment	1,693	2,942
Ending Balance, collectively evaluated for impairment	5,558	5,857
Financing Receivables:
Total loans	90,899	113,762
Ending Balance, individually evaluated for impairment	20,885	37,922
Ending Balance, collectively evaluated for impairment	70,014	75,840
Commercial Real Estate [Member]
Allowance for loan losses:
Balance, beginning of period	3,800	4,038
Provision for loan losses	2,486	1,079
Loans charged-off	(3,691)	(1,802)
Recoveries	366	485
Net (charge-offs) recoveries	(3,325)	(1,317)
Balance, end of period	2,961	3,800
Ending Balance, individually evaluated for impairment	640	1,448
Ending Balance, collectively evaluated for impairment	2,321	2,352
Financing Receivables:
Total loans	181,194	214,740
Ending Balance, individually evaluated for impairment	17,742	26,075
Ending Balance, collectively evaluated for impairment	163,452	188,665
Residential Construction [Member]
Allowance for loan losses:
Balance, beginning of period	740	2,848
Provision for loan losses	(214)	(1,811)
Loans charged-off	(103)	(588)
Recoveries	0	291
Net (charge-offs) recoveries	(103)	(297)
Balance, end of period	423	740
Ending Balance, individually evaluated for impairment	86	114
Ending Balance, collectively evaluated for impairment	337	626
Financing Receivables:
Total loans	20,445	26,707
Ending Balance, individually evaluated for impairment	1,173	1,242
Ending Balance, collectively evaluated for impairment	19,272	25,465
Residential Mortgage [Member]
Allowance for loan losses:
Balance, beginning of period	4,630	4,291
Provision for loan losses	1,184	1,694
Loans charged-off	(1,801)	(2,126)
Recoveries	458	771
Net (charge-offs) recoveries	(1,343)	(1,355)
Balance, end of period	4,471	4,630
Ending Balance, individually evaluated for impairment	2,334	1,618
Ending Balance, collectively evaluated for impairment	2,137	3,012
Financing Receivables:
Total loans	165,009	192,972
Ending Balance, individually evaluated for impairment	17,573	25,327
Ending Balance, collectively evaluated for impairment	147,436	167,645
Consumer [Member]
Allowance for loan losses:
Balance, beginning of period	413	415
Provision for loan losses	143	335
Loans charged-off	(516)	(477)
Recoveries	148	140
Net (charge-offs) recoveries	(368)	(337)
Balance, end of period	188	413
Ending Balance, individually evaluated for impairment	0	0
Ending Balance, collectively evaluated for impairment	188	413
Financing Receivables:
Total loans	9,664	11,451
Ending Balance, individually evaluated for impairment	50	86
Ending Balance, collectively evaluated for impairment	9,614	11,365
Other [Member]
Allowance for loan losses:
Balance, beginning of period	29	84
Provision for loan losses	41	(55)
Loans charged-off	0	0
Recoveries	0	0
Net (charge-offs) recoveries	0	0
Balance, end of period	70	29
Ending Balance, individually evaluated for impairment	0	0
Ending Balance, collectively evaluated for impairment	70	29
Financing Receivables:
Total loans	1,278	2,330
Ending Balance, individually evaluated for impairment	0	0
Ending Balance, collectively evaluated for impairment	$ 1,278	$ 2,330

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PARENT COMPANY FINANCIAL INFORMATION (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Assets:
Cash and cash equivalents	$ 183,150	$ 141,197
Investment securities available for sale	73,722	92,790
Other assets	8,318	6,796
TOTAL ASSETS	865,498	916,636
Liabilities and Shareholders' Equity:
Other liabilities	4,858	3,246
Subordinated debentures	12,372	12,372
Subordinated promissory notes	12,000	12,000
Shareholders' equity	22,676	29,692	35,455
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	865,498	916,636
Condensed Statements of Operations
Gain on sale of investments, available for sale	1,981	958
Impairment loss on investment securities available for sale	0	(585)
Net loss	(6,969)	(9,090)
Operating activities:
Net income (loss)	(6,969)	(9,090)
Stock based compensation	62	95
Impairment loss on investment securities available for sale	0	585
Gain on sale of investments	(1,981)	(958)
Increase in other assets	(1,296)	(233)
(Decrease) increase in other liabilities	1,612	(1,400)
Net cash (used in) provided by operating activities	4,680	8,397
Investing activities:
Net cash provided by (used in) investing activities	83,072	72,695
Financing activities:
Proceeds from issuance of common stock	234	258
Net cash (used in) provided by financing activities	(45,799)	(23,340)
Net (decrease) increase in cash and cash equivalents	41,953	57,752
Cash and cash equivalents at beginning of period	141,197	83,445
Cash and cash equivalents at end of period	183,150	141,197
Parent [Member]
Assets:
Cash and cash equivalents	784	1,427
Equity investment in subsidiaries	45,025	51,120
Investment securities available for sale	1,186	1,241
Other assets	587	593
TOTAL ASSETS	47,582	54,381
Liabilities and Shareholders' Equity:
Other liabilities	534	317
Subordinated debentures	12,372	12,372
Subordinated promissory notes	12,000	12,000
Shareholders' equity	22,676	29,692
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	47,582	54,381
Condensed Statements of Operations
Equity in undistributed loss of subsidiaries	(5,848)	(7,556)
Interest income	113	147
Gain on sale of investments, available for sale	0	109
Impairment loss on investment securities available for sale	0	(585)
Other income	154	140
Other expenses	(1,388)	(1,345)
Net loss	(6,969)	(9,090)
Operating activities:
Net income (loss)	(6,969)	(9,090)
Equity in undistributed loss of subsidiaries	5,848	7,556
Stock based compensation	62	95
Impairment loss on investment securities available for sale	0	585
Gain on sale of investments	0	(109)
Increase in other assets	5	118
(Decrease) increase in other liabilities	217	305
Net cash (used in) provided by operating activities	(837)	(540)
Investing activities:
Investment in subsidiaries	(40)	(24)
Net cash provided by (used in) investing activities	(40)	(24)
Financing activities:
Proceeds from issuance of common stock	234	259
Net cash (used in) provided by financing activities	234	259
Net (decrease) increase in cash and cash equivalents	(643)	(305)
Cash and cash equivalents at beginning of period	1,427	1,732
Cash and cash equivalents at end of period	$ 784	$ 1,427

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BORROWINGS (Tables)

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

Schedule of Federal Home Loan Bank, Advances

At December 31, 2012 and 2011, borrowed funds included the following FHLB advances (amounts in thousands):

Maturity	Interest Rate			2012		2011
May 25, 2016	4.46	%	Fixed	$	5,000	$	5,000
November 17, 2016	4.11	%	Fixed	5,000		5,000
November 30, 2016	4.09	%	Fixed	7,000		7,000
June 5, 2017	4.35	%	Fixed	10,000		10,000
July 3, 2017	4.36	%	Fixed	13,000		13,000
July 24, 2017	4.34	%	Fixed	5,000		5,000
July 31, 2017	4.35	%	Fixed	5,000		5,000
August 14, 2017	4.08	%	Fixed	5,000		5,000
August 14, 2017	3.94	%	Fixed	5,000		5,000
October 4, 2017	3.95	%	Fixed	7,000		7,000
February 5, 2018	2.06	%	Fixed	10,000		10,000
June 5, 2018	2.25	%	Fixed	5,000		5,000
June 5, 2018	2.55	%	Fixed	5,000		5,000
June 5, 2018	3.03	%	Fixed	5,000		5,000
September 10, 2018	3.14	%	Fixed	10,000		10,000
September 18, 2018	2.71	%	Fixed	10,000		10,000
				$	112,000	$	112,000

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INVESTMENT SECURITIES (Investment Securities Classified by Contractual Maturities) (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Total securities	$ 72,732,000	$ 91,230,000
Available for sale, Fair value, Total securities	73,722,000	92,790,000
Taxable Municipal Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Due within one year	0
Available for sale, Amortized cost, Due after one year through five years	257,000
Available for Sale, Amortized cost, Due after five years through ten years	4,679,000
Available for Sale, Amortized cost, Due after ten years	523,000
Available for sale, Amortized cost, Total securities	5,459,000	17,046,000
Available for sale, Fair value, Due within one year	0
Available for sale, Fair value, Due after one year through five years	270,000
Available for sale, Fair value, Due after five years through ten years	5,078,000
Available for sale, Fair value, Due after ten years	565,000
Available for sale, Fair value, Total securities	5,913,000	17,919,000
Mortgage-backed Securities GNMA [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Due within one year	0
Available for sale, Amortized cost, Due after one year through five years	39,000,000
Available for Sale, Amortized cost, Due after five years through ten years	17,463,000
Available for Sale, Amortized cost, Due after ten years	3,593,000
Available for sale, Amortized cost, Total securities	60,056,000	72,839,000
Available for sale, Fair value, Due within one year	0
Available for sale, Fair value, Due after one year through five years	39,470,000
Available for sale, Fair value, Due after five years through ten years	17,640,000
Available for sale, Fair value, Due after ten years	3,633,000
Available for sale, Fair value, Total securities	60,743,000	73,629,000
Held to maturity, Amortized cost, Due within one year	0
Held to maturity, Amortized cost, Due after one year through five years	17,949,000
Held to maturity, Amortized cost, Due after five years through ten years	2,380,000
Held to maturity, Amortized cost, Due after ten years	0
Held to maturity, Amortized cost, Total held to maturity securities	20,329,000
Held to maturity, Fair value, Due within one year	0
Held to maturity, Fair value, Due after one year through five years	18,253,000
Held to maturity, Fair value, Due after five years through ten years	2,415,000
Held to maturity, Fair value, Due after ten years	0
Held to maturity, Fair value, Total held to maturity securities	20,668,000
Mortgage-backed Securities FNMA [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Due within one year	0
Available for sale, Amortized cost, Due after one year through five years	5,872,000
Available for Sale, Amortized cost, Due after five years through ten years	0
Available for Sale, Amortized cost, Due after ten years	0
Available for sale, Amortized cost, Total securities	5,872,000
Available for sale, Fair value, Due within one year	0
Available for sale, Fair value, Due after one year through five years	5,880,000
Available for sale, Fair value, Due after five years through ten years	0
Available for sale, Fair value, Due after ten years	0
Available for sale, Fair value, Total securities	5,880,000
Trust Preferred Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Total securities	1,175,000	1,175,000
Available for sale, Fair value, Total securities	1,006,000	1,085,000
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Total securities	170,000	170,000
Available for sale, Fair value, Total securities	180,000	157,000
Total Other Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale, Amortized cost, Total securities	1,345,000
Available for sale, Fair value, Total securities	$ 1,186,000

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STOCK OPTION PLAN

12 Months Ended

Dec. 31, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK OPTION PLAN

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 1,542,773 shares of common stock. Options are granted at the discretion of the Company’s Board of Directors at an exercise price approximating market value, as determined by a committee of Board members. All options granted subsequent to a 1997 amendment will be 100% vested after either one or two years from the grant date and will expire after such a period as is determined by the Board at the time of grant. Options granted in 2011 and 2012 have a two year vesting provision.

A summary of option activity under the Plan for the year ended December 31, 2012, is presented below:

	Shares	Option Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2012	337,106	$	10.11
Granted	59,325	1.70
Exercised	—	—
Forfeited	27,764	9.43
Expired	114,987	12.79
Balance at December 31, 2012	253,680	$	7.00	2.82	$	—
Exercisable at December 31, 2012	141,549	$	10.71	2.14	$	—

The weighted average exercise price of all exercisable options at December 31, 2012 is $10.71. There were 328,520 shares reserved for future issuance under the Company’s stock option plan at December 31, 2012.

A summary of the status of the Company's non-vested options as of December 31, 2012 and changes during the year then ended is presented below:

	Shares	Weighted average grant date fair value
Non-vested - December 31, 2011	110,531	$	1.59
Granted	58,700	0.87
Vested	625	1.34
Forfeited/Expired	56,475	1.85
Non-vested - December 31, 2012	112,131	$	1.09

As of December 31, 2012 and 2011, there was $61,493 and $44,583 of unrecognized compensation cost related to non-vested share-based compensation arrangements, respectively.

Additional information concerning the Company’s stock options at December 31, 2012 is as follows:

Exercise Price	Number Outstanding	Contractual Life (Years)	Number Exercisable
1.70 - 2.99	58,700	4.16	—
3.00 - 5.49	53,400	3.16	—
5.50 - 8.63	52,550	2.15	52,523
8.64 - 10.91	49,600	1.15	49,599
10.92 - 40.78	27,125	2.59	27,122
40.79	12,305	5.07	12,305
	253,680	2.82	141,549

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 2012 and 2011:

	2012		2011
Dividend yield	—	%	—	%
Expected volatility	60.40	%	48.80	%
Risk free interest rate	.84	%	2.13	%
Expected life	5 years		5 years

The weighted average fair value of options granted during 2012 and 2011, was $0.87 and $1.34, respectively.

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BRANCH SALE

12 Months Ended

Dec. 31, 2012

Subsequent Events [Abstract]

BRANCH SALE

BRANCH SALE

On September 26, 2012, the Bank, and First Bank entered into a Purchase and Assumption Agreement, pursuant to which First Bank will purchase certain assets and assume certain liabilities of two branch offices of the Bank located in Rockingham, North Carolina and Southern Pines, North Carolina. The purchase price of the assets was computed as the sum of (i) a premium of 1% on the deposits at the branches, (ii) the aggregate value of the acquired loans, (iii) the aggregate net book value of the real property and related tangible personal property at the Rockingham branch, and (iv) the aggregate face value of the cash on hand at the Rockingham branch. The value at December 31, 2012 of the deposits was approximately $62.1 million, loans to be acquired was approximately $18.7 million, and are classified as held for sale, and property and equipment was approximately $1.9 million. The actual amount of deposits at the time of closing on March 22, 2013 was $57.3 million, loans acquired $16.4 million and property and equipment of $1.9 million. The Bank and First Bank closed the branch sale on March 22, 2013.

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INVESTMENT SECURITIES (Unrealized Losses and Fair Values of Investment Securities) (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Temporarily Impaired Securities [Member]
Securities available for sale:
Less Than 12 Months, Fair value	$ 7,130,000	$ 12,270,000
Less Than 12 Months, Unrealized losses	19,000	66,000
12 Months or More, Fair value	2,000	481,000
12 Months or More, Unrealized losses	1,000	19,000
Total, Fair value	7,132,000	12,751,000
Total, Unrealized losses	20,000	85,000
Securities Held to Maturity:
Less Than 12 Months, Fair value		8,043,000
Less Than 12 Months, Unrealized losses		37,000
12 Months or More, Fair value		0
12 Months or More, Unrealized losses		0
Total, Fair value		8,043,000
Total, Unrealized losses		37,000
Temporarily Impaired Securities [Member] | Taxable Municipal Securities [Member]
Securities available for sale:
Less Than 12 Months, Fair value	0	0
Less Than 12 Months, Unrealized losses	0	0
12 Months or More, Fair value	0	0
12 Months or More, Unrealized losses	0	0
Total, Fair value	0	0
Total, Unrealized losses	0	0
Temporarily Impaired Securities [Member] | Mortgage-backed Securities GNMA [Member]
Securities available for sale:
Less Than 12 Months, Fair value	5,132,000	12,100,000
Less Than 12 Months, Unrealized losses	17,000	51,000
12 Months or More, Fair value	0	0
12 Months or More, Unrealized losses	0	0
Total, Fair value	5,132,000	12,100,000
Total, Unrealized losses	17,000	51,000
Securities Held to Maturity:
Less Than 12 Months, Fair value		8,043,000
Less Than 12 Months, Unrealized losses		37,000
12 Months or More, Fair value		0
12 Months or More, Unrealized losses		0
Total, Fair value		8,043,000
Total, Unrealized losses		37,000
Temporarily Impaired Securities [Member] | Mortgage-backed Securities FNMA [Member]
Securities available for sale:
Less Than 12 Months, Fair value	1,998,000
Less Than 12 Months, Unrealized losses	2,000
12 Months or More, Fair value
12 Months or More, Unrealized losses
Total, Fair value	1,998,000
Total, Unrealized losses	2,000
Temporarily Impaired Securities [Member] | Trust Preferred Securities [Member]
Securities available for sale:
Less Than 12 Months, Fair value	0	0
Less Than 12 Months, Unrealized losses	0	0
12 Months or More, Fair value	0	481,000
12 Months or More, Unrealized losses	0	19,000
Total, Fair value	0	481,000
Total, Unrealized losses	0	19,000
Temporarily Impaired Securities [Member] | Equity Securities [Member]
Securities available for sale:
Less Than 12 Months, Fair value	0	170,000
Less Than 12 Months, Unrealized losses	0	15,000
12 Months or More, Fair value	2,000	0
12 Months or More, Unrealized losses	1,000	0
Total, Fair value	2,000	170,000
Total, Unrealized losses	1,000	15,000
Other than Temporarily Impaired Securities [Member]
Securities available for sale:
Less Than 12 Months, Fair value	0	0
Less Than 12 Months, Unrealized losses	0	0
12 Months or More, Fair value	1,006,000	604,000
12 Months or More, Unrealized losses	169,000	71,000
Total, Fair value	1,006,000	604,000
Total, Unrealized losses	169,000	71,000
Other than Temporarily Impaired Securities [Member] | Trust Preferred Securities [Member]
Securities available for sale:
Less Than 12 Months, Fair value	0	0
Less Than 12 Months, Unrealized losses	0	0
12 Months or More, Fair value	1,006,000	604,000
12 Months or More, Unrealized losses	169,000	71,000
Total, Fair value	1,006,000	604,000
Total, Unrealized losses	$ 169,000	$ 71,000

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PARENT COMPANY FINANCIAL INFORMATION (Tables)

12 Months Ended

Dec. 31, 2012

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

Schedule of Condensed Balance Sheets

Condensed financial information of Four Oaks Fincorp, Inc. at December 31, 2012 and 2011, and for the years ended December 31, 2012 and 2011 is presented below (amounts in thousands):

	2012		2011
Condensed Balance Sheets
Assets:
Cash and cash equivalents	$	784	$	1,427
Equity investment in subsidiaries	45,025		51,120
Investment securities available for sale	1,186		1,241
Other assets	587		593
Total assets	$	47,582	$	54,381
Liabilities and Shareholders’ Equity:
Other liabilities	$	534	$	317
Subordinated debentures	12,372		12,372
Subordinated promissory notes	12,000		12,000
Shareholders' equity	22,676		29,692
Total liabilities and shareholders’ equity	$	47,582	$	54,381

Schedule of Condensed Statements of Operations

	For the Years Ended December 31,
	2012			2011
Condensed Statements of Operations
Equity in undistributed loss of subsidiaries	$	(5,848	)	$	(7,556	)
Interest income	113			147
Gain on sale of investments, available for sale	—			109
Impairment loss on investment securities available for sale	—			(585		)
Other income	154			140
Other expenses	(1,388		)	(1,345		)
Net loss	$	(6,969	)	$	(9,090	)

Schedule of Condensed Statements of Cash Flows

	2012			2011
Condensed Statements of Cash Flows
Operating activities:
Net income (loss)	$	(6,969	)	$	(9,090	)
Equity in undistributed loss of subsidiaries	5,848			7,556
Stock based compensation	62			95
Impairment loss on investment securities available for sale	—			585
Gain on sale of investments	—			(109		)
Decrease in other assets	5			118
Increase in other liabilities	217			305
Net cash used in operating activities	(837		)	(540		)
Investing activities:
Investment in subsidiaries	(40		)	(24		)
Net cash used in investing activities	(40		)	(24		)
Financing activities:
Proceeds from issuance of common stock	234			259
Net cash provided by financing activities	234			259
Net decrease in cash and cash equivalents	(643		)	(305		)
Cash and cash equivalents, beginning of year	1,427			1,732
Cash and cash equivalents, end of year	$	784		$	1,427

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Net loss	$ (6,969)	$ (9,090)
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities	1,490	5,225
Tax effect	(567)	(1,977)
Reclassification of gains recognized in net loss	(1,981)	(958)
Tax effect	764	369
Reclassification of impairment loss recognized in net loss	0	585
Tax effect	0	(226)
Portion of other-than-temporary impairment loss recognized in other comprehensive income	(79)	(71)
Tax effect	30	27
Other comprehensive income (loss) net of tax amount	(343)	2,974
Comprehensive loss	$ (7,312)	$ (6,116)

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STOCK OPTION PLAN (Options by Exercise Price) (Details) (USD $)	12 Months Ended
	Dec. 31, 2012
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	253,680,000
Contractual Life (Years)	2 years 9 months 26 days
Number Exercisable (in shares)	141,549,000
1.70 - 2.99 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	58,700,000
Contractual Life (Years)	4 years 1 month 28 days
Number Exercisable (in shares)	0
3.00 - 5.49 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	53,400,000
Contractual Life (Years)	3 years 1 month 28 days
Number Exercisable (in shares)	0
5.50 - 8.63 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	52,550,000
Contractual Life (Years)	2 years 1 month 24 days
Number Exercisable (in shares)	52,523,000
8.64 - 10.91 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	49,600,000
Contractual Life (Years)	1 year 1 month 24 days
Number Exercisable (in shares)	49,599,000
10.92 - 40.78 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	27,125,000
Contractual Life (Years)	2 years 7 months 2 days
Number Exercisable (in shares)	27,122,000
40.79 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Number Outstanding (in shares)	12,305,000
Contractual Life (Years)	5 years 0 months 26 days
Number Exercisable (in shares)	12,305,000
Minimum [Member] | 1.70 - 2.99 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	1.70
Minimum [Member] | 3.00 - 5.49 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	3,000
Minimum [Member] | 5.50 - 8.63 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	5,500.0
Minimum [Member] | 8.64 - 10.91 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	8,640.00
Minimum [Member] | 10.92 - 40.78 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	10,920.00
Minimum [Member] | 40.79 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	40,790.00
Maximum [Member] | 1.70 - 2.99 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	2.99
Maximum [Member] | 3.00 - 5.49 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	5,490.00
Maximum [Member] | 5.50 - 8.63 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	8,630.00
Maximum [Member] | 8.64 - 10.91 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	10,910.00
Maximum [Member] | 10.92 - 40.78 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	40,780.00
Maximum [Member] | 40.79 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	40,790.00

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LOANS AND ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2012

Loans and Leases Receivable Disclosure [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS AND ALLOWANCE FOR LOAN LOSSES

The classification of loan segments as of December 31, 2012 and 2011 are summarized as follows (amounts in thousands):

	2012			2011
Commercial loans	$	29,563		$	40,345
Commercial construction and land development	90,899			113,762
Commercial real estate	181,194			214,740
Residential construction	20,445			26,707
Residential mortgage	165,009			192,972
Consumer	9,664			11,451
Other	1,278			2,330
	498,052			602,307
Less:
Net deferred loan fees	(123		)	(75		)
Allowance for loan losses	(16,549		)	(21,141		)
Total Loans	$	481,380		$	581,091
Loans held for sale	$	19,297		$	—

Nonperforming assets

Nonperforming assets at December 31, 2012 and 2011 consist of the following (amounts in thousands):

	2012		2011
Loans past due ninety days or more and still accruing	$	32	$	60
Nonaccrual loans	35,970		60,141
Foreclosed assets	15,136		12,159
Total	$	51,138	$	72,360

Purchased Loans

The population of purchased impaired loans at December 31, 2012 and 2011 includes one loan with a fair value of $134,000 and $186,000 for which no further credit deterioration was noted.  Therefore no additional allowance for loan loss reserves has been established because the originally determined credit discounts for such purchased impaired loans was deemed sufficient.  The amount of, and changes within, the accretable difference was deemed immaterial for the years ended December 31, 2011 and 2012.

Related Party Loans

The Company 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 as of December 31, 2012 and 2011. The following is a reconciliation of loans directly outstanding to executive officers, directors, and their affiliates at (amounts in thousands):

	2012			2011
Beginning balance	$	6,191		7,048
New loans	—			—
New loans - new Board of Director members	2,773			—
Principal repayments	(826		)	(857	)
Ending balance	$	8,138		6,191

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, 2012 the Company had pre-approved but unused lines of credit totaling $1.7 million to executive officers, directors and their affiliates.

Credit Risk

We use an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan. The credit grades have been defined as follows:

• Grade 1 - Lowest Risk

Loans secured by properly margined liquid collateral such as certificates of deposit, government securities, cash value of life insurance, stock actively traded on one of the major stock exchanges, etc. Repayment is definite and being handled as agreed. Maintains a strong, liquid financial condition as evidenced by a current financial statement in the Bank. Repayment agreement is definite, realistic, and being handled as agreed.

• Grade 2 - Satisfactory Quality

Loans secured by properly margined collateral with a definite repayment agreement in effect. Unsecured loans with repayment agreements that are definite, realistic, and are being handled as agreed. Repayment source well defined by proven income, cash flow, trade asset turn, etc. Multiple repayment sources exist. Individual and businesses will typically have a sound financial condition.

• Grade 3 – Satisfactory - Merits Attention

Loans being repaid as agreed that require close following because of complexity, information or underwriting deficiencies, emerging signs of weakness or non-standard terms. Secured loans repaying as agreed where collateral value or marketability are questionable but do not materially affect risk. Repayment sources well defined by proven income, cash flow, trade asset turn, etc., but may be weaker than Grade 2. Loans to weak individuals or business borrowers with a strong endorser or guarantor. Fully collectible, unsecured loans or loans secured by other than approved collateral for which an acceptable repayment agreement has not been established.

• Grade 4 - Low Satisfactory

New Loans - Applicants with excessive minor exceptions as defined by the Risk Grade forms. Applicants with major credit history or Beacon score issues as defined by the Risk Grade forms. Applicants with two or more major exceptions with mitigating factors identified on the Fair Lending form.

Existing Loans - Borrower’s ability to repay from primary (intended) repayment sources is not clearly sufficient to ensure performance as contracted; but the loan is performing as contracted, and secondary repayment sources are clearly sufficient to protect against the risk of principal or income loss; and it is reasonable to expect that the circumstances causing repayment capacity to be uncertain will be resolved within six months. Access to alternative financing sources exists but may be limited to institutions specializing in higher risk financing.

• Grade 5 - Special Mention

Special Mention risk loans include the following characteristics: Loans currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Potential weaknesses exist, generally the result of deviations from prudent lending practices, such as over advances on collateral or unproven primary repayment sources. Loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do increase the level of risk may also warrant this rating. Such trends may be in the borrower’s options, credit quality or financial strength. New loans with exceptions where no mitigating factors are justified, however, loans are not typically made if the grade is Special Mention at inception without management approval.

• Grades 6-8 - Substandard (Grade 6), Doubtful (Grade 7) and Loss (Grade 8)

A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Loans are not typically made if graded Substandard or worse at inception without management's approval.

The following table illustrates credit risk profile by creditworthiness class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	Commercial and Industrial		Commercial Construction and Land Development		Commercial Real Estate- Other		Residential - Construction		Residential -  Mortgage		Consumer - Other		Other - Loans		Total
1 - Lowest Risk	$	2,446	$	—	$	—	—		51		1,372		13		3,882
2 - Satisfactory Quality	441		595		2,429		109		10,595		288		—		14,457
3 - Satisfactory Quality - Merits Attention	10,222		22,278		51,384		1,337		58,140		4,526		1,091		148,978
4 - Low Satisfactory	13,558		35,502		104,652		17,008		68,148		1,019		125		240,012
5 - Special mention	323		9,064		6,228		356		9,720		91		49		25,831
6 - Substandard or worse	1,387		23,460		16,501		1,635		18,355		103		—		61,441
	$	28,377	$	90,899	$	181,194	$	20,445	$	165,009	$	7,399	$	1,278	$	494,601

	December 31, 2011
	Commercial and Industrial	Commercial Construction and Land Development	Commercial Real Estate- Other	Residential - Construction	Residential - Mortgage	Consumer - Other	Other - Loans	Total
1 - Lowest Risk	2,421	—	—	—	136	1,952	40	4,549
2 - Satisfactory Quality	483	974	2,942	497	12,720	288	6	17,910
3 - Satisfactory Quality - Merits Attention	10,696	26,907	63,887	1,971	68,172	5,183	298	177,114
4 - Low Satisfactory	20,070	36,852	98,007	20,756	68,668	1,515	1,984	247,852
5 - Special mention	2,593	8,673	22,311	1,849	15,226	165	2	50,819
6 - Substandard or worse	3,066	40,356	27,593	1,634	28,050	256	—	100,955
	39,329	113,762	214,740	26,707	192,972	9,359	2,330	599,199

Total loans within risk grade categories 5 (Special Mention) and 6 (Substandard) were $87.3 million at December 31, 2012, compared to $151.8 million at December 31, 2011. This represents a 42.5% reduction in these specific categories.

The following table illustrates the credit card portfolio exposure as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012				December 31, 2011
	Consumer - Credit Card		Business- Credit Card		Consumer - Credit Card		Business- Credit Card
Performing	$	2,233	$	1,186	$	2,082	$	991
Non Performing	32		—		10		25
	$	2,265	$	1,186	$	2,092	$	1,016

Nonaccruals

The following table represents the loans on nonaccrual status as of December 31, 2012 and 2011 by loan class (amounts in thousands):

	2012		2011
Commercial & industrial	$	664	$	779
Commercial construction and land development	15,941		29,538
Commercial real estate	9,091		14,830
Residential construction	833		1,469
Residential mortgage	9,408		13,466
Consumer	33		59
Other	—		—
Total	$	35,970	$	60,141

The following table illustrates the age analysis of past due loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	30-89 Days Past Due		Nonaccruals and Greater than 90 Days Past Due (1)		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Commercial & industrial	$	119	$	664	$	783	$	27,594	$	28,377	$	—
Commercial construction and land development	819		15,941		16,760		74,139		90,899		—
Commercial real estate	499		9,091		9,590		171,604		181,194		—
Residential construction	—		833		833		19,612		20,445		—
Residential mortgage	1,076		9,408		10,484		154,525		165,009		—
Consumer	34		33		67		7,332		7,399		—
Consumer credit cards	67		32		99		2,166		2,265		32
Business credit cards	12		—		12		1,174		1,186		—
Other loans	—		—		—		1,278		1,278		—
Total	$	2,626	$	36,002	$	38,628	$	459,424	$	498,052	$	32

(1) Nonaccruals and Greater than 90 Days Past Due is comprised of $32,000 of loans that were past due more than 90 days and still accruing interest, as well as $36.0 million of loans in nonaccrual status. 

	December 31, 2011
	30-89 Days Past Due	Nonaccruals and Greater than 90 Days Past Due (1)	Total Past Due	Current	Total Loans	Recorded Investment > 90 Days and Accruing
Commercial & industrial	129	779	908	38,421	39,329	—
Commercial construction and Land Development	1,221	29,538	30,759	83,003	113,762	—
Commercial real estate	1,647	14,830	16,477	198,263	214,740	—
Residential construction	180	1,469	1,649	25,058	26,707	—
Residential mortgage	3,479	13,466	16,945	176,027	192,972	—
Consumer	103	59	162	9,197	9,359	—
Consumer credit cards	62	35	97	1,995	2,092	35
Business credit cards	15	25	40	976	1,016	25
Other loans	—	—	—	2,330	2,330	—
Total	6,836	60,201	67,037	535,270	602,307	60

(1) Nonaccruals and Greater than 90 Days Past Due is comprised of $60,000 of loans that were past due more than 90 days and still accruing interest, as well as $60.1 million of loans in nonaccrual status. 

Impaired Loans

Impaired loans are those loans for which the Bank does not expect full repayment of all principal and accrued interest due either under the terms of the original loan agreement or within reasonably modified contractual terms. If the loan has been restructured such as in the case of a TDR, the loan continues to be considered impaired if all principal and interest is not to be repaid as specified by the original terms of the loan agreement. Whereas loans which are classified as Substandard (Risk Grade 6) are not necessarily impaired, all loans which are classified as Doubtful (Risk Grade 7) are considered impaired.

Once a loan has been determined to meet the definition of impairment, the amount of that impairment is measured through one of a number of available methods; a calculation of the net present value of the expected future cash flows of the loan discounted by the effective interest rate of the loan, through the observable market value of the loan or should the loan be collateral dependent, upon the fair market value of the underlying assets securing the loan. If a deficit is calculated, the amount of the measured impairment results in the establishment of a specific valuation allowance or reserve or charge-off, and is incorporated into the Bank's allowance for loan and lease losses.

When a loan has been designated as impaired and full collection of principal and interest under the contractual terms is not assured, the impaired loan will be placed into nonaccrual status and interest income will not be recognized. Payments received against such loans are initially applied fully to the principal balance of the note until the principal balance is satisfied. Subsequent payments are thereupon applied to the accrued interest balance which only then results in the recognition of interest income. Payments received against accruing impaired loans are applied in the same manner as that of accruing loans which have not been deemed impaired. The recorded investment in impaired notes does not include deferred fees or accrued interest and management deems this amount to be immaterial.

The following table illustrates the impaired loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	498	$	686	$	—	$	484	$	1
Commercial construction and land development	11,266		15,889		—		13,008		22
Commercial real estate other	12,865		14,263		—		12,328		64
Residential construction	340		340		—		162		—
Residential mortgage	10,106		11,542		—		9,937		132
Consumer	25		42		—		26		—
Subtotal:	$	35,100	$	42,762	$	—	$	35,945	$	219
With an allowance recorded:
Commercial and industrial	$	939	$	956	$	636	$	528	$	11
Commercial construction and land development	9,619		13,033		1,693		10,003		36
Commercial real estate other	4,877		6,852		640		5,623		46
Residential construction	833		1,134		86		884		—
Residential mortgage	7,467		8,081		2,334		7,493		44
Consumer	25		34		—		25		—
Subtotal:	$	23,760	$	30,090	$	5,389	$	24,556	$	137
Totals:
Commercial	40,064		51,679		2,969		41,974		180
Consumer	50		76		—		51		—
Residential	18,746		21,097		2,420		18,476		176
Grand Total	$	58,860	$	72,852	$	5,389	$	60,501	$	356

At December 31, 2012, the recorded investment in loans considered impaired totaled $58.9 million. Of the total investment in loans considered impaired, $23.8 million were found to show specific impairment for which $5.4 million in valuation allowance was recorded; the remaining $35.1 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance. For the year ended December 31, 2012, the average recorded investment in impaired loans was approximately $60.5 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $356,000.

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	992	$	1,459	$	—	$	1,262	$	11
Commercial construction and land development	23,049		28,958		—		22,315		167
Commercial real estate other	18,325		20,601		—		14,128		157
Residential construction	98		98		—		98		—
Residential mortgage	16,152		18,528		—		12,681		167
Consumer	77		132		—		90		—
Subtotal:	$	58,693	$	69,776	$	—	$	50,574	$	502
With an allowance recorded:
Commercial and industrial	$	1,427	$	1,597	$	1,237	$	967	$	18
Commercial construction and land development	14,873		20,999		2,942		18,136		45
Commercial real estate other	7,750		9,289		1,448		6,805		72
Residential construction	1,144		1,363		114		1,363		—
Residential mortgage	9,175		10,366		1,617		7,493		76
Consumer	9		16		1		4		—
Subtotal:	$	34,378	$	43,630	$	7,359	$	34,768	$	211
Totals:
Commercial	66,416		82,903		5,627		63,613		470
Consumer	86		148		1		94		—
Residential	26,569		30,355		1,731		21,635		243
Grand Total:	$	93,071	$	113,406	$	7,359	$	85,342	$	713

At December 31, 2011, the recorded investment in loans considered impaired totaled $93.1 million. Of the total investment in loans considered impaired, $34.4 million were found to show specific impairment for which $7.4 million in valuation allowance was recorded; no valuation allowance for the other impaired loans was considered necessary. For the year ended December 31, 2011, the average recorded investment in impaired loans was approximately $85.3 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $713,000.

Troubled Debt Restructurings

Loans are classified as a TDR when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.

Loans in the process of renewal or modification are reviewed by the Bank to determine if the risk grade assigned is accurate based on updated information. All loans identified by the Bank's internal loan grading system to pose a heightened level of risk at or prior to renewal or modification are additionally reviewed to determine if the loan should be classified as a TDR. The Bank's knowledge of the borrower's situation and any updated financial information obtained is first used to determine whether the borrower is experiencing financial difficulty. Once this is determined, the Bank reviews the modification terms to determine whether a concession has been granted. If the Bank determines that both conditions have been met, the loan will be classified as a TDR. If the Bank determines that both conditions have not been met, the loan is not classified as a TDR, but would typically then be monitored for any additional deterioration. Documentation to support this determination of TDR classification is maintained within the credit file.

For the year ended December 31, 2012, the Bank modified 15 loans totaling $1.7 million which were deemed TDRs. The following table presents a breakdown of these TDRs by loan class and the type of concession made to the borrower (amounts in thousands, except number of loans):

		For the Year Ended
		December 31, 2012
		Number of loans	Pre-Classification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
	Residential mortgage	1	$	395	$	395
	Subtotal	1	$	395	$	395
Extended payment terms:
	Commercial real estate	4	$	513	$	513
	Residential mortgage	2	66		66
	Consumer	1	19		19
	Subtotal	7	$	598	$	598
Other:
	Commercial real estate	5	$	695	$	695
	Consumer	2	49		49
	Subtotal	7	$	744	$	744
	Total	15	$	1,737	$	1,737

		For the Year Ended
		December 31, 2011
		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate:
	Commercial real estate	12	$	2,920	$	2,870
	Residential mortgage	2	310		310
	Subtotal	14	$	3,230	$	3,180
Extended payment terms:
	Commercial & industrial	5	$	485	$	485
	Commercial real estate	14	5,727		5,727
	Residential construction	1	165		165
	Residential mortgage	11	1,526		1,531
	Subtotal	31	$	7,903	$	7,908
Other:
	Commercial & industrial	2	$	146	$	146
	Commercial real estate	2	290		290
	Consumer	2	235		235
	Residential mortgage	2	735		735
	Subtotal	8	$	1,406	$	1,406
	Total	53	$	12,539	$	12,494

The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default for the year ended December 31, 2012andDecember 31, 2011 ,(amounts in thousands, except number of loans):

		For the Year Ended
		December 31, 2012
		Number of loans	Recorded Investment
Other
	Commercial real estate	1	$	28
	Consumer	2	49
		3	$	77
	Total	3	$	77

		Year Ended
		December 31, 2011
		Number of loans	Recorded Investment
Below market interest rate
	Commercial real estate	1	$	19
	Residential mortgage	2	271
	Subtotal	3	$	290
Extended payment terms
	Commercial & industrial	3	$	52
	Commercial real estate	8	4,033
	Residential mortgage	5	528
	Subtotal	16	$	4,613
Other
	Commercial & industrial	4	$	—
	Subtotal	4	$	—
	Total	23	$	4,903

The table below details the progression of troubled debt restructurings which have been entered into during the previous 12 months(amounts in thousands, except number of loans):

	December 31, 2012
	Paid in full			Paying as restructured			Converted to non-accrual			Foreclosure/Default
	Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment
Below market interest rate	—	—		1	$	395	—	$	—	—	$	—
Extended payment terms	—	—		7	598		—	—		—	—
Forgiveness of principal	—	—		—	—		—	—		—	—
Other	—	—		4	667		1	28		2	49
Total	—	$	—	12	$	1,660	1	$	28	2	$	49

Allowance for Loan Losses and Recorded Investment in Loans

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on a monthly basis during which time those loans that are identified as impaired are evaluated individually.

To provide greater transparency on non-performing assets, additional disclosures required by ASU 2010-20 have been included below.  Allowance for loan losses is reported by portfolio segment and further detail of credit quality indicators are provided by class of loans.

Following is an analysis of the allowance for loan losses by loan segment for the years ended December 31, 2012 and 2011(amounts in thousands):

December 31, 2012
				Real Estate
	Commercial and Industrial			Commercial construction and land development			Commercial real estate			Residential construction			Residential mortgage			Consumer			Other		Totals
Balance, beginning of period	$	2,730		$	8,799		$	3,800		$	740		$	4,630		$	413		$	29	$	21,141
Provision for loan losses	(1,464		)	5,205			2,486			(214		)	1,184			143			41		7,381
Loans charged-off	(703		)	(7,929		)	(3,691		)	(103		)	(1,801		)	(516		)	—		(14,743		)
Recoveries	622			1,176			366			—			458			148			—		2,770
Net (charge-offs) recoveries	(81		)	(6,753		)	(3,325		)	(103		)	(1,343		)	(368		)	—		(11,973		)
Balance, end of period	$	1,185		$	7,251		$	2,961		$	423		$	4,471		$	188		$	70	$	16,549
Ending Balance: individually    evaluated for impairment	$	636		$	1,693		$	640		$	86		$	2,334		$	—		$	—	$	5,389
Ending balance: collectively    evaluated for impairment	549			5,558			2,321			337			2,137			188			70		11,160
Financing Receivables:
Ending Balance	$	29,563		$	90,899		$	181,194		$	20,445		$	165,009		$	9,664		$	1,278	$	498,052
Ending Balance: individually    evaluated for impairment	$	1,437		$	20,885		$	17,742		$	1,173		$	17,573		$	50		$	—	$	58,860
Ending balance: collectively    evaluated for impairment	$	28,126		$	70,014		$	163,452		$	19,272		$	147,436		$	9,614		$	1,278	$	439,192

December 31, 2011
				Real Estate
	Commercial and Industrial			Commercial construction and land development			Commercial real estate			Residential construction			Residential mortgage			Consumer			Other			Totals
Balance, beginning of period	$	2,049		$	8,375		$	4,038		$	2,848		$	4,291		$	415		$	84		$	22,100
Provision for loan losses	2,443			7,755			1,079			(1,811		)	1,694			335			(55		)	11,440
Loans charged-off	(2,181		)	(7,735		)	(1,802		)	(588		)	(2,126		)	(477		)	—			(14,909		)
Recoveries	419			404			485			291			771			140			—			2,510
Net (charge-offs) recoveries	(1,762		)	(7,331		)	(1,317		)	(297		)	(1,355		)	(337		)	—			(12,399		)
Balance, end of period	$	2,730		$	8,799		$	3,800		$	740		$	4,630		$	413		$	29		$	21,141
Ending Balance: individually    evaluated for impairment	$	1,237		$	2,942		$	1,448		$	114		$	1,618		$	—		$	—		$	7,359
Ending balance: collectively    evaluated for impairment	1,493			5,857			2,352			626			3,012			413			29			13,782
Financing Receivables:
Ending Balance	$	40,345		$	113,762		$	214,740		$	26,707		$	192,972		$	11,451		$	2,330		$	602,307
Ending Balance: individually    evaluated for impairment	$	2,419		$	37,922		$	26,075		$	1,242		$	25,327		$	86		$	—		$	93,071
Ending balance: collectively    evaluated for impairment	$	37,926		$	75,840		$	188,665		$	25,465		$	167,645		$	11,365		$	2,330		$	509,236

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Age Analysis of Past Due Loans) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012		Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	$ 2,626		$ 6,836
Nonaccruals and greater than 90 days past due	36,002	[1]	60,201	[2]
Total past due	38,628		67,037
Current	459,424		535,270
Total loans	498,052		602,307
Recorded investment greater than 90 days and accruing	32		60
Nonaccrual loans	35,970		60,141
Commercial and Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	119		129
Nonaccruals and greater than 90 days past due	664	[1]	779	[2]
Total past due	783		908
Current	27,594		38,421
Total loans	28,377		39,329
Recorded investment greater than 90 days and accruing	0		0
Commercial Construction and Land Development [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	819		1,221
Nonaccruals and greater than 90 days past due	15,941	[1]	29,538	[2]
Total past due	16,760		30,759
Current	74,139		83,003
Total loans	90,899		113,762
Recorded investment greater than 90 days and accruing	0		0
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	499		1,647
Nonaccruals and greater than 90 days past due	9,091	[1]	14,830	[2]
Total past due	9,590		16,477
Current	171,604		198,263
Total loans	181,194		214,740
Recorded investment greater than 90 days and accruing	0		0
Residential Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	0		180
Nonaccruals and greater than 90 days past due	833	[1]	1,469	[2]
Total past due	833		1,649
Current	19,612		25,058
Total loans	20,445		26,707
Recorded investment greater than 90 days and accruing	0		0
Residential Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	1,076		3,479
Nonaccruals and greater than 90 days past due	9,408	[1]	13,466	[2]
Total past due	10,484		16,945
Current	154,525		176,027
Total loans	165,009		192,972
Recorded investment greater than 90 days and accruing	0		0
Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	34		103
Nonaccruals and greater than 90 days past due	33	[1]	59	[2]
Total past due	67		162
Current	7,332		9,197
Total loans	7,399		9,359
Recorded investment greater than 90 days and accruing	0		0
Consumer Credit Cards [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	67		62
Nonaccruals and greater than 90 days past due	32	[1]	35	[2]
Total past due	99		97
Current	2,166		1,995
Total loans	2,265		2,092
Recorded investment greater than 90 days and accruing	32		35
Business Credit Cards [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	12		15
Nonaccruals and greater than 90 days past due	0	[1]	25	[2]
Total past due	12		40
Current	1,174		976
Total loans	1,186		1,016
Recorded investment greater than 90 days and accruing	0		25
Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-89 Days past due	0		0
Nonaccruals and greater than 90 days past due	0	[1]	0	[2]
Total past due	0		0
Current	1,278		2,330
Total loans	1,278		2,330
Recorded investment greater than 90 days and accruing	$ 0		$ 0

[1] Nonaccruals and Greater than 90 Days Past Due is comprised of $32,000 of loans that were past due more than 90 days and still accruing interest, as well as $36.0 million of loans in nonaccrual status.

[2] Nonaccruals and Greater than 90 Days Past Due is comprised of $60,000 of loans that were past due more than 90 days and still accruing interest, as well as $60.1 million of loans in nonaccrual status.

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FAIR VALUE MEASUREMENT (Level 3 Nonrecurring and Recurring Fair Value Measurement) (Details) (USD $)				12 Months Ended							12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012 Nonrecurring Basis [Member]	Dec. 31, 2012 Nonrecurring Basis [Member] Minimum [Member]	Dec. 31, 2012 Nonrecurring Basis [Member] Maximum [Member]	Dec. 31, 2012 Significant Unobservable Inputs (Level 3) [Member]	Dec. 31, 2012 Significant Unobservable Inputs (Level 3) [Member] Recurring Basis [Member]	Dec. 31, 2011 Significant Unobservable Inputs (Level 3) [Member] Recurring Basis [Member]	Dec. 31, 2012 Significant Unobservable Inputs (Level 3) [Member] Trust Preferred Securities [Member] Recurring Basis [Member]	Dec. 31, 2011 Significant Unobservable Inputs (Level 3) [Member] Trust Preferred Securities [Member] Recurring Basis [Member]	Dec. 31, 2012 Equity Securities [Member] Recurring Basis [Member]	Dec. 31, 2012 Equity Securities [Member] Recurring Basis [Member] Minimum [Member]	Dec. 31, 2012 Equity Securities [Member] Recurring Basis [Member] Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Impaired loans	$ 58,860,000	$ 93,071,000	$ 18,372,000
Foreclosed assets	15,136,000	12,159,000	15,136,000
Available for sale securities	$ 73,722,000	$ 92,790,000				$ 1,006,000	$ 1,006,000	$ 1,085,000	$ 1,006,000	$ 1,085,000
Collateral discounts				15.00%	70.00%
Discounted appraisals				10.00%	30.00%
Probability of default												10.00%	20.00%
Loss given default											100.00%

XML

BORROWINGS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
FHLB Advances	$ 112,000,000	$ 112,000,000
Additional Disclosure [Abstract]
FHLB, available lines of credit	173,100,000
FHLB borrowings, weighted average interest rate	3.58%	3.58%
Line of credit, various financial institutions	16,000,000
Federal fund purchases outstanding	0
4.46% Advance Maturing May 25, 2016 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.46%
FHLB Advances	5,000,000	5,000,000
4.11% Advance Maturing November 17, 2016 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.11%
FHLB Advances	5,000,000	5,000,000
4.09% Advance Maturing November 30, 2016 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.09%
FHLB Advances	7,000,000	7,000,000
4.35% Advance Maturing June 5, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.35%
FHLB Advances	10,000,000	10,000,000
4.36% Advance Maturing July 3, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.36%
FHLB Advances	13,000,000	13,000,000
4.34% Advance Maturing July 24, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.34%
FHLB Advances	5,000,000	5,000,000
4.35% Advance Maturing July 31, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.35%
FHLB Advances	5,000,000	5,000,000
4.08% Advance Maturing August 14, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	4.08%
FHLB Advances	5,000,000	5,000,000
3.94% Advance Maturing August 14, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	3.94%
FHLB Advances	5,000,000	5,000,000
3.95% Advance Maturing October 4, 2017 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	3.95%
FHLB Advances	7,000,000	7,000,000
2.06% Advance Maturing February 5, 2018 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	2.06%
FHLB Advances	10,000,000	10,000,000
2.25% Advance Maturing June 5, 2018 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	2.25%
FHLB Advances	5,000,000	5,000,000
2.55% Advance Maturing June 5, 2018 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	2.55%
FHLB Advances	5,000,000	5,000,000
3.03% Advance Maturing June 5, 2018 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	3.03%
FHLB Advances	5,000,000	5,000,000
3.14% Advance Maturing September 10, 2018 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	3.14%
FHLB Advances	10,000,000	10,000,000
2.71% Advance Maturing September 18, 2018 [Member]
Federal Home Loan Bank, Advances, Branch of FHLB Bank [Line Items]
Interest Rate	2.71%
FHLB Advances	$ 10,000,000	$ 10,000,000

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis of Presentation

The consolidated financial statements include the accounts and transactions of the Company, a bank holding company incorporated under the laws of the State of North Carolina, and its wholly owned subsidiaries, the Bank, and Four Oaks Mortgage Services, L.L.C., which became inactive on September 30, 2012. All significant intercompany transactions have been eliminated. In March 2006, the Company formed Four Oaks Statutory Trust I, a wholly owned Delaware statutory business trust (the “Trust”), for the sole purpose of issuing Trust Preferred Securities (as defined in Note H - Trust Preferred Securities).  The Trust is not included in the consolidated financial statements of the Company.

Use of Estimates

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, fair value of impaired loans, fair value of foreclosed assets, other than temporary impairment of investment securities available for sale and held to maturity, and the valuation allowance against deferred tax assets.

Going Concern Considerations

Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. During 2012, the Company experienced significant losses, rapidly escalating impaired loans and declining capital levels. Notwithstanding these negative factors, management believes that its current operations and its cash availability are sufficient for the Company to discharge its liabilities and meet its commitments in the normal course of business. While management does not anticipate further significant deterioration in the Bank's loan portfolio and has performed stress tests and financial modeling under various potential scenarios in determining that the Company and the Bank will maintain at least adequate capitalization under federal regulatory guidelines, no assurances regarding these expectations can be made. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

The banking industry continues to operate in a challenging and volatile economic environment, which has adversely impacted the Company's and the Bank's results of operations and capital levels. Continued losses in 2012, primarily related to the elevated provision for loan losses, continue to reduce the Company's and the Bank's capital levels. The loan loss provision for 2012 was $7.4 million compared to $11.4 million for 2011, net charge offs for the year 2012 were $12.0 million compared to $12.4 million for the comparable period in 2011. At December 31, 2012 the Company's total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets were 10.2%, 5.9%, and 3.3%, respectively, compared to 10.3%, 6.97% and 4.4%, respectively, at December 31, 2011. At December 31, 2012, the Bank's total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets were 10.2%, 8.9% and 5.0%, respectively, compared to 9.8%, 8.5%, and 5.4%, respectively, at December 31, 2011.

In response to the difficult operating conditions that exist within the Bank's marketing area, the Bank committed substantial additional resources to management in an effort to accelerate resolution of non-performing and other problem assets over the course of 2012. This resolution activity has included bulk asset sales, short sales (settlements with borrowers at less than the residual principal balance of the loan), increasing the variety and scope of asset marketing activities, negotiating and entering into forbearance agreements in order to minimize loan losses and engaging in other programs to facilitate the reduction of the level of problem assets.

As a result of these activities, the level of non-performing assets has declined by 29.3% from a recorded investment of $72.4 million as of December 31, 2011 to a current level of $51.1 million. Impaired loans declined by 36.8%, from a recorded investment of $93.1 million as of December 31, 2011 to $58.9 million as of December 31, 2012. Net charge-offs over the course of the reporting period totaled $12.0 million, or 19.8% of the average recorded investment in non-performing loans of $60.5 million. This is in comparison to net charge-offs during the 2011 fiscal year of $12.4 million or 14.5% of the average recorded investment in non-performing loans of $85.3 million.

Foreclosed assets increased from $12.2 million as of December 31, 2011 to $15.1 million as of December 31, 2012, reflecting a transfer of foreclosed loans with a recorded investment of $13.0 million over the period. Sales of foreclosed assets increased from $4.9 million in fiscal year 2011 to $7.3 million during the course of fiscal year 2012 while write downs decreased from $2.8 million as of December 31, 2011 to $2.3 million as of December 31, 2012.

The Bank continues to maintain its commitment to resolve its non-performing assets and will continue to explore other additional resolution options which are determined to be both effective and result in the minimization of additional losses and expense.

The Company and the Bank entered into a formal written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) and the North Carolina Office of the Commissioner of Banks (“NCCOB”) that imposes certain restrictions on the Company and the Bank, as described in Notes H - Trust Preferred Securities and Note K - Regulatory Restrictions. A material failure to comply with the Written Agreement's terms could subject the Company to additional regulatory actions and further restrictions on its business, which may have a material adverse effect on the Company's future results of operations and financial condition.

In order for the Company and the Bank to maintain its well capitalized position under federal banking agencies' guidelines, management believes that the Company may need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets.   Management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity. The Company is also working to reduce its balance sheet to improve capital ratios and is actively evaluating a number of capital sources, asset reductions and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2013.

Cash and cash equivalents at December 31, 2012 were approximately $183.2 million, of which approximately $10.9 million has been earmarked for scheduled broker deposit maturities during 2013. Based on our liquidity analysis, management anticipates that the Company will be able to meet its obligations as they become due. If unanticipated market factors emerge, or if the Company is not successful in its efforts to comply with the requirements set forth in the Written Agreement, the FRB and/or the NCCOB may take further enforcement or other actions.  These actions might include greater restrictions on the Company's operations, or a revocation of its charter and the placement of the Bank into receivership if the situation materially deteriorates.

Cash and Cash Equivalents

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.  

Investment Securities

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. The Company began using this category in 2011.

(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. The Company does not use this category.

(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 until 2011. 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.

Other Than Temporary Impairment

Other Than Temporary Impairment

Each investment security in a loss position is evaluated for other-than-temporary impairment on at least a quarterly basis. The review includes an analysis of the facts and circumstances of each individual investment such as (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.

Regardless of these factors, if we have developed a plan to sell the security or it is likely that we will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related to all other factors. The amount of the total other-than- temporary impairment related to the credit loss is recognized in earnings, and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.

Loans Held for Sale

Loans Held for Sale

Loans held for sale generally represent single-family, residential first mortgage loans on a pre-sold basis originated by our mortgage division. Generally, commitments to sell these loans are made after the intent to proceed with mortgage applications are initiated with borrowers, and all necessary components of the loan are approved according to secondary market underwriting standards of the investor that purchases the loan. Upon closing, these loans, together with their servicing rights, are sold to mortgage loan investors under prearranged terms. Loans held for sale are subsequently measured at the lower of cost or fair value on an aggregated basis within the consolidated balance sheet under the caption “loans held for sale”.

Additionally, we have identified certain loans that will be sold as part of a branch sale (See Note S-Branch Sale). These loans are also identified within the consolidated balance sheet under the caption “loans held for sale”.

Loans, Allowance for Loan Losses and Foreclosed Assets

Allowance for Loan Losses

The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses.  Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off because management believes that the uncollectibility of a loan balance is confirmed.  Management evaluates the adequacy of our allowance for loan losses on a monthly basis.  The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations.  Additionally, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.

Management has developed a model for evaluating the adequacy of the allowance for loan losses.  The model uses the Company’s internal grading system to quantify the risk of each loan.  The grade is initially assigned by the lending officer and/or the credit administration function.  The internal grading system is reviewed and tested periodically by an independent internal loan review function as well as an independent external credit review firm.  The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, and past due loans and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. Additionally, regulatory agencies review the adequacy of the risk grades assigned as well as the risk grade process and may require changes based on judgments that differ from those of management that could impact the allowance for loan losses.

The grading system is comprised of seven risk categories for active loans.  Grades 1 through 4 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan.  Loans possessing a grade of 5 exhibit characteristics which indicate higher risk that the loan may not be able to perform in accordance with the terms of the loan.  Grade 6 loans are considered sub-standard and are generally impaired, however, certain of these loans continue to accrue interest and are not TDRs and are not considered impaired.    Grade 7 loans are considered doubtful and would be included in nonaccrual loans. Loans can also be classified as non-accrual, troubled debt restructure, or otherwise impaired, all of which are considered impaired and evaluated for specific reserve under FASB ASC 310-10 regardless of the risk grade assigned.

When the Bank determines that a loan is impaired an updated collateral value is generally obtained based on where the loan is in the collection process and the age of the existing appraisal.  Each loan is analyzed to determine the net value of collateral and an estimate of potential loss.  The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal.  If collection is deemed to be collateral dependent then the deficiency is generally charged off unless the deficiency is less than 10% of the balance, there has not been a prior charge-off, and the amount of such items in aggregate is immaterial. If the collection of the loan is not collateral dependent then a specific reserve is established for the deficiency. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value.  Impaired loans are re-evaluated periodically to determine the adequacy of specific reserves and prior charge-offs.

Loans that are not assessed for specific reserves under FASB ASC 310-10 are reserved for under FASB ASC 450.  The loans analyzed under FASB ASC 450 are assigned a reserve based on a quantitative factor and a qualitative factor. The quantitative factor is based on historical charge-off levels for each call report category. The qualitative factor addresses loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, prevailing economic conditions and all other relevant factors derived from our history of operations.   Together these two components comprise the ASC 450, or general reserve.    

The Bank previously determined the quantitative ASC 450 reserve using either the three year historical charge-offs, the two year historical charge-offs, or the last twelve months historical charge-offs.  Depending on the economic cycle and where we were in the cycle, one of these methods was chosen as most representative of the expectations for losses that are in the portfolio which were unidentified. The Bank evaluated the reserve results under the prior reserve methodology utilizing each of the three historical charge-off periods and, although it appropriately captured the improving trends, the results were considered less than prudent given the Bank's current level of non-performing loans and non-performing assets. As such, the Bank chose to utilize a new charge-off metric of the greater of (i) the charge-off rate from the most recent 8 quarters (rolling two years) or (ii) the charge-off rate from the most recent 12 quarters (rolling three years). This provides for the highest base charge-off rate regardless of whether the historical charge-offs are improving or declining. In addition, the Bank felt it was an appropriate time to move to a risk grade approach to determining the quantitative reserve. This approach assigns a different percentage ("multiplier") of the base charge-off rate to the balances for each risk grade within a loan category to reflect the varied risk of charge-off for each. The standard multipliers range from 0% for a risk grade 1 to 300% for a risk grade 6. In addition, categories that have a concentrated level of charge-offs associated with a particular risk grade could have an additional reserve factor of 50% to 100% added to that particular risk grade. Lastly, categories that have had historically high charge-offs also have an additional reserve factor between 25% to 100% added to the risk grade 5s and 6s to account for the additional risk in those categories. The reserve amount by risk grade is calculated and then combined for a blended quantitative reserve factor for each loan category.

The Bank also made changes to the qualitative factor for charge-off trends to provide a more objective and consistent result from quarter to quarter. The factors evaluated were not changed significantly but how the reserve is assigned is now determined by objective evaluation of those factors and the number of those improving and declining. An additional factor was added to take into consideration the significance of the change in charge-offs from period to period.

The net effect of all changes, compared to the prior model as of December 31, 2012, is shown in the chart below (amounts in thousands, except ratios:)

Methodology	ASC 450 Quantitative		ASC 450 Qualitative		Total ASC 450		Total Reserve
Prior Model $	8,330		911		9,241		14,629
Current Model $	9,516		1,469		10,985		16,549
Prior Model %	1.82	%	0.2	%	2.02	%	2.83	%
Current Model %	2.17	%	0.33	%	2.5	%	3.32	%

The allowance for loan losses represents management’s estimate of an appropriate amount to provide for known and inherent losses in the loan portfolio in the normal course of business.  While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used.  We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance.  Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above.  Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.

Using the data gathered during the quarterly evaluation process, the model calculates an acceptable level for the allowance for loan losses.  Management and the Board of Directors are responsible for determining the appropriate level of the allowance for loan losses based on the model results.

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.

Loans

Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on all loan classifications 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.

Purchased loans acquired in a business combination, which include loans purchased in the Nuestro Banco (“Nuestro”) acquisition, are recorded at estimated fair value on their purchase date; the purchaser cannot carry over the related allowance for loan losses for acquisitions subsequent to January 1, 2009. Purchased loans are accounted for under Financial Accounting Standards Board (“FASB") Accounting Standard Codification ("ASC') 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-3), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status. Generally, acquired loans that meet the Company’s definition for nonaccrual status fall within the scope of FASB ASC 310-30. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. For all other acquired loans that do not fall under the definition of ASC 310-30, the Company will account for these loans as described in the previous paragraphs.

For all classes of loans, 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.

Income Recognition on Impaired and Nonaccrual Loans

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.

Bank Premises and Equipment Held for Sale

Bank Premises and Equipment Held for Sale

Premises and equipment held for sale are stated at book value which approximates fair market value.

Bank Premises and Equipment

Bank Premises and Equipment

Land is carried at cost. Buildings, furniture, 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 buildings. Expenditures for repairs and maintenance are charged to expense as incurred.

Income Taxes

Income Taxes

Accrued taxes represent the estimated amount payable to or receivable from taxing jurisdictions, either currently or in the future, and are reported, on a net basis, as a component of “other assets” in the consolidated balance sheets. The calculation of the Company’s income tax expense is complex and requires the use of many estimates and judgments in its determination.

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. These temporary differences consist primarily of the allowance for loan losses, differences in the financial statement and income tax basis in premises and equipment and differences in financial statement and income tax basis in accrued liabilities. 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 fully realized.

Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income and the implementation of various tax plans to maximize realization of the deferred tax asset. As of December 31, 2012, a $21.7 million valuation allowance has been established primarily due to the possibility that all of the deferred tax asset associated with the allowance for loan losses may not be realized.

From time to time, management bases the estimates of related tax liabilities on its belief that future events will validate management’s current assumptions regarding the ultimate outcome of tax-related exposures. While the Company has obtained the opinion of advisors that the anticipated tax treatment of these transactions should prevail and has assessed the relative merits and risks of the appropriate tax treatment, examination of the Company’s income tax returns, changes in tax law and regulatory guidance may impact the treatment of these transactions and resulting provisions for income taxes.

Stock Compensation Plans

Stock Compensation Plans

The Company accounts for stock based awards granted to employees using the fair value method. The cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (usually the vesting period).  The cost of employee services received in exchange for an award is based on the grant-date fair value of the award.  Excess tax benefits are reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) 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 (loss) 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.

Net Loss Per Common Share and Common Shares Outstanding

Net Loss Per Common Share and Common Shares Outstanding

Basic loss per share represents loss available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss 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. Potential common shares that may be issued by the Company relate solely to outstanding stock options.

Basic and diluted net loss per common share have been computed based upon net loss 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: 

	2012	2011
Weighted average number of common shares used in computing basic net loss per share	7,745,342	7,599,666
Effect of dilutive stock options	—	—
Weighted average number of commons shares and dilutive potential common shares used in computing diluted net loss per share	7,745,342	7,599,666

Stock options that have exercise prices greater than the average market price of the common shares or stock options outstanding do not have a dilutive effect and are considered antidilutive.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, Fair Value Measurement (Topic 820). The purpose of the standard is to clarify and combine fair value measurements and disclosure requirements for U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). The new ASU provides amendments and wording changes used to describe certain requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning of the annual period of adoption. The Company has fully adopted all of the provisions within this ASU and has provided all required disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends Comprehensive Income (Topic 220). The amendments require that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The objective is to improve the comparability, consistency and transparency of financial reporting, and to increase the prominence of items reported in other comprehensive income. These amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Disclosures required by ASU 2011-05 are included in Consolidated Statements of Comprehensive Income (Loss). The adoption of the disclosure requirements had no material impact on the Company's consolidated financial position, results of operations, and earnings per share. In December 2011, the FASB issued ASU 2011-12, Presentation of Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, to allow time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Adoption of this ASU did not have any impact on the Company's consolidated financial statements or results of operations.

In December 2011, The FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment is effective for annual and interim periods beginning on or after January 1, 2013, and the Company has not yet determined the financial statement impact.

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INCOME TAXES (Deferred Tax Assets) (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets:
Allowance for loan losses	$ 6,335	$ 8,106
Non-qualified stock options	365	341
OTTI	623	623
Net deferred loan fees	43	29
Net operating loss	12,818	7,591
FMV adjustment on purchased assets	136	99
SERP accrual	162	141
Other	2,071	2,608
Total deferred tax assets	22,553	19,538
Less valuation allowance	(21,669)	(18,608)
Net deferred tax assets	884	930
Deferred tax liabilities:
Property and equipment	528	628
Unrealized gain on securities	280	507
Prepaid expense	333	282
Other	23	20
Total deferred tax liabilities	1,164	1,437
Net deferred tax liability, included in other liabilities	$ (280)	$ (507)

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FAIR VALUE MEASUREMENT (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Assets Measured at Fair Value on a Recurring Basis

Below are tables that present information about assets measured at fair value on a recurring basis at December 31, 2012 and 2011 (amounts in thousands):

					Fair Value Measurements at December 31, 2012, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	2012		2012		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	5,913	$	5,913	$	—	$	5,913	$	—
Mortgage-backed securities
GNMA	60,743		60,743		—		60,743		—
FNMA	5,880		5,880		—		5,880		—
Trust preferred securities	1,006		1,006		—		—		1,006
Equity securities	180		180		56		124		—
Total available for sale securities	$	73,722	$	73,722	$	56	$	72,660	$	1,006

					Fair Value Measurements at December 31, 2011 Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	2011		2011		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	17,919	$	17,919	$	—	$	17,919	$	—
Mortgage-backed securities GNMA	73,629		73,629		—		73,629		—
Trust preferred securities	1,085		1,085		—		—		1,085
Equity securities	157		157		157		—		—
Total available for sale    securities	$	92,790	$	92,790	$	157	$	91,548	$	1,085

Level 3 Assets Measured at Fair Value on a Recurring Basis

The table below presents reconciliation for the years ended December 31, 2012 and 2011 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands). During the year ended December 31, 2012, no securities were transferred from Level 3 to Level 2.

	Available-for-sale Securities
	2012			2011
Beginning Balance	$	1,085		$	1,299
Total realized and unrealized gains or (losses):
Included in earnings	—			(575		)
Included in other comprehensive income	(79		)	361
Purchases, issuances and settlements	—			—
Transfers in (out) of Level 3	—			—
Ending Balance	$	1,006		$	1,085

Fair Value Measurements, Impaired Loans

The following table illustrates the impaired loans by loan class as of December 31, 2012 and 2011(amounts in thousands):

	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	498	$	686	$	—	$	484	$	1
Commercial construction and land development	11,266		15,889		—		13,008		22
Commercial real estate other	12,865		14,263		—		12,328		64
Residential construction	340		340		—		162		—
Residential mortgage	10,106		11,542		—		9,937		132
Consumer	25		42		—		26		—
Subtotal:	$	35,100	$	42,762	$	—	$	35,945	$	219
With an allowance recorded:
Commercial and industrial	$	939	$	956	$	636	$	528	$	11
Commercial construction and land development	9,619		13,033		1,693		10,003		36
Commercial real estate other	4,877		6,852		640		5,623		46
Residential construction	833		1,134		86		884		—
Residential mortgage	7,467		8,081		2,334		7,493		44
Consumer	25		34		—		25		—
Subtotal:	$	23,760	$	30,090	$	5,389	$	24,556	$	137
Totals:
Commercial	40,064		51,679		2,969		41,974		180
Consumer	50		76		—		51		—
Residential	18,746		21,097		2,420		18,476		176
Grand Total	$	58,860	$	72,852	$	5,389	$	60,501	$	356

At December 31, 2012, the recorded investment in loans considered impaired totaled $58.9 million. Of the total investment in loans considered impaired, $23.8 million were found to show specific impairment for which $5.4 million in valuation allowance was recorded; the remaining $35.1 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment which would require a valuation allowance. For the year ended December 31, 2012, the average recorded investment in impaired loans was approximately $60.5 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $356,000.

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	992	$	1,459	$	—	$	1,262	$	11
Commercial construction and land development	23,049		28,958		—		22,315		167
Commercial real estate other	18,325		20,601		—		14,128		157
Residential construction	98		98		—		98		—
Residential mortgage	16,152		18,528		—		12,681		167
Consumer	77		132		—		90		—
Subtotal:	$	58,693	$	69,776	$	—	$	50,574	$	502
With an allowance recorded:
Commercial and industrial	$	1,427	$	1,597	$	1,237	$	967	$	18
Commercial construction and land development	14,873		20,999		2,942		18,136		45
Commercial real estate other	7,750		9,289		1,448		6,805		72
Residential construction	1,144		1,363		114		1,363		—
Residential mortgage	9,175		10,366		1,617		7,493		76
Consumer	9		16		1		4		—
Subtotal:	$	34,378	$	43,630	$	7,359	$	34,768	$	211
Totals:
Commercial	66,416		82,903		5,627		63,613		470
Consumer	86		148		1		94		—
Residential	26,569		30,355		1,731		21,635		243
Grand Total:	$	93,071	$	113,406	$	7,359	$	85,342	$	713

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loans losses based upon the fair value of the underlying collateral or discounted cash flows at December 31, 2012 and December 31, 2011 (amounts in thousands):

	December 31, 2012					December 31, 2011
	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	—	$	23,761		$	—	$	34,378
Specific valuation allowance allocations	—		(5,389		)	—		(7,359		)
	$	—	$	18,372		$	—	$	27,019

Impaired Loans and Foreclosed Assets Measured at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a non-recurring basis are included in the table below at December 31, 2012 and 2011(amounts in thousands):

					Fair Value Measurements at December 31, 2012, Using
Description	Total Carrying Amount in the Consolidated Balance Sheet 2012		Assets Measured at Fair Value 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans	$	18,372	$	18,372	$	—	$	—	$	18,372
Foreclosed assets	$	15,136	$	15,136	$	—	$	—	$	15,136

					Fair Value Measurements at December 31, 2011, Using
Description	Total Carrying Amount in the Consolidated Balance Sheet 2011		Assets Measured at Fair Value 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans	$	27,019	$	27,019	$	—	$	—	$	27,019
Foreclosed assets	$	12,159	$	12,159	$	—	$	—	$	12,159

Quantitative Information About Level 3 Fair Value Measurements

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring and nonrecurring basis at December 31, 2012(amounts in thousands, except percentages):

	Total Carrying Amount in the Consolidated Balance Sheet
	December 31, 2012
Nonrecurring measurements:
Impaired loans	$	18,372	Collateral discounts	15-70%
Foreclosed assets	$	15,136	Discounted appraisals	10-30%
Recurring measurement:
Trust preferred securities	$	1,006	Probability of default	10-20%
			Loss given default	100%

Range of Collateral Discounts for Impaired Loans by Segment

The following table reflects the general range of collateral discounts for impaired loans by segment:

Loan Segment	Range of Percentages
Commercial construction and land development	30% - 60%
Commercial real estate other	40% -70%
Residential construction	30% - 50%
Residential mortgage	15% - 40%
All other segments	15% - 30%

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FAIR VALUE MEASUREMENT

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurements. ASC 820 applies whenever other accounting pronouncements require or permit assets or liabilities to be measured at fair value. Accordingly, ASC 820 does not expand the use of fair value in any new circumstances. ASC 825 provides companies with an option to report selected financial assets and liabilities at fair value. As of December 31, 2012, the Company had not elected to measure any financial assets or liabilities using the fair value option under ASC 825; therefore the adoption of ASC 825 had no effect on the Company’s financial condition or results of operations.

The Company records securities available for sale at fair value on a recurring basis. Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market.

ASC 820 establishes a fair value hierarchy to prioritize the inputs of valuation techniques used to measure fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of how market-observable the fair value measurement is and defines the level of disclosure. ASC 820 clarifies fair value in terms of the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability at the measurement date (an exit price). In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants. These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.

Outlined below is the application of the fair value hierarchy established by ASC 820 to the Company’s financial assets that are carried at fair value.

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions.

Fair Value on a Recurring Basis.  The Company measures certain assets at fair value on a recurring basis, as described below.

Investment Securities Available for Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include equity securities traded on an active exchange, such as the New York Stock Exchange. Level 2 securities include taxable municipalities, and mortgage-backed securities issued by government sponsored entities, and certain equity securities.  The Company’s mortgage-backed securities were primarily issued by the Government National Mortgage Association (“GNMA”), with additional mortgage-backed securities issued by and the Federal National Mortgage Association (“FNMA”).  As of December 31, 2012, all of the Company’s mortgage-backed securities were agency issued and designated as Level 2 securities.  Securities classified as Level 3 include trust preferred securities in less liquid markets.

Below are tables that present information about assets measured at fair value on a recurring basis at December 31, 2012 and 2011 (amounts in thousands):

					Fair Value Measurements at December 31, 2012, Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	2012		2012		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	5,913	$	5,913	$	—	$	5,913	$	—
Mortgage-backed securities
GNMA	60,743		60,743		—		60,743		—
FNMA	5,880		5,880		—		5,880		—
Trust preferred securities	1,006		1,006		—		—		1,006
Equity securities	180		180		56		124		—
Total available for sale securities	$	73,722	$	73,722	$	56	$	72,660	$	1,006

					Fair Value Measurements at December 31, 2011 Using
	Total Carrying Amount in the Consolidated Balance Sheet		Assets Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	2011		2011		(Level 1)		(Level 2)		(Level 3)
Taxable municipal securities	$	17,919	$	17,919	$	—	$	17,919	$	—
Mortgage-backed securities GNMA	73,629		73,629		—		73,629		—
Trust preferred securities	1,085		1,085		—		—		1,085
Equity securities	157		157		157		—		—
Total available for sale    securities	$	92,790	$	92,790	$	157	$	91,548	$	1,085

The table below presents reconciliation for the years ended December 31, 2012 and 2011 for all Level 3 assets that are measured at fair value on a recurring basis (amounts in thousands). During the year ended December 31, 2012, no securities were transferred from Level 3 to Level 2.

	Available-for-sale Securities
	2012			2011
Beginning Balance	$	1,085		$	1,299
Total realized and unrealized gains or (losses):
Included in earnings	—			(575		)
Included in other comprehensive income	(79		)	361
Purchases, issuances and settlements	—			—
Transfers in (out) of Level 3	—			—
Ending Balance	$	1,006		$	1,085

Fair Value on a Nonrecurring Basis. The Company measures certain assets at fair value on a nonrecurring basis, as described below.

Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310, “Receivables” and ASC 450, “Contingencies”. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with ASC 820, impaired loans with an allowance established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value that relies upon comparable values from identical sources, the Company records the impaired loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans totaled $58.9 million at December 31, 2012.  Of such loans, $23.8 million had specific loss allowances aggregating $5.4 million at that date for a net fair value of $18.4 million.  Of those specific allowances, all were determined using Level 3 inputs. Of the remaining balance of impaired loans, the Company has determined that no specific allowance remains.

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loans losses based upon the fair value of the underlying collateral or discounted cash flows at December 31, 2012 and December 31, 2011 (amounts in thousands):

	December 31, 2012					December 31, 2011
	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	—	$	23,761		$	—	$	34,378
Specific valuation allowance allocations	—		(5,389		)	—		(7,359		)
	$	—	$	18,372		$	—	$	27,019

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records foreclosed assets as non-recurring Level 3. At December 31, 2012, fair value adjustments of $2.3 million were recorded to the foreclosed real estate of $15.1 million.  At December 31, 2011, there were $2.8 million fair value adjustments required after transfer related to foreclosed real estate of $12.2 million.

Assets measured at fair value on a non-recurring basis are included in the table below at December 31, 2012 and 2011(amounts in thousands):

					Fair Value Measurements at December 31, 2012, Using
Description	Total Carrying Amount in the Consolidated Balance Sheet 2012		Assets Measured at Fair Value 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans	$	18,372	$	18,372	$	—	$	—	$	18,372
Foreclosed assets	$	15,136	$	15,136	$	—	$	—	$	15,136

					Fair Value Measurements at December 31, 2011, Using
Description	Total Carrying Amount in the Consolidated Balance Sheet 2011		Assets Measured at Fair Value 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans	$	27,019	$	27,019	$	—	$	—	$	27,019
Foreclosed assets	$	12,159	$	12,159	$	—	$	—	$	12,159

Quantitative Information about Level 3 Fair Value Measurements

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring and nonrecurring basis at December 31, 2012(amounts in thousands, except percentages):

	Total Carrying Amount in the Consolidated Balance Sheet
	December 31, 2012
Nonrecurring measurements:
Impaired loans	$	18,372	Collateral discounts	15-70%
Foreclosed assets	$	15,136	Discounted appraisals	10-30%
Recurring measurement:
Trust preferred securities	$	1,006	Probability of default	10-20%
			Loss given default	100%

Collateral discounts to the principal balances of impaired loans varies widely and are a result from the consideration of a number of factors including the age of the most recent appraisal (i.e. an appraisal dating from an earlier period of real estate speculation would require as much as a 30% to 40% discount), the type of asset serving as collateral, the expected marketability of the asset, its material or environmental condition, and comparisons to actual sales data of similar assets from both internal and external sources.

The following table reflects the general range of collateral discounts for impaired loans by segment:

Loan Segment	Range of Percentages
Commercial construction and land development	30% - 60%
Commercial real estate other	40% -70%
Residential construction	30% - 50%
Residential mortgage	15% - 40%
All other segments	15% - 30%

As foreclosed assets are brought into other real estate owned through a process which requires a fair market valuation, further discounts typically reflect market conditions specific to the asset. These conditions are usually captured in subsequent appraisals which are required on an annual basis, and depending upon asset type and marketability demonstrate a more restrained variance as noted above.