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, 2011

Commission File Number 000-51843

ALARION FINANCIAL SERVICES, INC.

A Florida Corporation

IRS Employer Identification No. 20-3851373

One Northeast First Avenue

Ocala, Florida 34470

(352) 547-1200

Securities Registered Pursuant to Section 12(b)

of the Securities Exchange Act of 1934: NONE

Securities Registered Pursuant to Section 12(g) of the Securities Exchange

Act of 1934: Common Stock, $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

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 ¨

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant (2,279,776 shares) on December 31, 2011, was approximately $11,398,880. As of such date, no organized trading market existed for the common stock. Therefore, the aggregate market value was computed by reference to the last known sales price of $5.00 per share. For the purposes of this response, directors and officers of the Registrant are considered the affiliates of the Registrant at that date.

The number of shares outstanding of the Registrant’s common stock, as of January 31, 2012: 2,633,208 shares of $.01 par value common stock.

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS


		Page

PART I			1

Item 1.	Business		1
	Special Note Regarding Forward-Looking Statements		1
	General		1
	Critical Accounting Policies		3
	Economic Conditions		3
	Regulatory Matters		4
	Lending Activities		5
	Deposit Activities		9
	Investments		9
	Correspondent Banking		10
	Effect of Governmental Policies		10
	Interest and Usury		10
	Supervision and Regulation		10
	Competition		20
	Employees		20

Item 1A.	Risk Factors		20

Item 1B.	Unresolved Staff Comments		20

Item 2.	Properties		21

Item 3.	Legal Proceedings		22

Item 4.	Mine Safety Disclosures		22

PART II			23

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23

Item 6.	Selected Financial Data		24

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		48

Item 8.	Financial Statements and Supplementary Data		48

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		48

Item 9A.	Controls and Procedures		48

Item 9B.	Other Information		49

PART III			50

Item 10.	Directors, Executive Officers and Corporate Governance		50

Item 11.	Executive Compensation		50

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		50

Item 13.	Certain Relationships and Related Transactions, and Director Independence		50

Item 14.	Principal Accounting Fees and Services		51

PART IV			52

Item 15.	Exhibits, Financial Statement Schedules		52

SIGNATURES			54

PART I

Item 1. Description of Business

Forward-Looking Statements

Some of the statements in this Form 10-K discuss future expectations. There may also be statements regarding projections of results of operations or financial condition or state other “forward-looking” information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking information on various factors and numerous assumptions, which may or may not turn out to be correct.

Important factors that may cause actual results to differ from those contemplated by forward-looking statements include, for example:

The success or failure of our efforts to implement our business strategy;

The effect of changing economic conditions, both nationally and in our local community;

Changes in government regulations, tax and interest rates applicable to our business and similar matters;

Our ability to attract and retain quality employees; and

Other risks which may be described in our future filings with the SEC.

We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements other than material changes to such information.

General

Alarion Financial Services, Inc. (“AFSI”) was incorporated under the laws of the State of Florida on August 16, 2005, for the purpose of becoming a bank holding company by acquiring Alarion Bank (“Bank”) (AFSI and the Bank are collectively referred to herein as the “Company”). The Bank is a full-service Florida state chartered commercial bank, providing a wide range of business and consumer financial services in our target marketplace, which is comprised primarily of Marion and Alachua Counties in Florida. The Bank was formed by a group of business leaders, who believed that there was a significant demand for a locally-owned community bank.

Under Federal Reserve Board regulations, AFSI is expected to be a source of financial strength to the Bank. Banking regulations require that the Bank maintain a minimum ratio of capital to assets. In the event that the Bank’s growth is such that this minimum ratio is not maintained, AFSI may borrow funds, subject to the capital adequacy guidelines of the Federal Reserve, and contribute them to the capital of the Bank and otherwise raise capital in a manner which is unavailable to the Bank under existing banking regulations.

The Bank commenced business operations on February 28, 2005 in Ocala, Florida. The Bank opened a temporary Gainesville, Florida branch on March 2, 2005, and moved the branch to the permanent facility on September 1, 2005. The Bank opened a second branch in Gainesville on 34^th Street on March 28, 2006. A branch in Alachua, Florida was opened on December 20, 2006 and a second Ocala office opened on June 7, 2007. A third Ocala office opened on July 30, 2008.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation up to applicable limits. The operations of the Bank are subject to the supervision and regulation of the Federal Deposit Insurance Corporation (“FDIC”) and the Florida Office of Financial Regulation (“Florida Office”).

The Bank provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by the Bank include: demand interest-bearing and non-interest-bearing accounts, money market deposit accounts, NOW accounts, time deposits, credit cards, direct deposits, notary services, money orders, night depository, travelers’ checks, cashier’s checks, savings bonds, bank drafts, automated teller services, and drive-in tellers. In addition, the Bank makes secured and unsecured commercial, consumer, and real estate loans and issues stand-by letters of credit. The Bank provides automated teller machine (ATM) cards and is a member of the Star ATM network, thereby permitting customers to utilize the convenience of larger ATM networks. In addition to the foregoing services, the offices of the Bank provide customers with extended banking hours. The Bank does not have trust powers and, accordingly, no trust services are provided.

The revenues of the Bank are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment and mortgage-backed securities, and short-term investments. The principal sources of funds for the Bank’s lending activities are its deposits, repayment of loans, and the sale and maturity of investment securities. The principal expenses of the Bank are the interest paid on deposits, and operating and general administrative expenses.

As is the case with banking institutions generally, the Bank’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. See “Competition.”

The Company’s fiscal year ends December 31. This Form 10-K is also being used as the Bank’s Annual Disclosure Statement under Federal Deposit Insurance Corporation (FDIC) Regulations. This Form 10-K has not been reviewed or confirmed for accuracy or relevance by the FDIC.

Critical Accounting Policies

The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policy applied is related to the valuation of the loan portfolio.

A variety of estimates impact carrying value of the loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.

The allowance for loan losses is the most difficult and subjective judgment. The allowance is established and maintained at a level that the Company believes is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and the loan portfolio, current trends in delinquencies and charge-offs, the views of regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of the economic climate and direction, change in the interest rate environment, which may impact a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to its service area. Because the calculation of the allowance for loan losses relies on estimates and judgments relating to inherently uncertain events, results may differ from the Company’s estimates.

Management believes that the allowance for loan losses at December 31, 2011 appropriately reflects the risk inherent in the portfolio. The methodologies used in the calculation are in compliance with regulatory policy and US GAAP.

The allowance for loan losses is also discussed as part of “Management’s Discussion and Analysis - Financial Condition” and in Note 3 to the consolidated financial statements. The significant accounting policies are discussed in Note 1 to the consolidated financial statements.

As of December 31, 2011, we had approximately $4.5 million of net deferred tax assets as reported on our consolidated balance sheet. The realization of these deferred tax assets is dependent upon the generation of sufficient future taxable income. We currently believe that it is more likely than not that we will generate sufficient taxable income in the future to utilize these deferred tax assets. However, if additional allowances for loan losses or losses from operations differ from current forecasts, a valuation allowance may be required.

Economic Conditions

Our success significantly depends upon the growth in population, income levels, deposits and housing starts in our markets. During the current economic downturn, the rate of growth of each of these factors has decreased substantially and in some cases has turned negative. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally continue to remain challenging, our business may be adversely affected. Our specific market areas have experienced decreased growth, which has affected the ability of our customers to repay their loans to us and has generally affected our financial condition and results of operations.

With our loans concentrated in our Florida markets, the decline in local economic conditions has adversely affected the values of our real estate collateral and will likely continue to do so for the foreseeable future. Consequently, a prolonged decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.

Specifically, there has been a dramatic decrease in housing and real estate values in Florida during the current economic downturn, coupled with a significant increase in the rate of unemployment. These trends have contributed to an increase in our non-performing loans and reduced asset quality. As of December 31, 2011, our non-performing loans were approximately $6.5 million, or 3% of the loan portfolio. Nonperforming assets were approximately $11 million as of the same date, or 4% of total assets. In addition, we had approximately $4.9 million in accruing loans that were between 30 and 89 days delinquent at December 31, 2011. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolio and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned.

Our non-performing assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to have continued pressure on profitability. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. In addition, customers who are builders and developers face greater difficulty in selling their homes in markets where the decrease in housing and real estate values are more pronounced. Consequently, we have faced increased delinquencies and nonperforming assets as these customers are forced to default on their loans. While it is not prudent to anticipate market changes in the near-term, the possibility exists for additional downgrades, provisions for loan losses, charge-offs and foreclosures in our loan portfolios.

When we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then-fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase our risk profile and the amount of capital our regulators believe is appropriate in light of such risks. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. We may determine to sell nonperforming assets from time to time to improve our credit quality and reduce the time and costs of carrying these assets. These results of these sales cannot be determined and may result in additional write-downs.

Furthermore, the U.S. federal, state and foreign governments have taken or are considering extraordinary actions in an attempt to deal with the worldwide financial crisis and the severe decline in the global economy. To the extent adopted, many of these actions have been in effect for only a limited time, and have produced limited or no relief to the capital, credit and real estate markets. There is no assurance that these actions or other actions under consideration will ultimately be successful. The Dodd-Frank Act has just been adopted, and requires numerous studies and rulemaking. We cannot predict the effects of this recent legislation or the new regulations that will be issued to implement it, on us, our competitors, counterparties, and on the financial markets and the economy.

Regulatory Matters

On December 10, 2010 the Board of Directors of Alarion Bank entered into a Memorandum of Understanding (MOU) with the FDIC and the Florida Office of Financial Regulation (OFR). The MOU imposes no penalties on the Bank. Specifically, the Bank has agreed to maintain its “well capitalized” position, to establish and maintain an adequate allowance for loan and lease losses, to reduce adversely classified assets, to submit to the regulators a strategic plan and a commercial real estate loan risk monitoring and reduction plan, to ensure compliance with laws, regulations and policy statements, to not pay dividends, to notify the regulators of any changes in directors or executive officers and to provide periodic reports as to the Bank’s compliance with the memorandum. As of December 31, 2011, we believe we are in substantive compliance at this time as a result of correspondence received from regulators acknowledging the periodic reports submitted.

On January 19, 2012, AFSI’s Board of Directors adopted certain resolutions at the request of the Federal Reserve Bank of Atlanta (the “Federal Reserve”). The resolutions provide that AFSI may not, without prior Federal Reserve approval, incur debt, including trust preferred securities; declare or pay dividends including the payment of dividends on our outstanding Series A and Series B Preferred Stock; reduce the Company’s capital position by purchasing or redeeming any shares of our capital stock; or make any payment representing a reduction of capital other than the payment of normal and routine operating expenses. The resolutions also require us to submit confirmation of compliance with the resolutions.

Lending Activities

The Bank offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Bank’s market area. The Bank’s net loans at December 31, 2011 were $194 million, or 68% of total assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. The Bank has no foreign loans or loans for highly leveraged transactions.

The Bank’s loans are concentrated in five major areas: commercial real estate loans, residential real estate loans, construction, commercial loans (for equipment purchases, working capital and various other business purposes) and consumer loans. A majority of the Bank’s loans are made on a secured basis. As of December 31, 2011, approximately 87% of the Bank’s loan portfolio consisted of loans secured by real estate, of which approximately 60% of the total loan portfolio is secured by commercial properties. Our emphasis is on loans secured by commercial real estate, rather than riskier receivables or business inventory loans. Risks of these types of loans include the general business conditions of the local economy and borrowers’ ability to conduct their businesses to generate sufficient profits to repay their loans under the agreed upon terms and conditions. Personal guarantees may be obtained from the principals of business borrowers and third parties to support the borrowers’ ability to service the debt and reduce the risk of non-payment. Commercial loans may be made at variable or fixed rates of interest. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with terms or amortization schedules of longer than one year may carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five years. Commercial loans not secured by real estate amounted to approximately 10% of the Bank’s total loan portfolio as of December 31, 2011.

The Bank’s real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units or the development of single-family residential building lots. These real estate loans may be made at fixed or variable interest rates. The Bank generally does not make fixed-rate commercial real estate loans for terms exceeding five years. Loans in excess of five years are generally adjustable.

The Bank originates residential real estate loans on one to four family homes to be sold in the secondary market. These loans are to qualified buyers with commitments to purchase from correspondent banks prior to closing. These loans generally are repayable in monthly installments based on up to a 30-year amortization schedule with both fixed and variable interest rates. These loans are typically purchased within thirty days of closing, though the bank does portfolio certain adjustable rate loans generally underwritten to secondary market guidelines.

The Bank’s consumer loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. Consumer loans generally involve more risk than mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal. This risk is due to the potential for damage to the collateral or other loss of value, and the fact that any remaining deficiency often does not warrant further collection efforts. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but consumer loans may also be made on an unsecured basis. Consumer loans are made at fixed and variable interest rates, and are often based on up to a five-year amortization schedule.

Loan originations are derived from a number of sources. Loan originations can be attributed to direct solicitation by the Bank’s loan officers, existing customers and borrowers, advertising, walk-in customers and, in some instances, referrals from brokers.

Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectability. The Bank attempts to minimize credit losses through various means. In particular, on larger credits, the Bank generally relies on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, the Bank attempts to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.

We attempt to mitigate these risks through our underwriting process and the requirement that loans be secured by collateral. With regard to commercial loans, we require that borrowers provide current financial information. Such documentation should include a complete itemized balance sheet with supporting schedules for listed asset values, fiscal year-end operating statements and income tax returns. Businesses are also typically required to provide us with copies of annual reports if prepared by outside accounting firms. Loan and renewals to businesses are not considered until the required financial documents are compiled and thoroughly reviewed by our lending staff.

Loans to commercial establishments are typically secured by inventory, equipment, supplies, accounts receivable and any other asset of value that relates to the business’ operations. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by “all business assets,” or a “blanket lien” are typically made only by high quality borrowers, due to the non-specific nature of the collateral. Valuation of business collateral must be supported by a valuation, purchase order, or third party physical inspection. Should we not be able to obtain any of these items, the loan is then considered unsecured. Personal guarantees of the principals of business borrowers are required in instances where we deem it necessary or appropriate depending on the business’ assets or other financial indicators.

All loans to businesses must have a clearly stated and reasonable payment plan that allows for timely retirement of debt. Revolving lines of credit are occasionally granted to credit worthy businesses for the purpose of carrying current assets, such as inventory or accounts receivable, and are structured to coincide with the seasonal or natural business cycle of the borrower. We do not provide such lines to be used as a substitute for permanent equity capital of a borrower. All lines are reviewed not less than annually and must be paid in full and out of use at least annually for a period determined at the time of approval or renewal.

Loans secured by real estate primarily fall into three categories: (i) commercial, (ii) construction and (iii) residential. These real estate loans are secured by liens on commercial or residential real property or made for the purpose of financing the construction of a building or other improvements to real estate, regardless of whether any lien position has been perfected on the property. All real estate financing products are provided on a non-discriminatory basis throughout our lending area.

Our underwriting takes into consideration the amount financed, term, amortization and pricing, as well as all relevant borrower credit factors. Basic credit factors include the borrower’s overall creditworthiness, debt service capacity and secondary sources of repayment. Underwriting standards relevant to real estate financing also address market valuation of the mortgaged property, the level of the borrower’s equity or proposed ownership capital investment, projected income producing property revenue and overall property marketability. In almost all instances, we require a first or second lien on the real estate which secures the loan. In cases where we have accepted a second or more junior lien, we require an estoppel letter from the senior lien holders. We also typically require a title insurance policy insuring our interest in the real estate collateral. We require independent appraisals on all assets valued at over $250,000. Any new credit extensions are critically reviewed. In evaluating individual loan requests, the Bank considers the borrower’s current and future cash flow; income sources and stability; credit history with the Bank and others; liquidity; contingent debts and overall liability structure; and collateral coverage.

Loan-to-value ratios for new loans have been reduced for second mortgages from 89.99% to 85% and vacant lots from 100% to 75%. All other ratios follow Federal lending guidelines. Credit scores are a tool in the evaluation of loan requests but the Bank does not utilize a scoring model for approving loans. Rather, credit history with the Bank and others is reviewed on all loan decisions. An analysis worksheet providing guidelines for loan limits is performed for unsecured loans. Debt service coverage ratios of 1.25X have been implemented on most commercial loan types.

The Bank does not originate sub-prime loans, which it defines as those without income verification, asset verification, or high cost mortgage loans, as defined by Federal definitions.

All loan classes have adjustable rate products offered. Teaser rates are generally not offered, so the initial interest rate corresponds to the index plus a margin. Weaker borrowers and all CRE credits are reviewed for the impact of increasing rates in the future to make sure the borrower has the continued ability to repay the debt.

No loans have bank-funded interest reserves. Borrowers are sometimes required to deposit in the Bank sufficient funds or liquidity to demonstrate the ability to repay loans secured by non-income producing properties. Monitoring of Acquisition, Development and Construction (“ADC”) and non owner occupied CRE loans includes annual reviews on all commercial relationships in excess of $100,000, plus site visits quarterly on land loans in excess of $100,000 and income property loans in excess of $250,000. Semi-annual site visits are conducted if the loan amount is below those thresholds. Activity and concentration reports are provided monthly to the Board of Directors Loan Committee.

Home equity loans are provided to borrowers both with first mortgages with the Bank as well as borrowers with first mortgages with other banks. Credit bureau reports are utilized to make sure the existing first mortgage is not in arrearages, both at the time of origination and when reviewed in the future.

Interest-only loans are occasionally granted (outside of standard personal and business lines of credit) where there is a defined repayment source at a future time and the borrower has the capacity to service the required debt service. Examples would include short-term business loans for seasonal purchases, bridge financing pending a property or asset sale, and home construction financing for homebuilders where the loan will be repaid from the sale of the house. Acquisition and development (“A&D”) loans were also previously underwritten this way, but no new A&D loans have been originated since 2009. Quantifying these loans by loan type is being developed but is not available at the present time.

Loan underwriting standards have tightened during this economic cycle. Over the last three years, policy and procedure changes included establishing Commercial Real Estate (“CRE”) portfolio guidelines by type with reduction goals; adding stress testing to all CRE analysis for interest rates, vacancy and rental rates; requiring proof of liquidity; decreasing loan authority from $750,000 to $500,000 in aggregate borrower exposure that requires Board approval; and requiring all second mortgage consumer loans to be approved by a senior manager.

We typically make consumer loans to purchase automobiles, boats, recreational equipment and mobile homes. Prior to making such loans, we require the borrower to complete an application and we confirm the information contained therein prior to committing funds. We grant or deny consumer loan requests based on the customer’s ability to meet scheduled payments and the quality of offered collateral. We value collateral based on standard guidelines (i.e. National Automobile Dealer Association listings for used cars). All consumer loans must have a clearly stated and reasonable payment plan that allows for timely repayment of debt.

On occasion, we also make unsecured loans. We underwrite each unsecured loan based on the borrower’s and any guarantor’s cash flow and past credit history. In addition, we limit the terms of such unsecured extension of credit to one year for commercial loans and three years for consumer loans. With respect to sources of repayment, we require identification of primary and secondary sources to help ensure retirement of debts on schedule. Furthermore, we obtain borrower’s financial data and income tax returns to document favorable net-worth-to-debt ratios and sufficient liquidity to repay the debts in a timely fashion.

Loan Loss Allowance

In considering the adequacy of our allowance for loan losses, the Bank has considered that as of December 31, 2011, approximately 60% of outstanding loans are in the commercial real estate loan category. At December 31, 2011, commercial loans including commercial real estate represented 70% of our loan portfolio. Commercial loans are generally considered by management as having greater risk than other categories of loans in our loan portfolio. We believe that the real estate collateral securing our commercial real estate loans reduces the risk of loss inherently present in commercial loans.

At December 31, 2011, our consumer loan portfolio consisted primarily of lines of credit and installment loans secured by automobiles and other consumer goods. We believe that the risk associated with these types of loans has been adequately provided for in the loan loss allowance.

The Bank’s Board of Directors monitors the loan portfolio monthly in order to evaluate the adequacy of the allowance for loan losses. In addition to reviews by regulatory agencies, the Bank engages the services of outside consultants to assist in the evaluation of credit quality and loan administration. These professionals complement our internal system, which identifies potential problem credits as early as possible, categorizes the credits as to risk and includes a reporting process to monitor the progress of the credits.

The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are to be charged off against the allowance when management believes the collectability of principal is unlikely. In addition, loss experience will be monitored in establishing the provision. During the year ended December 31, 2011, $3,239,000 in loans were charged off against the allowance for loan losses.

Deposit Activities

Deposits are the major source of the Bank’s funds for lending and other investment activities. The Bank considers the majority of its regular savings, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised approximately 48% of the Bank’s total deposits at December 31, 2011. Approximately 52% of the Bank’s deposits at December 31, 2011 were time deposits. Generally, the Bank attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and over made up approximately 16% of the Bank’s total deposits at December 31, 2011. The majority of the deposits of the Bank are generated from Alachua and Marion County.

Investments

The Bank invests a portion of its assets in U.S. Government agency obligations, mortgage-backed securities, and federal funds sold. The Bank’s investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset fluctuations in deposits.

With respect to the Bank’s investment portfolio, the Bank’s total portfolio may be invested in U.S. Treasury and general obligations of its agencies and bank-qualified municipal securities because such securities generally represent a minimal investment risk. Occasionally, the Bank may purchase certificates of deposit of national and state banks. Mortgage-backed securities generally have a shorter life than the stated maturity. Federal funds sold are the excess cash the Bank has available over and above daily cash needs. This money is invested on an overnight basis with approved correspondent banks.

The Bank monitors changes in financial markets. In addition to investments for its portfolio, the Bank monitors its daily cash position to ensure that all available funds earn interest at the earliest possible date. A portion of the investment account is designated as secondary reserves and invested in liquid securities that can be readily converted to cash with minimum risk of market loss. These investments usually consist of U.S. Treasury obligations, U.S. government agencies and federal funds. The remainder of the investment account may be placed in investment securities of different type and longer maturity. Daily surplus funds are sold in the federal funds market for one business day. The Bank attempts to stagger the maturities of its securities so as to produce a steady cash-flow in the event the Bank needs cash, or economic conditions change to a more favorable rate environment.

Correspondent Banking

Correspondent banking involves one bank providing services to another bank which cannot provide that service for itself from an economic or practical standpoint. The Bank is required to purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies, overline and liquidity loan participations and sales of loans to or participation with correspondent banks.

The Bank sells loan participations to correspondent banks with respect to loans which exceed the Bank’s lending limit.

Effect of Governmental Policies

The earnings and business of the Bank are and will be affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for these purposes influence in various ways the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on assets.

Interest and Usury

The Bank is subject to numerous state and federal statutes that affect the interest rates that may be charged on loans. These laws do not, under present market conditions, deter the Bank from continuing the process of originating loans.

Supervision and Regulation

Banks and their holding companies, and many of their affiliates, are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations affecting the Company 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 and the Bank. Supervision, regulation, and examination of banks by regulatory agencies are intended primarily for the protection of depositors, rather than shareholders.

Bank Holding Company Regulation. The Holding Company is a bank holding company, registered with the Federal Reserve under the BHC Act. As such, the Company is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve. The BHC Act 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 5% of the voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the bank holding company, or (iii) merging or consolidating with any other bank holding company.

The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience, and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties’ performance under the Community Reinvestment Act of 1977 (the “CRA”), both of which are discussed below.

Banks are subject to the provisions of the CRA. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, 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. 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:

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charter a bank,

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obtain deposit insurance coverage for a newly chartered institution,

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establish a new branch office that will accept deposits,

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relocate an office, or

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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.

The BHC Act generally prohibits a bank holding company 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 so 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, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe 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.

Emergency Economic Stabilization Act. In response to the financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act (“EESA”) was signed into law on October 3, 2008, and established the Troubled Asset Relief Program (“TARP”). As part of TARP, the U.S. Treasury established the Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On January 23, 2009, AFSI issued $6.514 million in preferred stock to the U.S. Treasury. In connection with EESA, there have been numerous actions by the Federal Reserve Board, Congress, the U.S. Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization efforts under EESA. It remains unclear at this time what further legislative and regulatory measures will be implemented under EESA affecting AFSI

American Recovery and Reinvestment Act of 2009. On February 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future CPP recipients that are in addition to those previously announced by the U.S. Treasury, until the institution has repaid the U.S. Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the recipient’s appropriate regulatory agency.

Gramm-Leach-Bliley Act. In 1999, the Gramm-Leach-Bliley Act was enacted which reforms and modernizes certain areas of financial services regulation. The law permits the creation of new financial services holding companies that can offer a full range of financial products under a regulatory structure based on the principle of functional regulation. The legislation eliminates the legal barriers to affiliations among banks and securities firms, insurance companies, and other financial services companies. The law also provides financial organizations with the opportunity to structure these new financial affiliations through a holding company structure or a financial subsidiary. The new law reserves the role of the Federal Reserve Board as the supervisor for bank holding companies. At the same time, the law also provides a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies. The law also sets up a process for coordination between the Federal Reserve Board and the Secretary of the Treasury regarding the approval of new financial activities for both bank holding companies and national bank financial subsidiaries.

The law also includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institution’s privacy policy must take place at the time a customer relationship is established and not less than annually during the continuation of the relationship. The act also provides for the functional regulation of bank securities activities. The law repeals the exemption that banks were afforded from the definition of “broker,” and replaces it with a set of limited exemptions that allow the continuation of some historical activities performed by banks. In addition, the act amends the securities laws to include banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of the Community Reinvestment Act activities, the law generally requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the Community Reinvestment Act ratings of a bank or of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have satisfactory or better Community Reinvestment Act ratings when they commence the new activity.

Bank Regulation. The Bank is chartered under the laws of Florida and their deposits are insured by the FDIC to the extent provided by law. The Bank is subject to comprehensive regulation, examination and supervision by the FDIC and the Florida Office and to other laws and regulations applicable to banks. Such regulations include limitations on loans to a single borrower and to its directors, officers and employees; restrictions on the opening and closing of branch offices; the maintenance of required capital ratios; the granting of credit under equal and fair conditions; and the disclosure of the costs and terms of such credit. The Bank is examined periodically by the FDIC and the Florida Office, to whom it submits periodic reports regarding its financial condition and other matters. The FDIC and the Florida Office have a broad range of powers to enforce regulations under their jurisdiction, and to take discretionary actions determined to be for the protection and safety and soundness of banks, including the institution of cease and desist orders and the removal of directors and officers. The FDIC and the Florida Office also have the authority to approve or disapprove mergers, consolidations, and similar corporate actions.

There are various statutory limitations on the ability of the Bank to pay dividends. The FDIC also has the general authority to limit the dividend payment by banks if such payment may be deemed to constitute an unsafe and unsound practice.

Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to their parent holding companies or other affiliates, on investment in the stock or other securities of affiliates, and on the taking of such stock or securities as collateral from any borrower. In addition, banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) imposed major regulatory reforms, stronger capital standards for savings and loan associations and stronger civil and criminal enforcement provisions. FIRREA also provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with:

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the default of a commonly controlled FDIC insured depository institution; or

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any assistance provided by the FDIC to a commonly controlled FDIC insured institution in danger of default

The FDIC Improvement Act of 1991 (“FDICIA”) made a number of reforms addressing the safety and soundness of deposit insurance funds, supervision, accounting, and prompt regulatory action, and also implemented other regulatory improvements. Annual full-scope, on-site examinations are required of all insured depository institutions. The cost for conducting an examination of an institution may be assessed to that institution, with special consideration given to affiliates and any penalties imposed for failure to provide information requested. Insured state banks also are precluded from engaging as principal in any type of activity that is impermissible for a national bank, including activities relating to insurance and equity investments. The Act also recodified current law restricting extensions of credit to insiders under the Federal Reserve Act.

Also important in terms of its effect on banks has been the deregulation of interest rates paid by banks on deposits and the types of deposit accounts that may be offered by banks. Most regulatory limits on permissible deposit interest rates and minimum deposit amounts expired several years ago. The effect of the deregulation of deposit interest rates generally has been to increase the costs of funds to banks and to make their costs of funds more sensitive to fluctuations in money market rates. A result of the pressure on banks interest margins due to deregulation has been a trend toward expansion of services offered by banks and an increase in the emphasis placed on fee or noninterest income.

Capital Requirements. Bank regulatory agencies require financial institutions to maintain capital at adequate levels based on a percentage of assets and off balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general allowance for credit losses except for certain limitations. An institution’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2011 the Bank met all capital requirements to which they were subject.

For additional information regarding the Company’s capital ratios and requirements, see “Management’s Discussion and Analysis - Capital Resources, Commitments and Capital Requirements” and notes to the consolidated financial statements.

FDICIA contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized.”

The FDIC has issued regulations to implement the “prompt corrective action” provisions of FDICIA. In general, the regulations define the five capital categories as follows:

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an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures;

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an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater;

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an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%;

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an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and

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an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.

The FDIC also, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.

Generally, FDICIA requires that an “undercapitalized” institution must submit an acceptable capital restoration plan to the appropriate federal banking agency within 45 days after the institution becomes “undercapitalized” and the agency must take action on the plan within 60 days. The appropriate federal banking agency may not accept a capital restoration plan unless, among other requirements, each company having control of the institution has guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of the three consecutive calendar quarters and has provided adequate assurances of performance. The aggregate liability under this provision of all companies having control of an institution is limited to the lesser of:

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5% of the institution’s total assets at the time the institution becomes “undercapitalized” or

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the amount which is necessary, or would have been necessary, to bring the institution into compliance with all capital standards applicable to the institution as of the time the institution fails to comply with the plan filed pursuant to FDICIA.

An “undercapitalized” institution may not acquire an interest in any company or any other insured depository institution, establish or acquire additional branch offices or engage in any new business unless the appropriate federal banking agency has accepted its capital restoration plan, the institution is implementing the plan, and the agency determines that the proposed action is consistent with and will further the achievement of the plan, or the appropriate Federal banking agency determines the proposed action will further the purpose of the “prompt corrective action” sections of FDICIA.

If an institution is “critically undercapitalized,” it must comply with the restrictions described above. In addition, the appropriate Federal banking agency is authorized to restrict the activities of any “critically undercapitalized” institution and to prohibit such an institution, without the appropriate Federal banking agency’s prior written approval, from:

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entering into any material transaction other than in the usual course of business;

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engaging in any covered transaction with affiliates (as defined in Section 23A(b) of the Federal Reserve Act);

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paying excessive compensation or bonuses; and

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paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average costs of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas.

The “prompt corrective action” provisions of FDICIA also provide that in general no institution may make a capital distribution if it would cause the institution to become “undercapitalized.” Capital distributions include cash (but not stock) dividends, stock purchases, redemptions, and other distributions of capital to the owners of an institution.

Additionally, FDICIA requires, among other things, that:

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only a “well capitalized” depository institution may accept brokered deposits without prior regulatory approval and

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the appropriate federal banking agency annually examine all insured depository institutions, with some exceptions for small, “well capitalized” institutions and state-chartered institutions examined by state regulators. FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.

As of December 31, 2011, the Bank met the capital requirements of a “well capitalized” institution. Bank holding companies are not subject to “prompt corrective action” of FDICIA.

The FDIC has proposed revising its risk-based capital requirements to ensure that such requirements provide for explicit consideration by commercial banks of interest rate risk. Under the proposed rule, a bank’s interest rate risk exposure would be quantified using either the measurement system set forth in the proposal or the bank’s internal model for measuring such exposure, if such model is determined to be adequate by the bank’s examiner. If the dollar amount of a bank’s interest rate risk exposure, as measured by either measurement system, exceeds 1% of the bank’s total assets, the bank would be required under the proposed rule to hold additional capital equal to the dollar amount of the excess. It is anticipated that the regulatory agencies will issue a revised proposed rule for further public comment. Pending issuance of such revised proposal, the Bank’s management cannot determine what effect, if any, an interest rate risk component would have on the capital of the Bank.

Enforcement Powers. Congress has provided the federal bank regulatory agencies with an array of powers to enforce laws, rules, regulations and orders. Among other things, the agencies may require that institutions cease and desist from certain activities, may preclude persons from participating in the affairs of insured depository institutions, may suspend or remove deposit insurance, and may impose civil money penalties against institution-affiliated parties for certain violations.

Maximum Legal Interest Rates. Like the laws of many states, Florida law contains provisions on interest rates that may be charged by banks and other lenders on certain types of loans. Numerous exceptions exist to the general interest limitations imposed by Florida law. The relative importance of these interest limitation laws to the financial operations of the Bank will vary from time to time, depending on a number of factors, including conditions in the money markets, the costs and availability of funds, and prevailing interest rates.

Bank Branching. Banks in Florida are permitted to branch state wide. Such branch banking, however, is subject to prior approval by the FDIC and the Florida Office. Any such approval would take into consideration several factors, including the bank’s level of capital, the prospects and economics of the proposed branch office, and other conditions deemed relevant by the FDIC and the Florida Office for purposes of determining whether approval should be granted to open a branch office.

Change of Control. Federal law restricts the amount of voting stock of a bank holding company and a bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Bank may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Federal law also imposes restrictions on acquisitions of stock in a bank holding company and a state bank. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company (such as the Company). Upon receipt of such notice, the Federal Reserve may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a member or group acquires a certain percentage or more of a bank holding company’s or state bank’s voting stock, or if one or more other control factors set forth in the Act are present.

Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1996, provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state will be permissible one year after enactment. Interstate branching and consolidation of existing bank subsidiaries in different states is permissible. Florida has a law that allows out-of-state bank holding companies (located in states that allow Florida bank holding companies to acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank holding companies. The law essentially provides for out-of-state entry by acquisition only (and not by interstate branching) and requires the acquired Florida bank to have been in existence for at least two years.

Sarbanes-Oxley Act of 2002. In 2002, the Sarbanes-Oxley Act of 2002 was enacted. The Securities and Exchange Commission (the “SEC”) has promulgated certain regulations pursuant to the Act that will continue to impose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more extensive reporting regulations and disclosure. Compliance with the Act and corresponding regulations will increase the Company’s expenses.

Effect of Governmental Policies. The earnings and businesses of the Bank are affected by the policies of various regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of credit and deals with general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for those purposes influence in various ways the overall level of investments, loans, other extensions of credit, and deposits, and the interest rates paid on liabilities and received on assets.

USA Patriot Act

The terrorist attacks in September 2001, have led to the adoption of the Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, commonly known as the USA Patriot Act. Part of the USA Patriot Act is the International Money Laundering Abatement and financial Anti-Terrorism Act of 2001. This act requires the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions. These measures include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions. Among its other provision, this law requires each financial institution to: (i) establish an anti-laundering program; (ii) establish due diligence policies, procedures and controls with respect to private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in this country. In addition, the law contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The law expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

Future Legislation

Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such legislation may change banking statutes and the operating environment of AFSI and the Bank in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of AFSI or the Bank. With the recent enactments of EESA and ARRA, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time. We cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.

The Dodd-Frank Act

On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act will have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework of authority to conduct systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, or Council, the Federal Reserve, the OCC, and the FDIC.

The following items provide a brief description of certain provisions of the Dodd-Frank Act.

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Source of strength. The Dodd-Frank Act requires all companies that directly or indirectly control an insured depository institution to serve as a source of strength for the institution.

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Limitation on federal preemption. The Dodd-Frank Act significantly reduces the ability of national banks and federal thrifts to rely upon federal preemption of state consumer financial laws.

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Mortgage loan origination and risk retention. The Dodd-Frank Act contains additional regulatory requirements that may affect our operations and result in increased compliance costs. For example, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks and thrifts, in an effort to require steps to verify a borrower’s ability to repay. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgage and other asset-backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.

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Imposition of restrictions on certain activities. The Dodd-Frank Act requires new regulations for the over-the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, and reporting. Additionally, the Dodd-Frank Act requires that certain swaps and derivatives activities be “pushed out” of insured depository institutions and conducted in non-bank affiliates.

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Expanded FDIC resolution authority. While insured depository institutions have long been subject to the FDIC’s resolution process, the Dodd-Frank Act creates a new mechanism for the FDIC to conduct the orderly liquidation of certain “covered financial companies,” including bank and thrift holding companies and systemically significant non-bank financial companies.

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Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act creates a new independent CFPB within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers.

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Deposit insurance. The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. The Dodd-Frank Act also extends until December 31, 2012, federal deposit coverage for the full net amount held by depositors in non-interest bearing transaction accounts.

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Transactions with affiliates and insiders. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions.”

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Enhanced lending limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower.

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Corporate governance. The Dodd-Frank Act addresses many investor-protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.

Many of the requirements of the Dodd-Frank Act will be implemented over time and most will be subject to regulations implemented over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear.

Other Laws

The Bank’s loans will also be subject to federal laws applicable to credit transactions, such as the following (including the rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws):

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Federal Truth-in-Lending Act – governs disclosures of credit terms to consumer borrowers;

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Home Mortgage Disclosure Act – requires financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;

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Equal Credit Opportunity Act – prohibits discrimination on the basis of race, creed or other prohibitive factors in extending credit;

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Real Estate Settlement Procedures Act – requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions; and

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Fair Credit Reporting Act – governs the manner in which consumer debts may be collected by collection agencies.

The Company and the Bank’s operations are also subject to the:

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Right to Financial Privacy Act – imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial record; and

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Electronic Funds Transfer Act and Regulation E – governs automatic deposits to, and withdrawals from, deposit accounts and customer’s rights and liabilities arising from the use of debit cards, automated teller machines and other electronic banking services.

Liquidity

A Florida-chartered commercial bank is expected to maintain an adequate liquidity reserve. The liquidity reserve may consist of cash on hand, cash on demand deposit with correspondent banks and other investments and short-term marketable securities, such as federal funds sold and United States securities or securities guaranteed by the United States.

Competition

The Company encounters strong competition both in making loans and in attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws which permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Company competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.

To compete, the Company relies upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors, and staff. Large multi-branch banking competitors tend to compete primarily by rate and the number and location of branches while smaller, independent financial institutions tend to compete primarily by rate and personal service.

Employees

As of December 31, 2011, the Company and the Bank collectively had 76 full-time employees (including executive officers) and 13 part-time employees. The employees are not represented by a collective bargaining unit. The Company considers relations with employees to be good.

Item 1A.

Risk Factors

Not applicable

Item 1B.

Unresolved Staff Comments

Not applicable

Item 2.

Properties

The following table sets forth information on the Bank’s offices as of December 31, 2011.


Location		Facility Status

Headquarters & Main Office
One Northeast First Avenue
Ocala, Florida		Leased by Bank

Gainesville Branch Office
4373 Newberry Road
Gainesville, Florida		Owned by Bank

34^thStreet Branch Office
4200 SW 34^thStreet
Gainesville, Florida		Owned by Bank

Alachua Branch
16404 NW 174^thDrive
Alachua, Florida		Owned by Bank

17^thStreet Branch Office
2510 SE Maricamp Road
Ocala, Florida		Owned by Bank

SR200 Branch Office
7605 SW SR200
Ocala, Florida		Owned by Bank

Gainesville Lending Origination Office
5532 NW 43^rdSt, Suite D
Gainesville, FL		Leased by Bank

Gainesville Lending Origination Office
4200 SW 34^thStreet
Gainesville, FL		Owned by Bank

Ocala Lending Origination Office
2226 E. Silver Springs Blvd
Ocala, FL		Leased by Bank

Ocala Lending Origination Office
7621 SW SR200
Ocala, FL		Leased by Bank

St. Augustine Lending Origination Office
2738 U.S. 1 S.
St. Augustine, FL		Leased by Bank


Jacksonville Origination Office
13500 Sutton Park Drive South, Suite 102
Jacksonville, FL		Leased by Bank

Ponte Vedra Lending Origination Office
115-B Solana Road
Ponte Vedra Beach, FL		Leased by Bank

Mount Dora Lending Origination Office
17521 US Hwy 441 Ste. 30
Mount Dora, FL		Leased by Bank

None of these properties are encumbered by any liens or mortgages. Other than in the ordinary course of the Bank’s lending and investment business, the Company does not invest in real estate or real estate mortgages. Such activities are described in “Description of Business” and “Management’s Discussion and Analysis.”

Item 3.

Legal Proceedings

As of December 31, 2011, neither the Company nor the Bank was a party to any material legal proceedings.

Item 4.

Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Common Stock

There is no public market for the Common Stock and only isolated, privately negotiated sales of Common Stock have occurred since the Bank opened for business in February 2005, and AFSI became a bank holding company by acquiring the Bank on November 16, 2005. There is no established public trading market for the Common Stock and, historically, the shares of Common Stock have been inactively traded. Management of the Company is aware of certain transactions in its Common Stock, although the trading prices and number of shares transferred in all transactions are not known. The last known trade occurred at $5.00 per share. On December 31, 2011, AFSI had approximately 640 shareholders of record.

Neither the Bank nor AFSI has paid any cash dividends on shares of their Common Stock. AFSI does not intend to pay dividends for the foreseeable future. If at any time the Board of Directors of AFSI determines to pay dividends, such payment will depend upon several factors including AFSI’s earnings, financial condition and capital needs, the impact of legislation and regulations as then in effect or as may be proposed, economic conditions, and such other factors as the Board may deem relevant. Further, dividend payments by AFSI are restricted by statute. AFSI’s ability to make dividend payments also is subject to AFSI and the Bank meeting on a continuing basis all of their capital requirements and achieving and continuing profitable operations. There can be no assurance that future capital or earnings of the Bank will support dividend payments. No assurance can be given that dividends will be paid or, if paid, what the amount of dividends will be or whether such dividends, once paid, will continue. We are currently prohibited from paying dividends without the approval of the Federal Reserve, as described on page 4, under the heading “Regulatory Matters.” As a result, we did not pay dividends on our Series A or Series B Preferred stock in February, 2012.

The primary source of funds for payment of dividends by AFSI will be dividends received from the Bank. Payments by the Bank to AFSI are limited by law and regulations of the bank regulatory authorities. There are various statutory and contractual limitations on the ability of the Bank to pay dividends to AFSI. The FDIC and the Florida Office also have the general authority to limit the dividends paid by banks if such payment may be deemed to constitute an unsafe and unsound practice. Under Florida law applicable to banks and subject to certain limitations, after charging off bad debts, depreciation and other worthless assets, if any, the board of directors of a bank may declare a dividend of up to the bank’s aggregate net income for the current year combined with any retained earnings for the preceding two years as the board shall deem to be appropriate and, with the approval of the Florida Office, may declare a dividend from retained earnings for prior years. No dividends may be paid at a time when a bank’s net earnings from the preceding two years is a loss, or which would cause the capital accounts of the bank to fall below the minimum amount required by law, regulation, order, or any written agreement with the Florida Office or a federal regulatory agency.

Florida law applicable to companies (including the Company) provides that dividends may be declared and paid only if, after giving it effect, (i) the company is able to pay its debts as they become due in the usual course of business, and (ii) the company’s total assets would be greater than the sum of its total liabilities plus the amount that would be needed if the company were to be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend.

AFSI repurchased 20,000 shares of its common stock from the Bank in 2011. The Bank had taken title to the shares when it foreclosed on a lien on such shares which secured a loan made by the Bank.

The following table sets forth information about the number of shares reserved for issuance under the 2005 Stock Plan as of December 31, 2011.


	Number of securities to be issued upon exercise of outstanding options		Weighted average exercise price of outstanding options		Number of securities remaining available for future issuance
Plans approved by security holders		243,953	$	10.12		127,512
Equity compensation plans not approved by security holders		0	$	00.00		0

Total		243,953	$	10.12		127,512

Item 6.

Selected Financial Data

Not Applicable

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

SELECTED FINANCIAL DATA

The following table presents selected financial data for the Company. The data for the years 2009, 2010 and 2011 is derived from audited financial statements of the Company. The selected financial data should be read in conjunction with, and are qualified in their entirety by, the consolidated financial statements and the notes thereto and the other information included elsewhere herein.

SELECTED CONSOLIDATED FINANCIAL DATA AT DECEMBER 31, OR FOR THE YEAR THEN ENDED


($ in thousands, except per share amounts)	2011			2010			2009

Total assets	$	284,516			302,990			310,583
Loans, net		194,274			213,069			228,355
Cash and cash equivalents		5,077			6,404			22,098
Securities-Available for Sale		50,216			49,304			31,282
Deposits		241,228			251,344			249,989
Borrowed funds		17,754			24,054			28,633
Stockholders’ equity		24,257			26,634			30,706

Interest income	$	12,460			13,968			14,261
Interest expense		3,687			5,030			6,732
Net interest income		8,773			8,938			7,529
Provision for loan losses		4,460			6,635			1,012
Net interest income after provision for loan losses		4,313			2,303			6,517
Noninterest income		2,457			2,480			1,522
Noninterest expense		11,209			9,792			7,975
(Loss) earnings before income tax (benefit) expense		(4,439	)		(5,009	)		64
Income tax (benefit) expense		(1,653	)		(1,849	)		57
Net (loss) earnings		(2,786	)		(3,160	)		7
Basic and diluted (loss) per common share		(1.21	)		(1.35	)		(.15	)

SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER DATA:


	2011			2010			2009

Return on average assets		(0.92	)%		(1.01	)%		0.00	%
Return on average equity		(10.70	)%		(10.98	)%		0.02	%
Dividend payout ratio		N/A			N/A			N/A
Average equity to average assets		8.59	%		9.16	%		10.56	%
Total equity to total assets		8.53	%		8.79	%		9.89	%
Yield on average earning assets (1)		4.58	%		4.86	%		5.35	%
Net interest margin		3.23	%		3.11	%		2.83	%
Nonperforming assets to total assets		3.86	%		4.02	%		1.42	%
Nonperforming loans to total loans (2)		3.33	%		2.74	%		1.21	%
Allowance for loan losses to gross loans		2.70	%		1.90	%		1.31	%
Noninterest expenses to average assets		3.70	%		3.12	%		2.75	%
Operating efficiency ratio (3)		99.81	%		85.76	%		88.11	%
Net interest income to noninterest expenses		78.27	%		91.28	%		94.41	%
Total common shares outstanding		2,633,208			2,653,208			2,653,208
Book value per common share outstanding	$	6.67		$	7.54		$	9.10
Number of banking offices (all full-service)		6			6			6

(1)	Reflects interest income as a percent of average interest earning assets.

(2)	Non-performing loans consist of nonaccrual loans and accruing loans contractually past due ninety days or more.

(3)	Noninterest expense divided by the sum of net interest income plus noninterest income.

General

AFSI was incorporated on August 16, 2005 for the purpose of operating as a one-bank holding company. AFSI currently owns 100% of the outstanding shares of the Bank and North Central Florida Developers Corporation, (collectively, the “Company”). The Bank is a Florida-chartered commercial bank which opened for business on February 28, 2005. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation. The Bank provides community banking services to business and individuals from its banking offices located in Ocala, Gainesville and Alachua, Florida. North Central Florida Developers Corporation was formed in 2008 with the purpose of holding loans or assets that might require a longer-term hold in order to realize full economic value.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation up to applicable limits. The operations of the Bank are subject to the supervision and regulation of the FDIC and the Florida Office of Financial Regulation.

Historically, the Bank’s market area has been served both by large banks headquartered out of state as well as a number of community banks offering a higher level of personal attention, recognition and service. The large banks have generally applied a transactional business approach, based upon volume considerations, to the market while community banks have traditionally offered a more service relationship approach. Recent mergers and acquisitions have created an opportunity for the Bank. The Bank’s strategic focus is to exploit this opportunity by catering to the “displaced bank customer” in this marketplace.

The Bank provides a range of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by the Bank include: demand interest bearing and noninterest bearing accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards, debit cards, direct deposits, notary services, money orders, night depository, travelers’ checks, cashier’s checks, domestic collections, savings bonds, bank drafts, automated teller services, drive-in tellers, banking by mail and the full range of consumer loans, both collateralized and uncollateralized. In addition, the Bank makes secured and unsecured commercial and real estate loans and issues stand-by letters of credit. The Bank provides automated teller machine (ATM) cards and is a member of the Star ATM network thereby permitting customers to utilize the convenience of the Bank’s ATM network and Star member machines both nationwide and internationally. The Bank does not have trust powers and, accordingly, no trust services are provided.

The Bank’s target market is owner occupied and non owner occupied commercial real estate, small businesses, developers, consumers and professionals. The small business customer (typically a commercial entity with sales of $10 million or less) has the opportunity to generate significant revenue for banks yet is generally underserved by large bank competitors. These customers generally can afford profitability opportunities more than the average retail customer.

The Bank has actively pursued its targeted market for deposits, particularly the small businesses and professionals. In today’s environment, the product of every system itself becomes a sales tool. Recognizing that fact, the Bank endeavors to offer current technology to the marketplace. Such technology includes debit cards, internet banking and voice response account information systems. The goal is to provide a “high tech - high touch” experience.

As of December 31, 2011, the Bank had grown to approximately $285 million in total assets, $241 million in deposits, and $194 million in portfolio net loans and $10 million in loans held for sale. The Bank attributes its successful growth to its location in a dynamic growth area and its focus on its targeted market.

The revenues of the Bank are primarily derived from interest on, and fees received in connection with, real estate and other loans, from interest and dividends from investment securities, service charge income generated from demand accounts and ATM fees, and other services. The principal sources of funds for the Bank’s lending activities are its deposits, loan repayments, and proceeds from investment securities. The principal expenses of the Bank are the interest paid on deposits, and operating and general administrative expenses.

Lending Activities

The Bank’s loans are concentrated in commercial and real estate loans. A majority of the Bank’s loans are made on a secured basis, and, as of December 31, 2011, approximately 87% of the loan portfolio consisted of loans secured by first or second mortgages on residential or commercial real estate.

The Bank’s real estate loans are secured by mortgages and consist primarily of loans to individuals and businesses for the purchase, construction of, improvement of or investment in real estate, or for various other consumer and business purposes (whether or not related to the real estate securing them). The Bank also engages in lending to individuals and builders for the construction of single-family residences. These real estate loans may be made at fixed or variable interest rates. The Bank generally makes commercial real estate loans repayable in monthly installments based on up to a 20-year amortization schedule which become payable in full for terms generally five years or less. The Bank’s residential real estate loans generally are repayable in monthly installments based on up to a 30-year amortization schedule with variable interest rates. Fixed rate residential loans are available and are subsequently sold on the secondary market.

The Bank also makes non-real estate commercial loans which include loans to individuals and small-to-medium sized businesses and professionals located primarily in Marion and Alachua Counties for working capital, equipment purchases, and various other business purposes. A majority of these commercial loans are secured by inventory, equipment or similar assets, but these loans may also be made on an unsecured basis. Commercial loans may be made at variable or fixed rates of interest; typically, those loans which will have terms or amortization schedules of longer than one year will carry interest rates which vary with the prime lending rate and are generally refinanced or become payable in full in three to five years.

The Bank’s installment loan portfolio consists primarily of loans to individuals for various consumer purposes, but includes some business purpose loans which are payable on an installment basis. The majority of these loans are for terms of less than five years and are secured by liens on various personal assets of the borrowers, but installment loans also may be made on an unsecured basis. Installment loans are made at fixed and variable interest rates, and may be made based on up to a ten-year amortization schedule.

For additional information regarding the Bank’s loan portfolio, see “Page 29 Loan Portfolio” and “Page 5 Lending Activities” and footnote 3 to the consolidated financial statements.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw their funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. In the ordinary course of business, the Bank’s cash flows are generated from deposits, interest and fee income, as well as from loan repayments and the sale, repayments or maturity of securities available-for-sale. In addition to cash and due from banks, the Bank considers all securities available-for-sale and federal funds sold as primary sources of asset liquidity. Many factors affect the ability to accomplish these liquidity objectives successfully, including the economic environment, the asset/liability mix within the balance sheet, as well as the Bank’s reputation in the community. The Bank’s principal sources of funds are net increases in deposits, principal and interest payments on loans and proceeds from sales, calls and maturities of securities. The Bank used its capital resources primarily to fund existing and continuing loan commitments and to purchase securities. At December 31, 2011, the Bank had commitments to originate loans totaling $770,000 and had issued standby letters of credit of $97,000. At December 31, 2011, the Bank also had commitments to extend credit under the undisbursed portion of outstanding lines of credit of $14 million. Scheduled maturities of certificates of deposit during the twelve months following December 31, 2011, totaled $90 million. Management believes that the Bank has adequate resources to fund all its commitments, that substantially all of its existing commitments will be funded in the subsequent twelve months and, if so desired, that it can adjust the rates on certificates of deposit and other deposit accounts to retain deposits in a changing interest rate environment.

Capital Resources, Commitments and Capital Requirements

The Company’s principal sources of funds are those generated by the Bank, including net increases in deposits and other borrowings, principal and interest payments on loans, and proceeds from maturities of investment securities.

The Company uses its capital resources principally to fund existing and continuing loan commitments and to purchase investment securities. Off-balance sheet commitments to extend credit, which amounted to $770,000 at December 31, 2011, represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many commitments are expected to expire without being funded, committed amounts do not necessarily represent future cash requirements.

The following table summarizes the Company’s contractual obligations, including certain on-balance sheet and off-balance sheet obligations, at December 31, 2011 (in thousands):


	Payments Due by Period
Contractual Obligations	Total		Less Than 1 Year		1-2 Years		3-5 Years		More Than 5 Years

Time deposit maturities	$	124,872		89,758		23,783		11,331		0
FHLB advances		16,000		0		3,000		0		13,000
Other borrowings		1,754		1,754		0		0		0
Loan commitments		770		770		0		0		0
Standby letters of credit		97		97		0		0		0
Undisbursed line of credit loans		14,341		10,050		508		47		3,736


Total	$	157,834		102,429		27,291		11,378		16,736

Management believes that the Company has adequate resources to fund all its commitments and that the Company can adjust the rates and terms on time deposits and other deposit accounts to retain or obtain new deposits in a changing interest rate environment.

The Company’s stockholders’ equity was $24 million at December 31, 2011, 8.5% of total assets.

The federal banking regulatory authorities have adopted certain “prompt corrective action” rules with respect to depository institutions. The rules establish five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” The various federal banking regulatory agencies have adopted regulations to implement the capital rules by, among other things, defining the relevant capital measures for the five capital categories. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level. At December 31, 2011, the Bank met the capital ratios of a “well capitalized” financial institution with a total risk-based capital ratio of 10.16% Tier 1 risk-based capital ratio of 8.89%, and a Tier 1 leverage ratio of 6.49%. Depository institutions which fall below the “adequately capitalized” category generally are prohibited from making any capital distribution, are subject to growth limitations, and are required to submit a capital restoration plan.

There are a number of requirements and restrictions that may be imposed on institutions treated as “significantly undercapitalized” and, if the institution is “critically undercapitalized,” the banking regulatory agencies have the right to appoint a receiver or conservator.

The following table summarizes the regulatory capital levels and ratios for the Bank:


	Actual Bank Ratios			Regulatory Requirement For Well Capitalized Bank
*At December 31, 2011:*
Total capital to risk-weighted assets		10.16	%		10.00	%
Tier I capital to risk-weighted assets		8.89	%		6.00	%
Tier I capital to average assets - leverage ratio		6.49	%		5.00	%

Loan Portfolio

A significant source of the Bank’s income is the interest earned on its loan portfolio. At December 31, 2011, the Bank’s total assets were $285 million and its net loans receivable were $194 million or 68% of total assets.

The Bank’s primary market area consists of the Central Florida region (consisting primarily of Marion and Alachua Counties and surrounding areas). The Bank’s market area’s economic base is diversified. Significant industries include agribusiness and manufacturing, service enterprises, technology and information concerns. Adverse conditions in any one or more of the industries operating in such markets or a slow-down in general economic conditions could have an adverse effect on the Bank.

Lending activities are conducted pursuant to a written policy which has been adopted by the Bank. Each loan officer has defined lending authority beyond which loans, depending upon their type and size, must be reviewed and approved by a loan committee comprised of certain officers and directors of the Bank.

The composition of the Bank’s loan portfolio was as follows ($ in thousands):


	December 31,
	2011						2010
	Amount			% of Total			Amount			% of Total

Commercial real estate	$	119,244			59.8	%	$	131,503			60.7	%
Residential real estate and home equity		46,774			23.4	%		52,431			24.2	%
Construction		6,520			3.3	%		4,819			2.2	%
Commercial		19,489			9.8	%		20,587			9.5	%
Consumer		7,284			3.7	%		7,471			3.4	%


Total loans		199,311			100.0	%		216,811			100.0	%


Less: Allowance for loan losses		(5,397	)					(4,115	)
Deferred loan costs, net		360						373


Loans receivable, net	$	194,274					$	213,069


	December 31,
	2009						2008						2007
	Amount			% of Total			Amount			% of Total			Amount			% of Total

Commercial real estate	$	144,190			62.4	%	$	102,788			50.1	%	$	80,652			49.1	%
Residential real estate and home equity		40,937			17.7	%		34,286			16.7	%		27,440			16.7	%
Construction		15,400			6.7	%		45,569			22.2	%		39,722			24.2	%
Commercial		22,406			9.7	%		19,635			9.6	%		13,889			8.4	%
Consumer		8,070			3.5	%		2,928			1.4	%		2,699			1.6	%


Total loans		231,003			100.0	%		205,206			100.0	%		164,402			100.0	%


Less: Allowance for loan losses		(3,035	)					(2,714	)					(2,046	)
Deferred loan costs, net		387						300						351


Loans receivable, net	$	228,355					$	202,792					$	162,707

Maturities of Loans. The following table shows the contractual maturities of the Bank’s loan portfolio at December 31, 2011. Loans with scheduled maturities (based on only contract term) are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts, if any, are reported in the “due one year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The table does not include prepayment or scheduled principal repayments (in thousands):


Type of Loan	Due in 1 Year or Less		Due After 1 to 5 Years		Due After 5 Years		Total

Commercial Real Estate	$	43,493		62,582		13,169		119,244
Residential Real Estate and Home Equity		2,045		8,305		36,424		46,774
Construction		2,221		487		3,812		6,520
Commercial		5,319		9,035		5,135		19,489
Consumer		3,359		3,559		366		7,284


Total	$	56,437		83,968		58,906		199,311

For the above loans due after one year or more, the following is a presentation of an analysis of sensitivities to changes in interest rates at December 31, 2011 (in thousands):


Type of Loan	Fixed Interest Rate		Floating Interest Rate		Total

Commercial Real Estate	$	29,033		46,718		75,751
Residential Real Estate and Home Equity		13,067		31,662		44,729
Construction		941		3,358		4,299
Commercial		2,977		11,193		14,170
Consumer		3,649		276		3,925


Total	$	49,667		93,207		142,874

The following table sets forth certain information on non-accrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information (dollars in thousands). The increase in non-accrual loans is primarily attributable to the downturn in the economy, and the expectations for a lengthened period of economic weakness.


	At December 31,
	2011			2010			2009			2008			2007
Non-accrual loans:
Commercial real estate	$	4,887			4,703			363			272			—
Commercial		65			158			—			—			—
Construction and land development		1,368			—			1,724			781			—
Residential		121			782			755			444			—
Home equity		0			—			—			—			—
Consumer		27			189			—			—			—


Total non-accrual loans	$	6,468			5,832			2,842			1,497			—


Accruing loans over 90 days delinquent:
Commercial real estate		—			—			—			—			—
Commercial		—			—			—			—			—
Consumer		—			—			—			—			—


Total accruing loans over 90 days delinquent		—			—			—			—			—


Total non-performing loans	$	6,468			5,832			2,842			1,497			—


Foreclosed assets		4,523			6,359			1,583			651			—


Total non-performing loans and foreclosed assets	$	10,991			12,191			4,425			2,148			—

Total non-performing loans as a percentage of total loans		3.25	%		2.69	%		1.23	%		0.73	%		—

Total non-performing loans as a percentage of total assets		2.27	%		1.92	%		0.92	%		0.58	%		—

Total accruing loans over 90 days delinquent as a percentage of total assets		—			—			—			—			—


Restructured troubled debt	$	9,622			8,679			1,836			3,085			—

Loan Quality

Management seeks to maintain a high quality of loans through sound underwriting and lending practices. As of December 31, 2011, approximately 87% of the total loan portfolio was collateralized by commercial and residential real estate mortgages. The level of non-performing loans and real estate owned also is relevant to the credit quality of a loan portfolio. As of December 31, 2011, there was $6,468,000 in non-performing loans (those 90 days or more past due).

The commercial real estate mortgage loans in the Bank’s portfolio consist of fixed and adjustable-interest rate loans which were originated at prevailing market interest rates. The Bank’s policy has been to originate commercial real estate mortgage loans predominantly in its primary market area. Commercial real estate mortgage loans are generally made in amounts up to 80% of the appraised value of the property securing the loan and entail significant additional risks compared to residential mortgage loans. In making commercial real estate loans, the Bank primarily considers the net operating income generated by the real estate to support the debt service, the financial resources and income level and managerial expertise of the borrower, the marketability of the collateral and the Bank’s lending experience with the borrower.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his employment and other income and which are collateralized by real property whose value tends to be more readily ascertainable, commercial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of their business and generally are collateralized by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself, which is subject to adverse conditions in the economy. Further, the collateral underlying the loans may depreciate over time, cannot be appraised with as much precision as real estate, and may fluctuate in value based on the success of the business.

Construction loans are made to businesses and individuals to acquire land and construct improvements. These improvements can be both structural like homes and commercial buildings, or could be roads for such things as residential subdivisions. Repayment generally comes from the sale of the property, or occasionally, from permanent financing. The bank underwrites these loans carefully, reviewing such areas as the selling market, contracts on the property, surrounding development trends, overall market trends and most importantly, the ability of the borrower to service the debt for an extended time if necessary. These loans are secured with mortgages on the real estate and enhanced with other loan terms.

The Bank makes consumer and personal loans on a collateralized and noncollateralized basis. These loans are often collateralized by automobiles, recreational vehicles and mobile homes. Consumer and personal loans also are generated by the Bank. Such loans generally have a term of 60 months or less.

Loan concentrations are defined as amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. The Bank, on a routine basis, monitors these concentrations in order to consider adjustments in its lending practices to reflect economic conditions, loan to deposit ratios, and industry trends. As of December 31, 2011, loans collateralized with mortgages on real estate represented 87% of the loan portfolio and were to borrowers in varying activities and businesses.

The Loan Committee of the Board of Directors of the Bank concentrates its efforts and resources, and that of its senior management and lending officers, on loan review and underwriting procedures. Internal controls include ongoing reviews of loans made to monitor documentation and the existence and valuations of collateral. In addition, management of the Bank has established a review process with the objective of identifying, evaluating, and initiating necessary corrective action for marginal loans. The goal of the loan review process is to address classified and non-performing loans as early as possible.

Classification of Assets and Potential Problem Loans

Generally, interest on loans accrues and is credited to income based upon the principal balance outstanding. It is management’s policy to discontinue the accrual of interest income and classify a loan as non-accrual when principal or interest is past due 90 days or more unless, in the determination of management, the principal and interest on the loan are well collateralized and in the process of collection, or when in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. Consumer installment loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income.

Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”). OREO properties are recorded at the lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for credit losses at the time it is transferred to OREO. Further write-downs in OREO are recorded at the time management believes additional deterioration in value has occurred and are charged to noninterest expense. As of December 31, 2011, the Company had OREO totaling $4,523,000.

Accounting standards require the Bank to identify loans, for which the Bank probably will not receive full repayment of principal and interest, as impaired loans. The Statements require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the observable market price of the loan, or the fair value of the underlying collateral if the loan is collateral dependent. The Bank has implemented the Statements by including in its quarterly review of the adequacy of the allowance for credit losses, to also identify and value impaired loans in accordance with guidance in the Statements. Loans totaling $13,790,000 were deemed to be impaired under the Bank’s policy at December 31, 2011.

At December 31, 2011, the Bank had no accruing loans which were contractually past due 90 days or more as to principal and interest and $9,622,000 in troubled debt restructurings.

Classified Assets. Federal regulations and the Bank’s policy require the classification of loans and other assets, such as debt and equity securities, considered to be of lesser quality as “substandard”, “doubtful” or “loss” assets. An asset would be considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligator or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected. Assets that would be classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full”, on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets that would be classified as “loss”, are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition, the Bank’s policies require that assets which do not currently expose the insured institution to sufficient risk to warrant classification as substandard but possess other weaknesses are designated “special mention” by management.

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience in the industry, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and industry standards. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

When calculating the appropriate allowance for loan losses and when collectively evaluating loans for impairment, three years of historical loss information is used and adjusted according to qualitative factors that include changes in lending policies and procedures, changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, changes in the nature and volume of the portfolio and in the terms of loans, changes in the experience, ability, and depth of lending management and other relevant staff, changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, changes in the quality of the institution’s loan review system, changes in the value of underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit, and changes in the level of such concentrations, and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

When loans deteriorate causing an additional risk, the appropriate historical loss factor used in the allowance for loan losses calculation may be increased to provide for an increased loan loss provision and increased allowance for loan losses accordingly.

During 2011, Nonaccrual loans changed from $5,832,000 as of December 31, 2010 to $6,468,000 as of December 31, 2011. Other real estate owned changed from $6,359,000 to $4,523,000 during the same period. In 2011, charge-offs totaled $3,239,000 versus $5,816,000 in 2010. Provision for loan losses was $4,460,000 in 2011 and $6,635,000 in 2010. The allowance for loan losses totaled approximately $5,397,000, or 2.70% of total loans at December 31, 2011 and $4,115,000, or 1.89% of total loans at December 31, 2010.

Loans graded Substandard decreased from $20,343,000 at December 31, 2010 to $15,851,000 at December 31, 2011, a decrease of 22%. Past due loans decreased from $7,409,000 at December 31, 2010 to $4,951,000 during the same period.

If an asset is impaired, the estimated fair value of the asset would be determined and if that value is less than the then carrying value of the asset, the difference would be established as a specific reserve. If an asset is classified as loss, the amount of the asset classified as loss would be reserved. General reserves or general valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities but, unlike specific reserves, are not allocated to particular assets.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate and home equity loans for impairment disclosures.

Considering the nature of the Bank’s loan portfolio, management believes that the allowance for loan losses at December 31, 2011, was adequate.

The Bank’s allowance for loan losses was allocated using historical loss experience, environmental qualitative factors, and specific reserves for impaired loans based on management’s best estimate of the fair value of collateral securing these loans or based on projected future cash flows from the sale of the underlying collateral and payments from borrowers and guarantors. The allowance was allocated as follows (in thousands):


	At December 31,
	2011					2010
	Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans
At the end of year allocated to:

Commercial	$	437		9.8	%	$	427		9.5	%
Commercial real estate		3,398		59.8	%		2,367		60.7	%
Residential real estate and home equity		623		23.4	%		1,094		24.2	%
Construction		611		3.3	%		23		2.2	%
Consumer		328		3.7	%		204		3.4	%


Total	$	5,397		100.0	%	$	4,115		100.0	%


	At December 31,
	2009					2008					2007
	Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans
At the end of year allocated to:

Commercial	$	263		9.7	%	$	201		9.6	%	$	208		8.4	%
Commercial real estate		2,289		62.4	%		1,627		50.1	%		1,060		49.1	%
Residential real estate and home equity		208		17.7	%		206		16.7	%		139		16.7	%
Construction		221		6.7	%		624		22.2	%		593		24.2	%
Consumer		54		3.5	%		56		1.4	%		46		1.6	%


Total	$	3,035		100.0	%	$	2,714		100.0	%	$	2,046		100.0	%

The following table sets forth certain information with respect to activity in our allowance for loan losses during the years indicated (dollars in thousands):


	At December 31,
	2011			2010			2009			2008			2007
Allowance at beginning of year	$	4,115			3,035			2,714			2,046			1,345

Charge-offs:
Commercial real estate	$	1,212			3,650			339			—			—
Commercial		154			1,014			—			—			—
Construction		—			15			—			371			—
Residential		836			314			307			76			—
Home equity		717			769			—			—			—
Consumer		320			54			46			—			—


Total charge-offs	$	3,239			5,816			692			447			—


Recoveries:
Commercial real estate		7			222			—			—			—
Commercial		—			2			—			—			—
Residential		52			35
Consumer		2			2			1			—			—


Total recoveries	$	61			261			1			—			—


Provision for loan losses charged to operations		4,460			6,635			1,012			1,115			701


Allowance at end of year	$	5,397			4,115			3,035			2,714			2,046


Ratio of net charge-offs during the year to Average loans outstanding during the year		1.54	%		2.46	%		0.31	%		0.24	%		—


Allowance for loan losses as a percentage Of total loans at end of year		2.70	%		1.90	%		1.31	%		1.32	%		1.24	%


Allowance for loan losses as a percentage of non-performing loans		83.44	%		70.56	%		106.79	%		181.30	%		—

Investment Securities

At December 31, 2011 the Bank’s investment portfolio has been classified as Available-for-Sale with no securities classified as Held-to-Maturity. The following table sets forth the carrying amount of the Bank’s investment portfolio ($ in thousands):


	At December 31,
	2011		2010		2009
*Available for Sale:*
Mortgage-backed securities Corporate Bonds	$	47,164 1,993		49,304 —		30,277 —
U.S. Government agency securities		1,059		—		1,005


Total securities available for sale	$	50,216		49,304		31,282


Federal Home Loan Bank stock	$	1,266		1,409		1,499
Federal funds sold		—		3,015		11,925
Interest-earning deposits		224		262		285
Interest-bearing time deposits in banks	$	—		—		8,182

All mortgage-backed securities are government sponsored entity (GSE) issued.

The carrying amount and weighted average yields for investments at December 31, 2011 are shown below ($ in thousands):


Maturing In	Mortgage- Backed		U.S. Government Agency Securities		Corporate Bonds		Total		Weighted- Average Yields (1)

Due in 5 to 10 years	$	—		—		1,993		1,993		4.28	%
Due after 10 years		—		1,059		—		1,059		2.12	%
Mortgage-backed securities		47,164		—		—		47,164		2.60	%


Total	$	47,164		1,059		1,993		50,216		2.64	%

(1)	All securities are listed at actual yield and not on a tax equivalent basis. No securities are tax exempt.

Deposit Activities

Deposits are the major source of the Bank’s funds for lending and other investment purposes. Deposits are attracted principally from within the Bank’s primary market area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including “jumbo” certificates in denominations of $100,000 or more) and retirement savings plans. The distribution by type of the Bank’s deposit accounts was as follows ($ in thousands):


	December 31,
	2011					2010					2009
	Amount		% of Deposits			Amount		% of Deposits			Amount		% of Deposits
Noninterest-bearing deposits	$	31,038		12.9	%	$	26,778		10.7	%	$	18,136		7.3	%
Money-market accounts		38,879		16.1			37,693		15.0			38,540		15.4
NOW		13,106		5.4			6,868		2.7			9,036		3.6
Savings		33,333		13.8			31,915		12.7			25,961		10.4


Subtotal		116,356		48.2			103,254		41.1			91,673		36.7


Time deposits:
0.00-0.99%		33,002		13.7			18,313		7.3			338		.1
1.00-1.99%		51,330		21.3			78,497		31.2			67,074		26.8
2.00-2.99%		29,492		12.2			36,484		14.5			62,893		25.2
3.00-3.99%		8,439		3.5			8,820		3.5			14,566		5.8
4.00-4.99%		457		0.2			1,157		0.5			4,283		1.7
5.00-5.99%		2,152		0.9			4,819		1.9			9,162		3.7
6.00-6.99%		—		—			—		—			—		—


Total time deposits		124,872		51.8			148,090		58.9			158,316		63.3


Total deposits	$	241,228		100.0	%	$	251,344		100.0	%	$	249,989		100.0	%

Maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.

FDIC regulations limit the ability of certain insured depository institutions to accept, renew, or rollover deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institutions’ normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew, or roll over deposits at such rates without restriction, “adequately capitalized” depository institutions may accept, renew or roll over deposits at such rates with a waiver from the FDIC (subject to certain restrictions on payments of rates), and “undercapitalized” depository institutions may not accept, renew or roll over deposits at such rates. The regulations contemplate that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the agencies to implement the prompt corrective action provisions of applicable law (see “Supervision, Regulation and Governmental Policy – Capital Requirements”). As of December 31, 2011, the Bank met the definition of a “well capitalized” depository institution.

The Bank does not have a concentration of deposits from any one source, the loss of which would have a material adverse effect on the Bank. Management believes that substantially all of the Bank’s depositors are residents in its primary market area.

The Company also utilizes customer funds in the CDARS program, which allows customers to obtain full FDIC insurance and has the Bank offer offsetting certificates of deposit in participating banks. These deposits from other banks count as brokered deposits and totaled $3.8 million as of December 31, 2011.

Time deposits of $100,000 and over, public fund deposits and other large deposit accounts tend to be short-term in nature and more sensitive to changes in interest rates than other types of deposits and, therefore, may be a less stable source of funds. In the event that existing short-term deposits are not renewed, the resulting loss of the deposited funds could adversely affect the Bank’s liquidity. In a rising interest rate market, such short-term deposits may prove to be a costly source of funds because their short-term nature facilitates renewal at increasingly higher interest rates, which may adversely affect the Bank’s earnings. However, the converse is true in a falling interest-rate market where such short-term deposits are more favorable to the Bank.

As of December 31, 2011, time deposits of $100,000 and over mature as follows (in thousands):


Due in three months or less	$	9,364
Due from three months to six months		8,126
Due from six months to one year		10,794
Due over one year		9,883


Total	$	38,167

Borrowings

The Company has entered into short-term borrowing arrangements with customers consisting of securities sold under repurchase agreements. The agreements are on a demand basis and call for the payment of interest based on the federal funds rate.

The following summarizes these borrowings ($ in thousands):


	At December 31,
	2011			2010			2009
Balance outstanding at year-end	$	1,754		$	3,054		$	7,633
Average balance outstanding during the year		2,912			4,132			7,141
Average interest rate paid		0.44	%		0.51	%		0.48	%
Maximum amount outstanding at any month-end during year		4,473			5,410			10,450

The Bank has available short term fed funds lines to meet short term liquidity needs. A line of $5,000,000 is available with the Independent Bankers Bank of Florida, $3,000,000 is available with The Independent BankersBank and $3,000,000 is available with BBVA Compass Bank. No balances were outstanding on these lines at December 31, 2011.

The Bank also has an agreement with the Federal Home Loan Bank of Atlanta and pledges its loan portfolio as collateral. There were four advances outstanding at December 31, 2011. The maturity and interest rate of the Federal Home Loan Bank (“FHLB”) advances are as follows at December 31, 2011 ($ in thousands):


Advance	Maturity		Interest Rate			Amount
5/23/06		2016		4.47	%	$	5,000
8/30/06		2016		4.71	%		3,000
5/18/07		2017		4.22	%		5,000
1/20/11		2012		0.35	%		3,000


						$	16,000

One advance with a 2016 maturity date and interest rate of 4.47% has a call feature benefiting the issuer with a call date of February 23, 2012. The advance with a 2017 maturity date has a call feature benefiting the issuer with a call date of February 21, 2012.

Results of Operations

Net interest income, which constitutes the principal source of income for the Bank, represents the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. The principal interest-earning assets are federal funds sold, time deposits in banks, investment securities and loans receivable. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts (“NOW accounts”), savings deposits, money-market accounts and Federal Home Loan Bank advances. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on them.

The following table sets forth, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) interest-rate spread; and (v) net interest margin; and (vi) weighted average yields and rates. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities. The yields and costs include the amortization of fees which are considered to constitute adjustments to yields ($ in thousands).


	December 31,
	2011							2010							2009
	Average Balance		Interest and Dividends		Average Yield/ Rate			Average Balance		Interest and Dividends		Average Yield/ Rate			Average Balance		Interest and Dividends		Average Yield/ Rate

Interest-earning assets:
Loans	$	206,774	$	11,161		5.40	%	$	226,245	$	12,668		5.60	%	$	219,392	$	12,921		5.89	%
Securities		48,490		1,279		2.64	%		40,817		1,240		3.04	%		22,219		844		3.80	%
Other(1)		16,606		20		0.12	%		20,380		60		0.29	%		24,705		496		2.01	%


Total interest-earning assets	$	271,870	$	12,460		4.58	%	$	287,442	$	13,968		4.86	%	$	266,316	$	14,261		5.35	%


Noninterest-earning assets		31,200							26,875							23,897

Total Assets	$	303,070						$	314,317						$	290,213

Interest-bearing liabilities:
Savings, NOW and MMKT		85,479		598		0.70	%		73,087		846		1.16	%		58,234		409		0.70	%
Time Deposits <$100,000		97,246		1,612		1.66	%		109,746		2,322		2.12	%		103,760		3,871		3.73	%
Time Deposits >=$100,000		43,442		836		1.92	%		52,254		1,166		2.23	%		49,407		1,636		3.31	%

Deposits		226,167		3,046		1.35	%		235,087		4,334		1.84	%		211,401		5,916		2.80	%

Other borrowings		20,597		641		3.11	%		24,054		696		2.89	%		28,347		816		2.88	%


Total interest-bearing liabilities		246,764		3,687		1.49	%		259,141		5,030		1.94	%		239,748		6,732		2.81	%


Capitalized interest				—							—							—

Net interest expense				3,687							5,030							6,732

Noninterest-bearing deposits		29,170							23,699							18,135
Noninterest bearing liabilities		1,109							2,690							1,685
Stockholder’s equity		26,027							28,787							30,645


Total liabilities and stockholder’s equity	$	303,070						$	314,317						$	290,213


Net earning assets	$	25,106						$	28,301						$	26,568


Net Interest income			$	8,773						$	8,938						$	7,529


Interest-rate spread						3.09	%						2.92	%						2.54	%

Net interest margin(2)						3.23	%						3.11	%						2.83	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.10							1.11							1.11

(1)	Other interest-earning assets included Federal funds sold and Federal Home Loan Bank stock.

(2)	Net interest margin is net interest income divided by total interest-earning assets.

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in rate (change in rate multiplied by prior volume); (2) changes in volume (changes in volume multiplied by prior rate); and (3) changes in rate-volume (change in rate multiplied by change in volume).


	Rate			Volume			Rate/Volume			Total
	(In thousands)
Year Ended December 31, 2011 vs. 2010:
Interest-earning assets:
Loans	$	(456	)		(1,090	)		39			(1,507	)
Securities		(163	)		233			(31	)		39
Other interest earning assets		(36	)		(11	)		7			(40	)


Total		(655	)		(868	)		15			(1,508	)


Interest-bearing liabilities:
Deposits
Savings, demand, money-market and NOW deposits		(335	)		143			(57	)		(249	)
Time deposits		(668	)		(459	)		88			(1,039	)
Other borrowings		53			(100	)		(8	)		(55	)


Total		(950	)		(416	)		23			(1,343	)


Net change in net interest income	$	295			(452	)		(8	)		(165	)


	Rate			Volume			Rate/Volume			Total
	(In thousands)
Year Ended December 31, 2010 vs. 2009:
Interest-earning assets:
Loans	$	(637	)		404			(20	)		(253	)
Securities		(169	)		706			(141	)		396
Other interest earning assets		(423	)		(87	)		74			(436	)


Total		(1,229	)		1,023			(87	)		(293	)


Interest-bearing liabilities:
Deposits
Savings, demand, money-market and NOW deposits		265			104			68			437
Time deposits		(2,209	)		317			(127	)		(2,019	)
Other borrowings		4			(123	)		(1	)		(120	)


Total		(1,940	)		298			(60	)		(1,702	)


Net change in net interest income	$	711			725			(27	)		1,409

Comparison of the years ended December 31, 2011 and 2010

General Operating Results. Net loss available to common shareholders for the twelve month period ended December 31, 2011 was $3.2 million or $1.21 per basic and diluted share, compared to a net loss of $3.6 million or $1.35 per basic and diluted share for 2010. The $374,000 decrease in net loss resulted primarily from a $1.4 million increase in noninterest expenses, offset by a decrease in provision for loan losses of $2.2 million and a $1.3 million decrease in interest expense.

Interest Income. Interest income decreased $1.5 million to $12.5 million for the year ended December 31, 2011 compared to $14.0 million in interest income for the year ended December 31, 2010. The decrease was due to a decrease in the average yield earned on interest earning assets from 4.86% for the year ended December 31, 2010 to 4.58% for the year ended December 31, 2011, and a $15.6 million decrease in average interest earning assets outstanding during 2011 compared to 2010.

Interest Expense. Interest expense decreased $1.3 million from $5.0 million for the year ended December 31, 2010, to $3.7 million for the year ended December 31, 2011. The decrease was primarily due to a decrease in the average cost of interest bearing liabilities from 1.94% for the year ended December 31, 2010, to 1.49% for 2011, and a $12.4 million decrease in average interest bearing liabilities outstanding during 2011 compared to 2010.

Provision for Loan Losses. The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectibility of the Company’s loan portfolio. The Company recorded provisions for loan losses for the years ended December 31, 2011 and 2010 of $4.5 million and $6.6 million, respectively. Management believes that the allowance for loan losses, which was $5.4 million or 2.70% of gross loans at December 31, 2011, is adequate.

NonInterest Income. Noninterest income decreased $23,000 during 2011 to $2.46 million, compared to $2.48 million in 2010. The decrease was primarily due to a decrease of $478,000 in net gain on sales of securities, partially offset by an increase of $362,000 in net gain on sale of loans held for sale and an $86,000 increase in other income.

NonInterest Expense. Noninterest expenses increased by $1.4 million from $9.8 million for the twelve month period ended December 31, 2010 to $11.2 million for 2011. The increase was primarily due to increases of $565,000 in salaries and employee benefits, $92,000 in occupancy and equipment expense and $774,000 in other real estate owned expense.

Income Taxes. The income tax benefit was $1.7 million for the year ended December 31, 2011 compared to $1.8 million for 2010.

Based on the Company’s current earnings forecast and/or budget, the losses that generated the deferred tax asset are only temporary and taxable income is projected in the near future which would utilize and support the reversal of the valuation allowance initially established. Based on this positive evidence it is more likely than not that the deferred tax asset will be utilized.

The Company’s future performance will depend on a number of factors outside of our control. Some of our borrowers may not repay loans that we make to them. If a significant number of loans are not repaid, it will have an adverse effect on our earnings and overall financial condition. The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. As a result, our allowance for loan losses may not be adequate to cover actual losses, and future provision for loan losses may adversely affect our earnings. Furthermore, a prolonged economic downturn or recession in our target markets would result in operating losses, impaired liquidity and the erosion of capital. A variety of factors could cause such an economic dislocation or recession, including adverse developments in the industries in these areas. Also, a significant portion of our loan portfolio is secured by real estate located in our market areas. If real estate prices decline in our markets, the value of the real estate collateral securing our loans could be reduced. Such a reduction in the value of our collateral could increase the number of non-performing loans and adversely affect our financial performance.

In addition to pursuing loan and deposit growth, we are also utilizing an expanding branch network. We currently operate six offices. These facilities are expected to enable us to serve and acquire more loan and deposit customers. The opening of these offices and their continued operation required, and will continue to require, us to spend more money on salaries, rent and advertising. Until the new branches can produce enough net interest income to offset their incremental contribution to our non-interest expenses, they could have the effect of decreasing our net earnings.

Asset/Liability Management

A principal objective of the Company’s asset/liability management strategy is to minimize its exposure to changes in interest rates by matching the maturity and repricing horizons of interest-earning assets and interest-bearing liabilities. This strategy is overseen in part through the direction of the Bank’s Asset and Liability Committee (“ALCO”) which establishes policies and monitors results to control interest rate sensitivity.

Management evaluates interest rate risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to maintain interest rate risk within target levels for the appropriate level of risk which are determined by the ALCO. The ALCO uses internally generated reports to measure the Bank’s interest rate sensitivity. From these reports, the ALCO can estimate the net earnings effect of various interest rate scenarios.

As a part of the Company’s interest rate risk management policy, the ALCO examines the extent to which its assets and liabilities are “interest rate sensitive” and monitors the Bank’s interest rate sensitivity “gap.” An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate sensitivity gap is the difference between interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If the repricing of each bank’s assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the ALCO also evaluates how the repayment of particular assets and liabilities is impacted by changes in interest rates.

Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or period of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps”) which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment (on loans) and early withdrawal (of deposit accounts) levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.

Currently the Company has not entered into any interest rate swaps or similar hedging instruments in connection with its asset/liability management and the Company does not expect to use interest rate swaps in its operations. Further discussion on off-balance-sheet arrangements can be found in Note 10 of the Notes to Consolidated Financial Statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. The Company also did not have any significant interest rate lock commitments at December 31, 2011.

Management’s strategy is to maintain a balanced interest rate risk position to protect its net interest margin from market fluctuations.

Principal among the Company’s asset/liability management strategies has been the emphasis on managing its interest rate sensitive liabilities in a manner designed to attempt to reduce the Company’s exposure during periods of fluctuating interest rates. Management believes that the type and amount of the Company’s interest rate sensitive liabilities may reduce the potential impact that a rise in interest rates might have on the Company’s net interest income. The Company seeks to maintain a core deposit base by providing quality services to its customers without significantly increasing its cost of funds or operating expenses. Management anticipates that these accounts will continue to comprise a significant portion of the Company’s total deposit base. The Company also maintains a portfolio of liquid assets in order to reduce its overall exposure to changes in market interest rates. The Company also maintains a “floor,” or minimum rate, on certain of its floating or prime based loans. These floors allow the Company to continue to earn a higher rate when the floating rate falls below the established floor rate. All interest rate caps and floors are clearly and closely related to the loan agreement and therefore not bifurcated and valued separately.

The following table sets forth certain information relating to the Company’s interest-earning assets and interest-bearing liabilities at December 31, 2011 that are estimated to mature or are scheduled to reprice within the period shown ($ in thousands):


	Under 3 Months			3 to 12 Months			1-5 Years			Over Five Years			Total
Interest-earning deposits	$	224			—			—			—			224
Federal funds sold		—			—			—			—			—
Interest bearing time deposits in banks		—			—			—			—			—
Loans (1)		81,614			31,709			70,970			15,378			199,671
Securities (2)		1,059			—			1,019			49,404			51,482


Total rate-sensitive assets (earning assets)	$	82,897			31,709			71,989			64,782			251,377


Money market (3)		18,847			9,423			9,423			—			37,693
Savings and NOW deposits (3)		19,391			19,392			—			—			38,783
Time deposits (3)		29,943			59,815			35,114			—			124,872
Other borrowings (4)		1,754			3,000			8,000			5,000			17,754


Total rate-sensitive liabilities	$	69,935			91,630			52,537			5,000			219,102


Gap (re-pricing differences)	$	12,962			(59,921	)		19,452			59,782			32,275


Cumulative Gap	$	12,962			(46,959	)		(27,507	)		32,275


Cumulative Gap/total assets		4.6	%		(16.5	)%		(9.7	)%		11.3	%


Cumulative Gap/total earning assets		5.2	%		(18.7	)%		(10.9	)%		12.8	%


Total assets													$	284,516


Total earning assets													$	251,377

⁽¹⁾	In preparing the table above, adjustable-rate loans were included in the period in which the interest rates are next scheduled to adjust rather than in the period in which the loans mature. Fixed-rate loans were scheduled according to their contractual maturities.

⁽²⁾	Securities were scheduled based on their remaining maturity or repricing frequency. Fixed-rate mortgage-backed securities are scheduled ratably over nine years. Includes FHLB stock grouped in over five years.

⁽³⁾	Excludes noninterest-bearing deposit accounts. Money-market, NOW, and savings deposits are scheduled based on FDICIA studies on nonmaturity deposits. All other time deposits were scheduled through the maturity dates.

⁽⁴⁾	Federal Home Loan Bank advances with call features are scheduled based on call dates.

Impact of Inflation and Changing Prices

The financial statements and related financial data concerning the Company presented in this 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant impact on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.

Item 7A.

Qualitative and Quantitative Disclosures about Market Risk

Not applicable.

Item 8.

Financial Statements and Supplemental Data

The financial statements of the Company at December 31, 2011 and 2010 and for the years then ended are set forth in this Form 10-K as Exhibit 13.1.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designated by, or under the supervision of, our Principal Executive and Principal Financial Officers and effected by our Board of Directors, management and other personnel, 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 and includes those policies and procedures that:

•

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework.

Based on our assessment, management believes that, as of December 31, 2011, our internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over-financial reporting.

Item 9B.

Other Information

Not applicable.

PART III

Item 10.

Directors, Executive Officers, and Corporate Governance

The information contained under the sections captioned “Directors” and “Executive Officers” under “Election of Directors” and “Section 16(a) Reporting Requirements” in the Proxy Statement, is incorporated herein by reference.

Item 11.

Executive Compensation

The Company has a Code of Ethics that applies to its principal executive officer and principal financial officer (who is also its principal accounting officer), a copy of which is incorporated by reference into this Form 10-K as Exhibit 14.1. The information contained in the section captioned “Information about the Board of Directors and Its Committees,” and “Executive Compensation and Benefits” under “Election of Directors” in the Proxy Statement, is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information contained in the section captioned “Directors” and under “Election of Directors,” in the Proxy Statement, is incorporated herein by reference.

Item 13.

Certain Relationships and Related Transactions and Director Independence

AFSI does not make loans to our directors, officers or employees. The Bank, however, does promote lending relationships with our directors, officers and employees. Loans made to directors, executive officers and principal shareholders, defined as individuals owning 10% or more of AFSI’s common stock (collectively “Affiliates”) are governed under provisions of Section 22(h) of the Federal Reserve Act, which requires that any loans made to Affiliates, or to any related interest of an Affiliate, must (i) be on substantially the same terms, including interest rates and collateral as those prevailing at the time for comparable transactions with non-affiliated parties; and (ii) not involved more that the normal risk of repayment or present other unfavorable features. There is, however, an exception for loans made to employees who are Affiliates that are made pursuant to a benefit or compensation package that is widely available to all Bank employees and does not give a preference to Affiliates. There is also an aggregate limit of $25,000, or 5% of the amount of the Bank’s unimpaired capital and unimpaired surplus on all loans to an individual Affiliate, unless the amount has been approved by the Board of Directors and the Affiliate has abstained from participating in the voting.

There is a further exception regarding loans to executive officers of the Bank. Executive officers are those people who participate, or who have authority to participate, in major policy making functions of the Bank, regardless of their title. The Bank may lend any otherwise permissible sum of money to an executive officer for (i) financing the education of the officer’s children; (ii) a Board of Director’s approved first mortgage on the officer’s residence; or (iii) a loan secured by certain low-risk collateral. The Bank may also lend up to the higher of $25,000 or 2.5% of the Bank’s unimpaired capital and unimpaired surplus (but never more than $100,000) to an executive officer for any other purpose.

As of December 31, 2011, the Bank had an aggregate total of $11,968,000 outstanding in loans and other extensions of credit to Affiliates. At December 31, 2011, the Bank had unsecured loans outstanding with aggregate outstanding balances of $5,069,677 of which $1,744,600 were to insiders. All such loans (both those to insiders and those to unaffiliated borrowers) were underwritten to the same policy standards and are due on demand. No insider received any preferential treatment with regard to interest rates, maturity, payment schedule or other features of the loans. All of the outstanding loans to directors and executive officers are performing pursuant to their terms.

The Bank leases a loan production office facility in Gainesville, Florida from Bosshardt Realty Services, Inc. Bosshardt Realty Services, Inc. is owned by director Carol R. Bosshardt. The total amount of lease payments paid during 2011 was approximately $13,600. The lease is ongoing but may be terminated by either party, with or without cause, upon ninety days advance written notice, or may be terminated at any time upon the mutual agreement of the Bank and Bosshardt Realty Services, Inc.

Information contained in the section captioned “Directors” and under “Election of Directors” in the Proxy statement, is incorporated herein by reference.

Item 14.

Principal Accounting Fees and Services

The information contained in the section captioned “Ratification of the Appointment of the Independent Auditor for the Fiscal Year Ending December 31, 2011” in the Proxy Statement is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

The following documents are filed as part of this report as Exhibit 13.1.

Consolidated Financial Statements of Alarion Financial Services, Inc. (including all required schedules):

Independent Auditor’s Report;

Consolidated Balance Sheets at December 31, 2011 and 2010;

Consolidated Statements of Earnings, Stockholders’ Equity, and Statements of Cash Flows for years ended December 31, 2011 and 2010.

Notes to Consolidated Financial Statements

Exhibits.

Exhibits marked with an (a) were filed with the Form 10-K filed with the Securities and Exchange Commission on March 15, 2006. Exhibits marked with a (b) were filed with the Form 8-K filed with the Securities and Exchange Commission on January 27, 2009. Exhibit (c) was filed in the Annual Report on Form 10-KSB/A filed with the Commission on July 17, 2006. The Exhibits marked with a (d) were filed in Form 8-K filed with the Commission on January 27, 2009.



(a)	3.1	Articles of Incorporation

(a)	3.2	Bylaws

(b)	3.3	Articles of Amendment to the Articles of Incorporation authorizing the Series A Preferred Shares

(b)	3.4	Articles of Amendment to the Articles of Incorporation authorizing the Series B Preferred Shares

(a)	4.1	Specimen Common Stock Certificate

(a)	4.2	Warrant Plan and Specimen Warrant Plan

(b)	4.3	Form of Certificate for Series A Preferred Stock

(b)	4.4	Form of Certificate for Series B Preferred Stock

(c)	4.5	2005 Stock Plan

(a)	10.1	Employment Agreement with Jon M. Kurtz

(a)	10.2	Lease for Main Office

(b)	10.3	Letter Agreement, dated January 23, 2009 between AFSI and the United States Department of the Treasury

(b)	10.4	Form of Waiver



(b)	10.5	Form of Compliance Agreement

(b)	10.6	Securities Purchase Agreement – Standard Terms between the Company and the United States Department of the Treasury

(d)	10.8	Employment Agreement with Robert L. Page

	13.1	Financial Statements

(a)	14.1	Code of Ethics

(a)	21.1	Schedule of Subsidiaries

	31.1	Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

	31.2	Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

	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 Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.1	Certification of Chief Executive Officer to the United States Department of the Treasury

	99.2	Certification of Principal Financial Officer to the United States Department of the Treasury

	99.3	Letter to Shareholders

	101.INS	XBRL Instance Document

	101.SCH	XBRL Schema Document

	101.CAL	XBRL Calculation Linkbase Document

	101.DEF	XBRL Definition Linkbase Document

	101.LAB	XBRL Label Linkbase Document

	101.PRE	XBRL Presentation Linkbase Document

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 duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ocala, State of Florida, on the 28th day of March, 2012.

ALARION FINANCIAL SERVICES, INC.

/s/ Jon M. Kurtz

Jon M. Kurtz

Principal Executive Officer

/s/ Matthew Ivers

Matthew Ivers

Principal Financial 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 28th day of March, 2012:


/s/ Loralee W. Hutchinson		Chairperson of the Board
Loralee W. Hutchinson

/s/ Carol R. Bosshardt		Director
Carol R. Bosshardt

/s/ Gloria W. Fletcher		Director
Gloria W. Fletcher

/s/ Jon M. Kurtz		Principal Executive Officer, President and Director
Jon M. Kurtz

/s/ Ignacio L. Leon		Director
Ignacio L. Leon

/s/ Job E. White		Director
Job E. White

/s/ Tommy W. Williams, Jr.		Director
Tommy W. Williams, Jr.

Alarion Financial Services, Inc.

Form 10-K

For Fiscal Year Ending December 31, 2011

EXHIBIT INDEX


Exhibit No.		Exhibit

(a) 3.1		Articles of Incorporation

(a) 3.2		Bylaws

(b) 3.3		Articles of Amendment to the Articles of Incorporation authorizing the Series A Preferred Shares

(b) 3.4		Articles of Amendment to the Articles of Incorporation authorizing the Series B Preferred Shares

(a) 4.1		Specimen Common Stock Certificate

(a) 4.2		Warrant Plan and Specimen Warrant Plan

(b) 4.3		Form of Certificate for Series A Preferred Stock

(b) 4.4		Form of Certificate for Series B Preferred Stock

(c) 4.5		2005 Stock Plan

(a) 10.1		Employment Agreement with Jon M. Kurtz

(a) 10.2		Lease for Main Office

(b) 10.3		Letter Agreement, dated January 23, 2009 between AFSI and the United States Department of the Treasury

(b) 10.4		Form of Waiver

(b) 10.5		Form of Compliance Agreement

(b) 10.6		Securities Purchase Agreement – Standard Terms between the Company and the United States Department of the Treasury

(d) 10.7		Side Letter Agreement between the Company and the United States Department of the Treasury

(d) 10.8		Employment Agreement with Robert L. Page

13.1		Financial Statements

(a) 14.1		Code of Ethics

(a) 21.1		Schedule of Subsidiaries

31.1		Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act


		31.2		Certification of Principal Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act

		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 Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		99.1		Certification of Chief Executive Officer to the United States Department of the Treasury

		99.2		Certification of Principal Financial Officer to the United States Department of the Treasury

		99.3		Letter to Shareholders

		101.INS		XBRL Instance Document

		101.SCH		XBRL Schema Document

		101.CAL		XBRL Calculation Linkbase Document

		101.DEF		XBRL Definition Linkbase Document

		101.LAB		XBRL Label Linkbase Document

		101.PRE		XBRL Presentation Linkbase Document

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Alarion Financial Services Inc 10-K