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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number 000-51843



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ALARION FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 20-3851373                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|One Northeast First Avenue, Ocala,
Florida                     |  | 34470                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (352) 547-1200

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, Par Value $0.01



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of issuers knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

The issuers revenues for its most recent fiscal year were $ 7,867,000.

Indicate by check mark whether the issuer is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes ̈No  x

The aggregate market value of the Common Stock of the issuer held by non-affiliates of the issuer ( 1,436,588 shares) on December 31, 2006, was
approximately $15,084,174. As of such date, no organized trading market existed for the Common Stock of the issuer. The aggregate market value was computed by reference the sale price of the Common Stock of the issuer at its last sales price of
$10.50 per share. For the purposes of this response, directors, officers and holders of 10.61% or more of the issuers Common Stock are considered the affiliates of the issuer at that date.

As of February 28, 2007, there were issued and outstanding 2,062,947 shares of the issuers Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2007 filed with the Securities and Exchange Commission pursuant to Regulation 14A on March 29, 2007 are incorporated into Part III, Items
9 through 12 and 14 of this Annual Report on Form 10-KSB/A.



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TABLE OF CONTENTS



|              |  |                                                                                                                 |  |   
|------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|              |  | Page                                                                                                           
|PART I        |  | 1                                                                                                              
|              |  |                                                                                                                
|Item 1.       |  | Description of Business                                                                                         |  | 1 
|              |  | Special Note Regarding Forward-Looking Statements                                                               |  | 1 
|              |  | General                                                                                                         |  | 1 
|              |  | Critical Accounting Policies                                                                                    |  | 3 
|              |  | Lending Activities                                                                                              |  | 3 
|              |  | Deposit Activities                                                                                              |  | 6 
|              |  | Investments                                                                                                     |  | 7 
|              |  | Correspondent Banking                                                                                           |  | 7 
|              |  | Effect of Governmental Policies                                                                                 |  | 7 
|              |  | Interest and Usury                                                                                              |  | 8 
|              |  | Supervision and Regulation                                                                                      |  | 8 
|              |  | Competition                                                                                                     |  | 16
|              |  | Employees                                                                                                       |  | 16
|              |  |                                                                                                                
|Item 2.       |  | Description of Properties                                                                                       |  | 16
|              |  |                                                                                                                
|Item 3.       |  | Legal Proceedings                                                                                               |  | 18
|              |  |                                                                                                                
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 18
|              | 
|PART II       |  | 19                                                                                                             
|              |  |                                                                                                                
|Item 5.       |  | Market for the Registrants Common Equity and Related Stockholder Matters                                       |  | 19
|              |  |                                                                                                                
|Item 6.       |  | Managements Discussion and Analysis                                                                            |  | 20
|              |  |                                                                                                                
|Item 7.       |  | Financial Statements                                                                                            |  | 41
|              |  |                                                                                                                
|Item 8.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 41
|              |  |                                                                                                                
|Item 8A.      |  | Controls and Procedures                                                                                         |  | 41
|              |  |                                                                                                                
|Item 8B.      |  | Other Information                                                                                               |  | 42
|              | 
|PART III      |  | 43                                                                                                             
|              |  |                                                                                                                
|Item 9.       |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 43
|              |  |                                                                                                                
|Item 10.      |  | Executive Compensation                                                                                          |  | 43
|              |  |                                                                                                                
|Item 11.      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 43
|              |  |                                                                                                                
|Item 12.      |  | Certain Relationships and Related Transactions                                                                  |  | 43
|              |  |                                                                                                                
|Item 13.      |  | Exhibits                                                                                                        |  | 45
|              |  |                                                                                                                
|Item 14.      |  | Principal Accountant Fees and Services                                                                          |  | 45
|              | 
|SIGNATURES    |  | 46                                                                                                             
|              | 
|EXHIBIT INDEX |  | 48                                                                                                             



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##### Table of Contents

PART I



|Item 1. | Description of Business
|------- | -----------------------

Forward-Looking Statements

Some of the statements in this Form 10-KSB 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 by the directors of Alarion Bank
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 as the Company). The Bank is
a Florida state chartered commercial bank and is a full service 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.



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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
34thStreet on March 28, 2006. A branch in Alachua, Florida was opened on December 20, 2006.

The Banks deposits are insured by the Bank Insurance Fund of 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-KSB is also being used as the
Banks Annual Disclosure Statement under Federal Deposit Insurance Corporation (FDIC) Regulations. This Form 10-KSB has not been reviewed or confirmed for accuracy or relevance by the FDIC.



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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.

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.

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, 2006 were $ 106 million, or
76% 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, 2006, approximately 87% of the Banks loan portfolio consisted of loans secured by real estate, of which approximately 54% 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.



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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 12% of the Banks total loan portfolio as of December 31, 2006.

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 collectibility. 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



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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.

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.



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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, 2006, approximately 54% of outstanding loans are in the commercial real estate loan category. At
December 31, 2006, commercial loans including commercial real estate represented 66% 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, 2006, 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 collectibility of principal is unlikely. In addition, loss experience will be monitored in establishing the provision. During the year ended December 31, 2006, no 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 37% of the Banks total deposits at December 31, 2006.
Approximately 63% of the Banks deposits at December 31, 2006 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 31%
of the Banks total deposits at December 31, 2006. The majority of the deposits of the Bank are generated from Alachua and Marion County.



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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 is 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.



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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 is 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:



| |  |  | charter a bank,
| | - |  | ---------------



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| |  |  | obtain deposit insurance coverage for a newly chartered institution,
| | - |  | --------------------------------------------------------------------



| |  |  | establish a new branch office that will accept deposits,
| | - |  | --------------------------------------------------------



| |  |  | relocate an office, or
| | - |  | ----------------------



| |  |  | 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.

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



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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:



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



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



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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, 2006 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:



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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%;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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:



| |  |  | 5% of the institutions total assets at the time the institution becomes undercapitalized or
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | 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:



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



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##### Table of Contents

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



| |  |  | paying excessive compensation or bonuses; and
| | - |  | ---------------------------------------------



| |  |  | 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:



| |  |  | only a well capitalized depository institution may accept brokered deposits without prior regulatory approval and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 2006, 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.



13



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##### Table of Contents

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.



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##### Table of Contents

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.

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):



| |  |  | Federal Truth-in-Lending Act  governs disclosures of credit terms to consumer borrowers;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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:



| |  |  | 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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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, 2006, the Company and the Bank collectively had 43 full-time employees
(including executive officers) and 6 part-time employees. The employees are not represented by a collective bargaining unit. The Company considers relations with employees to be good.



|Item 2. | Description of Properties
|------- | -------------------------

The following table sets
forth information on the Banks offices as of December 31, 2006.



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##### Table of Contents

|                                                                                                                 |  |                
|---------------------------------------------------------------------------------------------------------------- |  | ---------------
|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  
|                                                                                                                 | 
|34thStreet
Branch Office 4200 SW 34thStreet Gainesville, Florida                                                 |  | Owned by Bank  
|                                                                                                                 | 
|Alachua Branch 16404 NW 174thDrive Alachua,
Florida                                                              |  | Leased by Bank 
|                                                                                                                 | 
|Future 17thStreet Branch Office (under construction) Intersection of 17thStreet and SE 25thStreet Ocala, Florida |  | Owned by Bank  

AFSIs headquarters and the Banks main office is leased by the Bank from Bernadette
Castro, 303 NE First, LLC, and Austin International Realty, LLC. The Bank entered into a master lease for an initial term of five years and six months, with three five-year renewal options. The lease rate for the entire building is $80,000 annually
for the first five years, $100,000 per year for the next five years, $103,000 for each of the succeeding five years, and $106,090 for each of the five years in the final renewal term. AFSI subleases excess space to reduce its rent expense. This
facility is a four-story, 24,000 square-foot building which is occupied by the bank as follows:



| | 1. | The ground floor, approximately 4,000 square feet (Suite 104), is occupied by the Bank for its main branch with an additional 500 square feet (Suite 105) for the Residential
Department.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The second and third floors, include additional space of approximately 500 square feet for bank operations.
| | -- | -----------------------------------------------------------------------------------------------------------



| | 3. | The fourth floor, 1,000 square feet, for administrative purposes.
| | -- | -----------------------------------------------------------------



| | 4. | The Bank also occupies an adjacent drive-through facility (117 East Silver Springs Boulevard) and a customer parking lot (303 Northeast First Avenue).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------

The Gainesville branch office is located in a building consisting of approximately 6,000 square feet. The Bank purchased this property for $985,000 and
spent an estimated $1,136,000 for construction.

The Bank opened the 34thStreet Branch Office in April of 2006. The 34thStreet property cost $1,000,000 for the 2.1 acres of land with an estimated construction cost of approximately $700,000. As of December 31, 2006 the
Company has not entered into a contract to build the branch. The Bank opened the branch in a modular facility placed on the property, until the permanent



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##### Table of Contents

facility is completed in 2007 or 2008. The Bank plans to exchange the rear 1.0 acre with a bank director for a future branch site on Tower Road, Gainesville,
Florida. This exchange has been approved by the Board of Directors and banking regulators.

The Bank anticipates opening a branch site on SE 17thStreet in Ocala in the second quarter of 2007. Land
has been purchased and site work is in progress. The Bank will open in a modular building with construction of the permanent building to begin in 2007. The Company has entered into a contract for $681,000 for the site improvements and modular
connection. The amount remaining at December 31, 2006 was $628,000.

The Alachua Branch opened December 20, 2006 is a leased
building. A permanent site will be selected in late 2007 or early 2008.

The Bank purchased a new site for $958,000 in February 2007 on
State Road 200 in Ocala. An existing building would be remodeled after a branch application is approved by the regulatory authorities, with anticipated opening late 2007.

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, and except for the Banks possible exchange of excess land at its 34thStreet branch, 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, 2006,
neither the Company nor the Bank was a party to any legal proceedings.



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

None



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##### Table of Contents

PART II



|Item 5. | Market for the Registrants Common Equity and Related Stockholder Matters
|------- | -------------------------------------------------------------------------

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 $10.50 per share. On December 31, 2006, AFSI had approximately 613 shareholders of record.

Neither the Bank nor AFSI has paid any cash dividends on the shares of 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.

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 did not repurchase any of its shares in 2006.

The following table sets forth information about the number of shares reserved for issuance under the 2005 Stock Plan as of December 31, 2006.



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##### Table of Contents

|                                                              |  |                                                                      |  |                                                       |       |                                                             |       
|------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ----------------------------------------------------- | ----- | ----------------------------------------------------------- | ------
|                                                              |  | Number of securities to be issued uponexercise of outstandingoptions |  | Weighted average exercise price ofoutstanding options |       | Number of securities remaining availablefor future issuance
|Plans approved by security holders                            |  | 218,001                                                              |  | $                                                     | 10.00 |                                                             | 17,320
|Equity compensation plans not approved by security holders(1) |  | 0                                                                    |  | $                                                     | 0     |                                                             | 0     
|                                                              |  |                                                                      |  |                                                       |       |                                                             |       
|Total                                                         |  | 218,001                                                              |  | $                                                     | 10.00 |                                                             | 17,320
|                                                              |  |                                                                      |  |                                                       |       |                                                             |       



|Item 6. | Managements Discussion and Analysis
|------- | ------------------------------------

SELECTED FINANCIAL DATA

The following table presents selected financial data for the Company. The data for the fiscal year
2005 is derived from audited financial statements of the Company (Bank prior to reorganization). The selected financial data should be read in conjunction with, and are qualified in their entirety by, the financial statements and the notes thereto
and the other information included elsewhere herein. Selected financial data for the organizational phase in 2004 prior to the bank opening was immaterial and therefore not presented.

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

($ in thousands, except per share
amounts)



|                                                    |  |      |         |   |      |        |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | ------ | -
|                                                    |  | 2006 |         |   | 2005 |       
|Total assets                                        |  | $    | 139,444 |   |      | 72,227 |  
|Loans, net                                          |  |      | 106,289 |   |      | 44,529 |  
|Cash and cash equivalents                           |  |      | 6,734   |   |      | 10,900 |  
|Securities held to maturity                         |  |      |        |   |      | 10,308 |  
|Securities-Available for Sale                       |  |      | 13,837  |   |      |       |  
|Deposits                                            |  |      | 107,642 |   |      | 57,086 |  
|Borrowed funds                                      |  |      | 16,769  |   |      | 703    |  
|Stockholders equity                                |  |      | 14,337  |   |      | 13,791 |  
|                                                    |  |     
|Interest income                                     |  | $    | 6,934   |   |      | 1,781  |  
|Interest expense                                    |  |      | 3,703   |   |      | 725    |  
|Net interest income                                 |  |      | 3,231   |   |      | 1,056  |  
|Provision for loan losses                           |  |      | 781     |   |      | 564    |  
|Net interest income after provision for loan losses |  |      | 2,450   |   |      | 492    |  
|Noninterest income                                  |  |      | 933     |   |      | 185    |  
|Noninterest expense                                 |  |      | 3,945   |   |      | 2,464  |  
|Loss before income tax benefit                      |  |      | (562    | ) |      | (1,787 | )
|Income tax benefit                                  |  |      | (199    | ) |      | (778   | )
|Net loss                                            |  |      | (363    | ) |      | (1,009 | )
|Basic and diluted loss per share                    |  |      | (.23    | ) |      | (.67   | )



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SELECTED CONSOLIDATED FINANCIAL RATIOS

AND OTHER DATA:



|                                             |  |      |           |    |      |           |   
|-------------------------------------------- |  | ---- | --------- | -- | ---- | --------- | --
|                                             |  | 2006 |           |    | 2005 |          
|Return on average assets                     |  |      | (0.33     | )% |      | (2.17     | )%
|Return on average equity                     |  |      | (2.63     | )% |      | (7.30     | )%
|Dividend payout ratio                        |  |      | N/A       |    |      | N/A       |   
|Average equity to average assets             |  |      | 12.61     | %  |      | 29.66     | % 
|Total equity to total assets                 |  |      | 10.28     | %  |      | 19.09     | % 
|Yield on average earning assets (1)          |  |      | 6.99      | %  |      | 5.05      | % 
|Net interest margin                          |  |      | 3.26      | %  |      | 2.89      | % 
|Nonperforming assets to total assets (2)     |  |      | N/A       |    |      | N/A       |   
|Nonperforming loans to total loans (2)       |  |      | N/A       |    |      | N/A       |   
|Allowance for loan losses to gross loans     |  |      | 1.25      | %  |      | 1.26      | % 
|Noninterest expenses to average assets       |  |      | 3.60      | %  |      | 5.29      | % 
|Operating efficiency ratio (3)               |  |      | 94.74     | %  |      | 198.55    | % 
|Net interest income to noninterest expenses  |  |      | 81.90     | %  |      | 42.86     | % 
|Total shares outstanding                     |  |      | 1,607,140 |    |      | 1,514,200 |   
|Book value per common share outstanding      |  | $    | 8.92      |    |      | 9.11      |   
|Number of banking offices (all full-service) |  |      | 4         |    |      | 2         |   

---

|(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.
|--- | --------------------------------------------------------------------------------------



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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 (collectively, the Company). AFSIs only business is
the ownership and operation of the Bank. 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.

The
Banks deposits are insured by the Bank Insurance Fund of 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.



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The Bank has capitalized upon its market strategy to grow rapidly. As of December 31, 2006, the Bank
had grown to approximately $139 million in total assets, $108 million in deposits, and $106 million in net loans since opening in February 2005. 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, 2006, 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 26 Loan Portfolio and Page 3 Lending Activities and footnote 3 to the consolidated financial statements.



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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, 2006, the Bank had commitments to originate loans
totaling $12 million, and had issued standby letters of credit of $1 million. At December 31, 2006, the Bank also had commitments to extend credit under the undisbursed portion of outstanding lines of credit of $29 million. Scheduled maturities
of certificates of deposit during the twelve months following December 31, 2006 totaled $46 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 $12 million at December 31, 2006, 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.



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##### Table of Contents

The following table summarizes the Companys contractual obligations, including certain on-balance
sheet and off-balance sheet obligations, at December 31, 2006 (in thousands):



|                                 |  |                        |         |                 |        |          |        |          |       |                   |       
|-------------------------------- |  | ---------------------- | ------- | --------------- | ------ | -------- | ------ | -------- | ----- | ----------------- | ------
|                                 |  | Payments Due by Period
|Contractual Obligations          |  | Total                  |         | Less Than 1Year |        | 1-3Years |        | 3-5Years |       | More Than 5 Years
|Time deposit maturities          |  | $                      | 68,100  |                 | 46,055 |          | 19,997 |          | 2,048 |                   |      
|FHLB advances                    |  |                        | 10,000  |                 | 2,000  |          |       |          |      |                   | 8,000 
|Other borrowings                 |  |                        | 6,769   |                 | 6,769  |          |       |          |      |                   |      
|Loan commitments                 |  |                        | 12,000  |                 | 12,000 |          |       |          |      |                   |      
|Standby letters of credit        |  |                        | 965     |                 | 825    |          | 140    |          |      |                   |      
|Undisbursed line of credit loans |  |                        | 28,567  |                 | 8,827  |          | 5,444  |          | 6,813 |                   | 7,483 
|                                 |  |                        |         |                 |        |          |        |          |       |                   |       
|Total                            |  | $                      | 126,401 |                 | 76,476 |          | 25,581 |          | 8,861 |                   | 15,483
|                                 |  |                        |         |                 |        |          |        |          |       |                   |       

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 $14 million at December 31, 2006, 10% 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, 2006, the Bank met the capital ratios of a
well capitalized financial institution with a total risk-based capital ratio of 11.56% Tier 1 risk-based capital ratio of 10.44%, and a Tier 1 leverage ratio of 9.35%. 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.



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##### Table of Contents

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, 2006:                             |  |                    |   |  |                                                  |  
|Total capital to risk-weighted assets             |  | 11.56              | % |  | 10.0                                             | %
|Tier I capital to risk-weighted assets            |  | 10.44              | % |  | 6.0                                              | %
|Tier I capital to average assets - leverage ratio |  | 9.35               | % |  | 5.0                                              | %

Loan Portfolio

A significant source of the Banks income is the interest earned on its loan portfolio. At December 31, 2006, the Banks total assets were $139 million and its net loans receivable were $106 million or
76% 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, |        
|                                        |  | 2006         |         |   | 2005      |      
|                                        |  | Amount       |         |   | % ofTotal |       |   | Amount |   |        | % ofTotal | 
|Commercial real estate                  |  | $            | 58,146  |   |           | 54.2  | % |        | $ | 26,626 |           |  | 59.3  | %
|Residential real estate and home equity |  |              | 16,527  |   |           | 15.4  |   |        |   | 5,784  |           |  | 12.9  |  
|Construction                            |  |              | 18,611  |   |           | 17.3  |   |        |   | 7,079  |           |  | 15.8  |  
|Commercial loans                        |  |              | 12,751  |   |           | 11.9  |   |        |   | 4,979  |           |  | 11.0  |  
|Consumer                                |  |              | 1,308   |   |           | 1.2   |   |        |   | 456    |           |  | 1.0   |  
|                                        |  |              |         |   |           |       |   |        |   |        |           |  |       |  
|                                        |  |              |         |  
|Total loans                             |  |              | 107,343 |   |           | 100.0 | % |        |   | 44,924 |           |  | 100.0 | %
|                                        |  |              |         |   |           |       |   |        |   |        |           |  |       |  
|                                        |  |              |         |  
|Less: Allowance for loan losses         |  |              | (1,345  | ) |           |       |   |        |   | (564   | )         |  |       |  
|Deferred loan costs, net                |  |              | 291     |   |           |       |   |        |   | 169    |           |  |       |  
|                                        |  |              |         |   |           |       |   |        |   |        |           |  |       |  
|Loans receivable, net                   |  | $            | 106,289 |   |           |       |   |        | $ | 44,529 |           |  |       |  
|                                        |  |              |         |   |           |       |   |        |   |        |           |  |       |  



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Maturities of Loans.The following table shows the contractual maturities of the
Banks loan portfolio at December 31, 2006. 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 After1 to 5 Years |        | DueAfter 5 Years |        | Total
|Commercial Real Estate                  |  | $                     | 19,521 |                       | 23,982 |                  | 14,643 |       | 58,146 
|Residential Real Estate and Home Equity |  |                       | 1,234  |                       | 1,864  |                  | 13,429 |       | 16,527 
|Construction                            |  |                       | 6,415  |                       | 6,806  |                  | 5,389  |       | 18,611 
|Commercial                              |  |                       | 5,101  |                       | 5,325  |                  | 2,325  |       | 12,751 
|Consumer                                |  |                       | 249    |                       | 1,007  |                  | 52     |       | 1,308  
|                                        |  |                       |        |                       |        |                  |        |       |        
|Total                                   |  | $                     | 32,520 |                       | 38,984 |                  | 35,838 |       | 107,343
|                                        |  |                       |        |                       |        |                  |        |       |        

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, 2006 (in thousands):



|                                        |  |                     |        |                        |        |       |       
|--------------------------------------- |  | ------------------- | ------ | ---------------------- | ------ | ----- | ------
|Type of Loan                            |  | Fixed Interest Rate |        | Floating Interest Rate |        | Total
|Commercial Real Estate                  |  | $                   | 9,857  |                        | 28,768 |       | 38,625
|Residential Real Estate and Home Equity |  |                     | 2,968  |                        | 12,325 |       | 15,293
|Construction                            |  |                     | 420    |                        | 11,776 |       | 12,196
|Commercial                              |  |                     | 2,491  |                        | 5,159  |       | 7,650 
|Consumer                                |  |                     | 871    |                        | 188    |       | 1,059 
|                                        |  |                     |        |                        |        |       |       
|Total                                   |  | $                   | 16,607 |                        | 58,216 |       | 74,823
|                                        |  |                     |        |                        |        |       |       

Loan Quality

Management seeks to maintain a high quality of loans through sound underwriting and lending practices. As of December 31, 2006 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, 2006 there were no 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.



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##### Table of Contents

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, 2006 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



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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, 2006 the Company
had no OREO.

The Bank has adopted Statements of Financial Accounting Standards No. 114 and 118. These Statements address the
accounting by creditors for impairment of certain loans and generally 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. No loans were deemed
to be impaired under the Banks policy at December 31, 2006.

At December 31, 2006, the Bank had no accruing loans which
were contractually past due 90 days or more as to principal and interest and no troubled debt restructurings as defined by Statement of Financial Accounting Standards No. 15. In addition, management had not identified any problems loans at
December 31, 2006.

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.

If an asset is classified, the estimated fair value of the asset would be determined and if that value is loss 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.



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At December 31, 2006, there were no classified loans. There were no concentration of loans exceeding
10% of total loans which has not been disclosed as a category of loans.

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 uncollectibility 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 collectibility 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.

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.

The allowance for loan losses totaled approximately $1,345,000 at December 31, 2006 and there were no
loans charged-off since the Bank began operations. Considering the nature of the Banks loan portfolio, management believes that the allowance for loan losses at December 31, 2006 was adequate.



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The Banks general allowance for possible loan losses by type of loan was allocated by using peer
group averages and actual loss experiences of peers, as follows (in thousands):



|                                        |  |                 |       |                          |        |   |        |   |                          |  |        |  
|--------------------------------------- |  | --------------- | ----- | ------------------------ | ------ | - | ------ | - | ------------------------ |  | ------ | -
|                                        |  | At December 31, |      
|                                        |  | 2006            |       |                          | 2005   |  
|                                        |  | Amount          |       | % of Loans to TotalLoans |        |   | Amount |   | % of Loans to TotalLoans | 
|At the end of year allocated to:        |  |                 |       |                          |        |   |        |   |                          |  |        |  
|                                        |  |                 |       |                         
|Commercial                              |  | $               | 183   |                          | 11.9   | % |        | $ | 75                       |  | 11.0   | %
|Commercial real estate                  |  |                 | 809   |                          | 54.2   |   |        |   | 352                      |  | 59.3   |  
|Residential real estate and home equity |  |                 | 79    |                          | 15.4   |   |        |   | 23                       |  | 12.9   |  
|Construction                            |  |                 | 252   |                          | 17.3   |   |        |   | 106                      |  | 15.8   |  
|Consumer                                |  |                 | 22    |                          | 1.2    |   |        |   | 8                        |  | 1.0    |  
|                                        |  |                 |       |                          |        |   |        |   |                          |  |        |  
|Total                                   |  | $               | 1,345 |                          | 100.00 | % |        | $ | 564                      |  | 100.00 | %
|                                        |  |                 |       |                          |        |   |        |   |                          |  |        |  

Investment Securities

At December 31, 2006 the Banks investment portfolio has been classified as Available-for-Sale with no securities classified as Held-to-Maturity. The portfolio was previously classified as Held-for-Maturity
until reclassified on December 29, 2006. The following table sets forth the carrying amount of the Banks investment portfolio ($ in thousands):



|                                        |  |                 |        |      |       
|--------------------------------------- |  | --------------- | ------ | ---- | ------
|                                        |  | At December 31,
|                                        |  | 2006            |        | 2005
|Available-for-Sale:                     |  |                 |        |      |       
|Mortgage-backed securities              |  | $               | 1,856  |      |      
|U.S. Government agency securities       |  |                 | 11,981 |      |      
|                                        |  |                 |        |      |       
|Total securities held to maturity       |  | $               | 13,837 |      |      
|                                        |  |                 |        |      |       
|                                        |  |                
|Held to maturity:                       |  |                 |        |      |       
|Mortgage-backed securities              |  | $               |       |      | 2,319 
|U.S. Government agency securities       |  |                 |       |      | 7,989 
|                                        |  |                 |        |      |       
|Total securities held to maturity       |  | $               |       |      | 10,308
|                                        |  |                 |        |      |       
|                                        |  |                
|Federal Home Loan Bank stock            |  | $               | 595    |      | 35    
|                                        |  |                 |        |      |       
|                                        |  |                
|Federal funds sold                      |  | $               | 3,848  |      | 8,371 
|                                        |  |                 |        |      |       
|                                        |  |                
|Interest-earning deposits               |  | $               | 105    |      | 121   
|                                        |  |                 |        |      |       
|                                        |  |                
|Interest-bearing time deposits in Banks |  | $               | 1,000  |      |      
|                                        |  |                 |        |      |       



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The carrying amount and weighted average yields for investments at December 31, 2006 are shown below
($ in thousands):



|                           |  |                |       |                                |        |       |        |                           |      |  
|-------------------------- |  | -------------- | ----- | ------------------------------ | ------ | ----- | ------ | ------------------------- | ---- | -
|Maturing In                |  | MortgageBacked |       | U.S.GovernmentAgencySecurities |        | Total |        | WeightedAverageYields (1) |     
|Due in Less than 1 year    |  | $              |      |                                | 5,991  |       | 5,991  |                           | 4.80 | %
|After 1 through 5 years    |  |                |      |                                | 4,991  |       | 4,991  |                           | 5.28 | %
|After 5 through 10 years   |  |                |      |                                | 999    |       | 999    |                           | 5.99 | %
|Mortgage backed securities |  |                | 1,856 |                                |       |       | 1,856  |                           | 5.00 | %
|                           |  |                |       |                                |        |       |        |                           |      |  
|                           |  |                |       |                               
|Total                      |  | $              | 1,856 |                                | 11,981 |       | 13,837 |                           | 5.16 | %
|                           |  |                |       |                                |        |       |        |                           |      |  

---

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

The Bank has adopted Statement of Financial Accounting Standards No. 115 (FAS 115), which requires companies to classify investments
securities, including mortgage-backed securities as either held-to-maturity or available-for-sale. Securities classified as held-to-maturity are carried at amortized cost. Securities classified as available-for-sale are reported at fair value, with
unrealized gains and losses, net of tax effect, reported as a separate component of stockholders equity. As of December 31, 2006, none of the Banks securities were classified as Held-to-Maturity.

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, |        
|                             |  | 2006         |         |              | 2005  |  
|                             |  | Amount       |         | % ofDeposits |       |   | Amount |   | % ofDeposits | 
|Noninterest-bearing deposits |  | $            | 9,615   |              | 8.9   | % |        | $ | 9,335        |  | 16.4  | %
|Money-market accounts        |  |              | 24,687  |              | 22.9  |   |        |   | 16,010       |  | 28.1  |  
|NOW                          |  |              | 4,581   |              | 4.3   |   |        |   | 3,369        |  | 5.9   |  
|Savings                      |  |              | 659     |              | 0.6   |   |        |   | 1,048        |  | 1.8   |  
|                             |  |              |         |              |       |   |        |   |              |  |       |  
|Subtotal                     |  |              | 39,542  |              | 36.7  |   |        |   | 29,762       |  | 52.1  |  
|                             |  |              |         |              |       |   |        |   |              |  |       |  
|Time deposits:               |  |              |         |              |       |   |        |   |              |  |       |  
|1.00-1.99%                   |  |              |        |              |      |   |        |   | 349          |  | .6    |  
|2.00-2.99%                   |  |              | 104     |              | .1    |   |        |   | 171          |  | .3    |  
|3.00-3.99%                   |  |              | 487     |              | .5    |   |        |   | 5,581        |  | 9.8   |  
|4.00-4.99%                   |  |              | 25,129  |              | 23.3  |   |        |   | 18,701       |  | 32.8  |  
|5.00-5.99%                   |  |              | 42,064  |              | 39.1  |   |        |   | 2,522        |  | 4.4   |  
|6.00-6.99%                   |  |              | 316     |              | .3    |   |        |   |             |  |      |  
|                             |  |              |         |              |       |   |        |   |              |  |       |  
|Total time deposits          |  |              | 68,100  |              | 63.3  |   |        |   | 27,324       |  | 47.9  |  
|                             |  |              |         |              |       |   |        |   |              |  |       |  
|Total deposits               |  | $            | 107,642 |              | 100.0 | % |        | $ | 57,086       |  | 100.0 | %
|                             |  |              |         |              |       |   |        |   |              |  |       |  



32



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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, 2006, 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.

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, 2006, time deposits of $100,000 and over mature as follows (in thousands):



|                                    |  |   |       
|----------------------------------- |  | - | ------
|Due in three months or less         |  | $ | 11,663
|Due from three months to six months |  |   | 4,846 
|Due from six months to one year     |  |   | 10,291
|Due over one year                   |  |   | 6,158 
|                                    |  |   |       
|                                    | 
|Total                               |  | $ | 32,958
|                                    |  |   |       

Borrowings

During 2006, the Company 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.



33



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##### Table of Contents

The following summarizes these borrowings as of December 31, 2006 ($ in thousands):



|                                                        |  |   |       |  
|------------------------------------------------------- |  | - | ----- | -
|Balance outstanding at year-end                         |  | $ | 5,339 |  
|Average balance outstanding during the year             |  | $ | 4,195 |  
|Average interest rate paid                              |  |   | 4.55  | %
|Maximum amount outstanding at any month-end during year |  | $ | 7,750 |  

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 $1.5 million as of December 31, 2006.

AFSI had an agreement with the Independent Bankers Bank to borrow funds under an unsecured line of credit at an interest rate of 7.25%. There was no
balance outstanding at December 31, 2006. The line was cancelled in January 2007.

The Bank has available short term fed funds lines
to meet short term liquidity needs. A line of $4,000,000 is available with the Independent Bankers Bank of Florida and $4,500,000 is available with Bankers Bank (Georgia). There were no borrowings under these lines in 2006.

The Bank also has an agreement with the Federal Home Loan Bank of Atlanta to borrow and has drawn funds of $5,000,000, $3,000,000 and $2,000,000 during
2006. The Bank pledges its loan portfolio as collateral. There were no advances in 2005.

The maturity and interest rate of the Federal
Home Loan Bank (FHLB) advances are as follows at December 31, 2006 ($ in thousands):



|         |  |          |  |               |  |        |      
|-------- |  | -------- |  | ------------- |  | ------ | -----
|Advance  |  | Maturity |  | Interest Rate |  | Amount
|5/21/06  |  | 2016     |  | 4.47%         |  | $      | 5,000
|8/30/06  |  | 2016     |  | 4.71%         |  |        | 3,000
|12/22/06 |  | 2007     |  | 5.25%         |  |        | 2,000
|         |  |          |  |               |  |        |      

The two advances with 2016 maturity dates have call features benefiting the issuer with call dates
of February 23, 2007 and August 29, 2008 respectively.

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, investment securities and loans receivable. Interest-bearing liabilities primarily consist of time deposits, interest-bearing
checking accounts (NOW accounts), savings deposits and money-market accounts. 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



34



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##### Table of Contents

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. There
were no non-accrual loans or tax exempt income for the period indicated. The yields and costs include the amortization of fees which are considered to constitute adjustments to yields ($ in thousands).



|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|-------------------------------------------------------------------------------- |  | -------------- | ------- | -------------------- | ---- | ----------------- |  | ---- | -------------- |  | -------------------- | ------ | ----------------- | - | ----- |  | ---- | -
|                                                                                 |  | December 31,   |        
|                                                                                 |  | 2006           |         |                      | 2005 |                  
|                                                                                 |  | AverageBalance |         | InterestandDividends |      | AverageYield/Rate |  |      | AverageBalance |  | InterestandDividends |        | AverageYield/Rate |  
|Interest-earning assets:                                                         |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Loans                                                                            |  | $              | 72,206  |                      | $    | 5,652             |  | 7.83 | %              |  | $                    | 19,916 |                   |   | 1,104 |  | 6.59 | %
|Securities                                                                       |  |                | 14,802  |                      |      | 737               |  | 4.98 |                |  |                      | 3,773  |                   |   | 122   |  | 3.84 |  
|Other (1)                                                                        |  |                | 12,194  |                      |      | 545               |  | 4.47 |                |  |                      | 16,128 |                   |   | 555   |  | 3.44 |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Total interest-earning assets                                                    |  |                | 99,202  |                      |      | 6,934             |  | 6.99 | %              |  |                      | 39,817 |                   |   | 1,781 |  | 5.05 | %
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Noninterest-earning assets                                                       |  |                | 10,400  |                      |      |                   |  |      |                |  |                      | 6,769  |                   |   |       |  |      |  
|Total assets                                                                     |  | $              | 109,602 |                      |      |                   |  |      |                |  | $                    | 46,586 |                   |   |       |  |      |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Interest-bearing liabilities:                                                    |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Savings, NOW and MMKT                                                            |  |                | 26,242  |                      |      | 937               |  | 3.57 | %              |  |                      | 12,993 |                   |   | 289   |  | 2.64 |  
|Time deposits < $100,000                                                         |  |                | 25,862  |                      |      | 1,193             |  | 4.61 |                |  |                      | 5,627  |                   |   | 191   |  | 4.04 |  
|Time deposits >= $100,000                                                        |  |                | 23,202  |                      |      | 1,190             |  | 5.13 |                |  |                      | 7,236  |                   |   | 240   |  | 3.94 |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Deposits                                                                         |  |                | 75,306  |                      |      | 3,320             |  | 4.41 |                |  |                      | 25,856 |                   |   | 720   |  | 2.78 |  
|Borrowings                                                                       |  |                | 8,130   |                      |      | 383               |  | 4.71 |                |  |                      | 153    |                   |   | 5     |  | 3.27 |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Total interest-bearing liabilities                                               |  |                | 83,436  |                      |      | 3,703             |  | 4.44 |                |  |                      | 26,009 |                   |   | 725   |  | 2.79 | %
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Noninterest-bearing deposits                                                     |  |                | 11,550  |                      |      |                   |  |      |                |  |                      | 5,995  |                   |   |       |  |      |  
|Noninterest-bearing liabilities                                                  |  |                | 792     |                      |      |                   |  |      |                |  |                      | 765    |                   |   |       |  |      |  
|Stockholders equity                                                             |  |                | 13,824  |                      |      |                   |  |      |                |  |                      | 13,817 |                   |   |       |  |      |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Total liabilities and stockholders equity                                       |  | $              | 109,602 |                      |      |                   |  |      |                |  | $                    | 46,586 |                   |   |       |  |      |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Net earning assets                                                               |  | $              | 15,766  |                      |      |                   |  |      |                |  | $                    | 13,808 |                   |   |       |  |      |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Net interest income                                                              |  |                |         |                      | $    | 3,231             |  |      |                |  |                      |        |                   | $ | 1,056 |  |      |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Interest-rate spread                                                             |  |                |         |                      |      |                   |  | 2.55 | %              |  |                      |        |                   |   |       |  | 2.26 | %
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Net interest margin (2)                                                          |  |                |         |                      |      |                   |  | 3.26 | %              |  |                      |        |                   |   |       |  | 2.89 | %
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                | 1.19    |                      |      |                   |  |      |                |  |                      | 1.53   |                   |   |       |  |      |  
|                                                                                 |  |                |         |                      |      |                   |  |      |                |  |                      |        |                   |   |       |  |      |  

---

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

|(2) | Net interest margin is net interest income annualized in 2005 divided by total interest-earning assets.
|--- | -------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

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, 2006 vs. 2005:         |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Interest-earning assets:                       |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Loans                                          |  | $              | 455 |        | $ | 2,899 |             |  | $ | 1,194 |   |  | $ | 4,548 |  
|Securities                                     |  |                | 66  |        |   | 356   |             |  |   | 193   |   |  |   | 615   |  
|Other Interest Earning Assets                  |  |                | 165 |        |   | (135  | )           |  |   | (40   | ) |  |   | (10   | )
|                                               |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Total                                          |  |                | 686 |        |   | 3,120 |             |  |   | 1,347 |   |  |   | 5,153 |  
|                                               |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Interest-bearing liabilities:                  |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Deposits                                       |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Savings, demand, money-market and NOW deposits |  |                | 175 |        |   | 295   |             |  |   | 178   |   |  |   | 648   |  
|Time deposits                                  |  |                | 194 |        |   | 1,213 |             |  |   | 545   |   |  |   | 1,952 |  
|Other borrowings                               |  |                | 2   |        |   | 261   |             |  |   | 115   |   |  |   | 378   |  
|                                               |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Total                                          |  |                | 371 |        |   | 1,769 |             |  |   | 838   |   |  |   | 2,978 |  
|                                               |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  
|Net change in net interest income              |  | $              | 315 |        | $ | 1,351 |             |  | $ | 509   |   |  | $ | 2,175 |  
|                                               |  |                |     |        |   |       |             |  |   |       |   |  |   |       |  

Comparison of the years ended December 31, 2006 and 2005

General Operating Results.Net loss for the twelve month period ended December 31, 2006 was $363,000, or $0.23 per basic and diluted share,
compared to $1,009,000, or $0.67 per basic and diluted share, for the comparable period in 2005. The $646,000 decrease in net loss resulted primarily from an increase net interest income of $2.2 million and an increase in non-interest income of
$748,000, partially offset by a $217,000 increase in provision for loan losses, a $1.5 million increase in non-interest expense and a decrease in income tax benefit of $579,000. For the 2005 period, the Bank had only been in operation for ten
months.

Interest Income. Interest income increased $5.2 million to $6.9 million for the twelve month period ended December 31, 2006,
when compared to the twelve month period ended December 31, 2005. The increase was due to an increase in the average yield earned on interest earning assets from 5.05% for the twelve months ended December 31, 2005 to 6.99% for the twelve
months ended December 31, 2006 and a $59.4 million increase in average interest earning assets outstanding at December 31, 2006 compared to December 31, 2005.

Interest Expense. Interest expense increased $3.0 million from $725,000 for the twelve month period ended December 31, 2005 to $3.7 million for the twelve month period ended December 31, 2006.
The increase was primarily due to an increase of $57.4 million in average interest bearing liabilities outstanding and an increase in the average cost of interest bearing liabilities from 2.79% for the twelve months ended December 31, 2005 to
4.44% for the comparable 2006 period.



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##### Table of Contents

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 twelve month periods ended December 31, 2006 and 2005 of $781,000 and $564,000,
respectively. The increase in the provision was primarily due to the overall growth of the loan portfolio. Management believes that the allowance for loan losses, which was $1.3 million or 1.25% of gross loans at December 31, 2006, is adequate.

Non-Interest Income. Non-interest income increased $748,000 during the 2006 period. The increase was primarily due to an increase of
$593,000 in net gain on sale of loans held for sale, and an increase of $114,000 in deposit account fees.

Non-Interest Expense. Non-interest
expenses increased by $1.5 million from $2.5 million for the twelve month period ended December 31, 2005 to $3.9 million for the twelve month period ended December 31, 2006. The increase was primarily due to increases of $930,000 in
salaries and employee benefits, $177,000 in occupancy and equipment expense, $77,000 increase in advertising and promotion, $98,000 in data processing expense, and $161,000 in other non-interest expense, all related to the overall growth of the
Company.

Income Taxes. The income tax benefit was $778,000, an effective rate of 43.5%, for the twelve month period ended December 31,
2005 and $199,000, an effective rate of 35.4% for the corresponding period in 2006. In 2006, the effective rate was higher due to the reversal of a valuation allowance.

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.

To support our effort
to reach profitability, we are attempting to make loans and obtain low cost funding sources, to increase our earning asset base and net interest income. We will need to reach a significant level of net interest income in order to offset the
non-interest expenses we incur for such things as salaries, occupancy, data processing, professional services and advertising. We will spend the same amount on many of these items, regardless of the amount of net-interest income we receive.
Therefore, it is important for us to reach a certain asset size in order to reach profitability.



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In addition to pursuing loan and deposit growth, we are also utilizing an expanding branch network. We
currently operate four offices, with two more to open later this year. 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
increasing our net losses.

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



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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 9 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, 2006.

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.



39



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The following table sets forth certain information relating to the Companys interest-earning assets
and interest-bearing liabilities at December 31, 2006 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                    |  | $              | 105    |   |                |        |    |           |       |   |                 |       |   |       |   | 105    
|Federal funds sold                           |  |                | 3,848  |   |                |        |    |           |       |   |                 |       |   |       |   | 3,848  
|Interest bearing time deposits in Banks      |  |                | 500    |   |                | 500     |    |           |       |   |                 |       |   |       |   | 1,000  
|Loans (1)                                    |  |                | 51,844 |   |                | 7,793   |    |           | 42,600 |   |                 | 5,106  |   |       |   | 107,343
|Securities (2)                               |  |                | 2,048  |   |                | 4,149   |    |           | 5,816  |   |                 | 2,419  |   |       |   | 14,432 
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Total rate-sensitive assets (earning assets) |  | $              | 58,345 |   |                | 12,442  |    |           | 48,416 |   |                 | 7,525  |   |       |   | 126,728
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Money market (3)                             |  |                | 12,343 |   |                | 6,172   |    |           | 6,172  |   |                 |       |   |       |   | 24,687 
|Savings and NOW deposits (3)                 |  |                | 2,620  |   |                | 2,620   |    |           |       |   |                 |       |   |       |   | 5,240  
|Time deposits (3)                            |  |                | 22,432 |   |                | 32,294  |    |           | 13,374 |   |                 |       |   |       |   | 68,100 
|Other borrowings                             |  |                | 5,340  |   |                | 8,429   |    |           | 3,000  |   |                 |       |   |       |   | 16,769 
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Total rate-sensitive liabilities             |  | $              | 42,735 |   |                | 49,515  |    |           | 22,546 |   |                 |       |   |       |   | 114,796
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Gap (repricing differences)                  |  | $              | 15,610 |   |                | (37,073 | )  |           | 25,870 |   |                 | 7,525  |   |       |   | 11,932 
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Cumulative Gap                               |  | $              | 15,610 |   |                | (21,463 | )  |           | 4,407  |   |                 | 11,932 |   |       |   |        
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Cumulative Gap/total assets                  |  |                | 11.2   | % |                | (15.4   | )% |           | 3.2    | % |                 | 8.6    | % |       |   |        
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Cumulative Gap/total earning assets          |  |                | 12.3   | % |                | (16.9   | )% |           | 3.5    | % |                 | 9.4    | % |       |   |        
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Total assets                                 |  |                |        |   |                |         |    |           |        |   |                 |        |   |       | $ | 139,444
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        
|Total earning assets                         |  |                |        |   |                |         |    |           |        |   |                 |        |   |       | $ | 126,728
|                                             |  |                |        |   |                |         |    |           |        |   |                 |        |   |       |   |        

---

|(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.
|--- | -------------------------------------------------------------------------------------



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Selected Quarterly Results



|                                            |  |              |       |   |               |       |   |              |       |   |               |       |   |              |      |   |               |      |   |              |      |   |               |      |  
|------------------------------------------- |  | ------------ | ----- | - | ------------- | ----- | - | ------------ | ----- | - | ------------- | ----- | - | ------------ | ---- | - | ------------- | ---- | - | ------------ | ---- | - | ------------- | ---- | -
|                                            |  | 2006         |       |   | 2005          |      
|                                            |  | FirstQuarter |       |   | SecondQuarter |       |   | ThirdQuarter |       |   | FourthQuarter |       |   | FirstQuarter |      |   | SecondQuarter |      |   | ThirdQuarter |      |   | FourthQuarter |     
|Interest income                             |  | $            | 1,169 |   |               | 1,549 |   |              | 1,944 |   |               | 2,272 |   |              | 116  |   |               | 233  |   |              | 570  |   |               | 862  |  
|Interest expense                            |  |              | 578   |   |               | 811   |   |              | 1,049 |   |               | 1,265 |   |              | 8    |   |               | 92   |   |              | 238  |   |               | 387  |  
|Net interest income                         |  |              | 591   |   |               | 738   |   |              | 895   |   |               | 1,007 |   |              | 108  |   |               | 141  |   |              | 332  |   |               | 475  |  
|Provision for loan losses                   |  |              | 126   |   |               | 232   |   |              | 205   |   |               | 218   |   |              | 15   |   |               | 118  |   |              | 259  |   |               | 172  |  
|Noninterest income                          |  |              | 117   |   |               | 276   |   |              | 291   |   |               | 249   |   |              | 0    |   |               | 35   |   |              | 83   |   |               | 67   |  
|Noninterest expense                         |  |              | 763   |   |               | 929   |   |              | 1,022 |   |               | 1,231 |   |              | 486  |   |               | 509  |   |              | 705  |   |               | 764  |  
|Earnings before income taxes                |  |              | (181  | ) |               | (147  | ) |              | (41   | ) |               | (193  | ) |              | (393 | ) |               | (451 | ) |              | (549 | ) |               | (394 | )
|Net earnings                                |  |              | (114  | ) |               | (97   | ) |              | (29   | ) |               | (123  | ) |              | (143 | ) |               | (326 | ) |              | (325 | ) |               | (215 | )
|Basic earnings per common and diluted share |  |              | (.08  | ) |               | (.06  | ) |              | (.02  | ) |               | (.07  | ) |              | (.10 | ) |               | (.22 | ) |              | (.22 | ) |               | (.13 | )

Impact of Inflation and Changing Prices

The financial statements and related financial data concerning the Company presented in this 10-KSB 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 7. | Financial Statements
|------- | --------------------

The financial statements of
the Company at December 31, 2006 and 2005 and for the years then ended are set forth in this Form 10-KSB as Exhibit 13.1.



|Item 8. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None



|Item 8A. | Controls and Procedures
|-------- | -----------------------

(a) Evaluation of
disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date
of this report, the Chief Executive and Chief Financial officers of the Company concluded that the Companys disclosure controls and procedures were adequate.



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(b) Changes in internal controls. The Company made no significant changes in its internal controls
or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial officers.



|Item 8B. | Other Information
|-------- | -----------------

Not applicable.



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PART III



|Item 9. | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
|------- | ---------------------------------------------------------------------------------------------------------------

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 10. | 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-KSB 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 11. | 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 12. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------

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.



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As of December 31, 2006, the Bank had an aggregate total of $7,179,540 outstanding in loans and
other extensions of credit to Affiliates. At December 31, 2006, the Bank had unsecured loans outstanding with aggregate outstanding balances of $3,060,172 of which $1,105,833 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. As of December 31, 2006, the Bank had the following outstanding loans to AFSIs and the Banks directors and executive officers:



|                             |  |                       |  |                                   |  |                                         |  |                     |  |              
|---------------------------- |  | --------------------- |  | --------------------------------- |  | --------------------------------------- |  | ------------------- |  | -------------
|Name                         |  | Maturity Date of Loan |  | Largest AmountOutstanding in 2006 |  | Amount Outstanding At December 31, 2006 |  | Loan Type           |  | Interest Rate
|Barrett, Spencer Director    |  | Demand                |  | $100,000.00                       |  | $78,729.17                              |  | Unsecured LOC       |  | 8.250%       
|Bosshardt, Carol Director    |  | Demand                |  | $1,000,000.00                     |  | $777,104.17                             |  | Unsecured LOC       |  | 8.250%       
|Bosshardt, Carol Director    |  | Demand                |  | $250,000.00                       |  | $250,000.00                             |  | Unsecured LOC       |  | 8.250%       
|Bosshardt, Carol Director    |  | 4/27/2016             |  | $425,000.00                       |  | $421,797.03                             |  | Commercial  SFR    |  | 7.460%       
|Bosshardt, Carol Director    |  | 11/1/2011             |  | $1,500,000.00                     |  | $1,021,734.98                           |  | Multiple S?F Condos |  | 7.620%       
|Czuryla, Walter Bank EVP     |  | Demand                |  | $4,764.55                         |  |                                        |  | Unsecured ODP       |  | 8.250%       
|Fletcher, Gloria Director    |  | 7/13/2015             |  | $1,813,470.69                     |  | $1,813,470.69                           |  | Commercial R/E      |  | 6.710%       
|Fletcher, Gloria Director    |  | 6/26/2007             |  | $188,600.00                       |  | $188,456.58                             |  | Single Family Condo |  | 8.000%       
|Hill, Michael Director       |  | Demand                |  | $2,070.60                         |  |                                        |  | Unsecured ODP       |  | 8.250%       
|Hill, Michael Director       |  | 9/29/2007             |  | $147,300.00                       |  | $147,052.66                             |  | Residential Lot     |  | 7.500%       
|Hill Michael Director        |  | Demand                |  | $8.75                             |  |                                        |  | Unsecured LOC       |  | 8.250%       
|Kurtz, Jon President and CEO |  | Demand                |  | $410.22                           |  |                                        |  | Unsecured ODP       |  | 8.250%       
|Page, Robert Bank EVP        |  | Demand                |  | $4500.00                          |  |                                        |  | Unsecured ODP       |  | 8.250%       
|White, Job E. Director       |  | Demand                |  | $1,000,000.00                     |  | $777,104.17                             |  | Unsecured LOC       |  | 8.250%       
|White, Job E. Director       |  | 9/30/2007             |  | $350,000.00                       |  | $350,000.00                             |  | Commercial  SFR    |  | 8.250%       
|White, Job E. Director       |  | 10/21/2020            |  | $399,546.15                       |  | $399,545.71                             |  | HELOC               |  | 8.250%       
|White, Job E. Director       |  | 11/1/2011             |  | $1,500,000.00                     |  | $1,021,734.98                           |  | Multiple S/F Condos |  | 7.620%       
|Williams, Tommy Director     |  | Demand                |  | $1,000,000.00                     |  | $777,104.17                             |  | Unsecured LOC       |  | 8.250%       
|Williams, Tommy Director     |  | Demand                |  | $2,184,903.29                     |  | $1,731,653.29                           |  | S/F Residences      |  | 7.750%       
|Williams, Tommy Directory    |  | 11/1/2011             |  | $1,500,000.00                     |  | $1,021,734.98                           |  | Multiple S/F Condos |  | 7.620%       

The Company entered into a lease with Halachua Properties, LLC, which is owned by certain
directors, during 2006 to rent office space for a branch in Alachua, Florida. This lease is for one year with a one year renewal option for $34,000 annually.



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|Item 13. | Exhibits
|-------- | --------

Exhibits marked with an (a) were filed with the Form
10-KSB filed with the Securities and Exchange Commission on March 15, 2006.



|    |  |      |  |                                                                                                                                                    
|--- |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 3.1  |  | Articles of Incorporation                                                                                                                          
|    |  |     
|(a) |  | 3.2  |  | Bylaws                                                                                                                                             
|    |  |     
|(a) |  | 4.1  |  | Specimen Common Stock Certificate                                                                                                                  
|    |  |     
|(a) |  | 4.2  |  | Warrant Plan and Specimen Warrant Plan                                                                                                             
|    |  |     
|(a) |  | 10.1 |  | Employment Agreement with Jon M. Kurtz                                                                                                             
|    |  |     
|(a) |  | 10.2 |  | Lease for Main Office                                                                                                                              
|    |  |     
|    |  | 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 Chief 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 Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|Item 14. | Principal Accountant 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, 2006 in the Proxy Statement is incorporated herein by reference.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has 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 29th day of March, 2007.



ALARION FINANCIAL SERVICES, INC./s/ Jon M. KurtzJon M. KurtzChairman and Chief Executive Officer




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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 29thday of March, 2007:



|                           |  |  |  |                                                
|-------------------------- |  |  |  | -----------------------------------------------
|/s/ Loralee W. Miller      |  |  |  | Chairperson of the Board                       
|Loralee W. Miller          |  |  |  |                                                
|                           |  | 
|/s/ Michael P. Hill        |  |  |  | Director and Vice Chairman of the Board        
|Michael P. Hill            |  |  |  |                                                
|                           |  | 
|/s/ Spencer Barrett        |  |  |  | Director                                       
|Spencer Barrett            |  |  |  |                                                
|                           |  | 
|/s/ Carol R. Bosshardt     |  |  |  | Director                                       
|Carol R. Bosshardt         |  |  |  |                                                
|                           |  | 
|/s/ Gloria W. Fletcher     |  |  |  | Director                                       
|Gloria W. Fletcher         |  |  |  |                                                
|                           |  | 
|/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.     |  |  |  |                                                
|                           |  | 
|/s/ Jon M. Kurtz           |  |  |  | Chief Executive Officer, President and Director
|Jon M. Kurtz               |  |  |  |                                                
|                           |  | 
|/s/ Robert L. Page         |  |  |  | Acting Chief Financial Officer                 
|Robert L. Page             |  |  |  |                                                



47



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##### Table of Contents

Alarion Financial Services, Inc.

Form 10-KSB

For Fiscal Year Ending December 31, 2006

EXHIBIT INDEX

Exhibits marked with an (a) were filed with the Form 10-KSB filed with the Securities and Exchange
Commission on March     , 2007.



|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                           
|(a)   3.1   |  | Articles of Incorporation                                                                                                                         
|            | 
|(a)   3.2   |  | Bylaws                                                                                                                                            
|            | 
|(a)   4.1   |  | Specimen Common Stock Certificate                                                                                                                 
|            | 
|(a)   4.2   |  | Warrant Plan and Specimen Warrant Certificate                                                                                                     
|            | 
|(a) 10.1    |  | Employment Agreement with Jon M. Kurtz                                                                                                            
|            | 
|(a) 10.2    |  | Lease for Main Office                                                                                                                             
|            | 
|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 Chief 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 Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



48