Exhibit 13.1

Financial Statements of Alarion Bank

INDEX TO FINANCIAL STATEMENTS



|                                                        |  |          
|------------------------------------------------------- |  | ---------
|Report of Independent Registered Public Accounting Firm |  | F-1      
|                                                        | 
|Consolidated Balance Sheets                             |  | F-2      
|                                                        | 
|Consolidated Statements of Operations                   |  | F-3      
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | F-4      
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-5      
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-6 F-24



---

Report of Independent Registered Public Accounting Firm

Alarion Financial Services, Inc.

Ocala, Florida:

We have audited the accompanying
consolidated balance sheet of Alarion Financial Services, Inc. and Subsidiary (the Company) at December 31, 2005, and the related consolidated statements of operations, changes in stockholders equity and cash flows for year
ended December 31, 2005 and the period from February 19, 2004 (date of organization) to December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2005, and the results of its operations and its cash flows for year ended December 31, 2005 and the
period from February 19, 2004 (date of organization) to December 31, 2004, in conformity with U.S. generally accepted accounting principles.



|                          
|--------------------------
|HACKER, JOHNSON & SMITH PA
|Orlando, Florida          
|March 1, 2006             



F-1



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Balance Sheet

At December 31, 2005

($ in
thousands, except per share amounts)



|                                                                                                   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Assets                                                                                             |  |   |        |  
|Cash and due from banks                                                                            |  | $ | 2,408  |  
|Interest-earning deposits and federal funds sold                                                   |  |   | 8,492  |  
|                                                                                                   |  |   |        |  
|Cash and cash equivalents                                                                          |  |   | 10,900 |  
|                                                                                                   | 
|Securities held to maturity                                                                        |  |   | 10,308 |  
|Loans, net of allowance for loan losses of $564                                                    |  |   | 44,529 |  
|Loans held for sale                                                                                |  |   | 321    |  
|Accrued interest receivable                                                                        |  |   | 208    |  
|Premises and equipment, net                                                                        |  |   | 4,923  |  
|Federal Home Loan Bank stock                                                                       |  |   | 35     |  
|Deferred income taxes                                                                              |  |   | 778    |  
|Other assets                                                                                       |  |   | 225    |  
|                                                                                                   |  |   |        |  
|Total assets                                                                                       |  | $ | 72,227 |  
|                                                                                                   |  |   |        |  
|Liabilities and Stockholders Equity                                                               |  |   |        |  
|                                                                                                   | 
|Liabilities:                                                                                       |  |   |        |  
|Noninterest-bearing demand deposits                                                                |  |   | 9,335  |  
|NOW, money-market and savings deposits                                                             |  |   | 20,427 |  
|Time deposits < $100,000                                                                           |  |   | 13,119 |  
|Time deposits > = $100,000                                                                         |  |   | 14,205 |  
|                                                                                                   |  |   |        |  
|Total deposits                                                                                     |  |   | 57,086 |  
|                                                                                                   | 
|Other borrowings                                                                                   |  |   | 703    |  
|Accrued interest payable                                                                           |  |   | 149    |  
|Accrued expenses and other liabilities                                                             |  |   | 498    |  
|                                                                                                   |  |   |        |  
|Total liabilities                                                                                  |  |   | 58,436 |  
|                                                                                                   |  |   |        |  
|Commitments and contingencies (Notes 4, 8 and 15)                                                  |  |   |        |  
|                                                                                                   | 
|Stockholders equity:                                                                              |  |   |        |  
|Preferred stock, $.01 par value; 1,000,000 shares authorized, none issued or outstanding           |  |   |       |  
|Common stock, $.01 par value; 4,000,000 shares authorized, 1,514,200 shares issued and outstanding |  |   | 15     |  
|Additional paid-in capital                                                                         |  |   | 15,073 |  
|Accumulated deficit                                                                                |  |   | (1,297 | )
|                                                                                                   |  |   |        |  
|Total stockholders equity                                                                         |  |   | 13,791 |  
|                                                                                                   |  |   |        |  
|Total liabilities and stockholders equity                                                         |  | $ | 72,227 |  
|                                                                                                   |  |   |        |  

See Accompanying Notes to Consolidated Financial Statements.



F-2



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Operations

($ in thousands, except per share amounts)



|                                                           |  |                             |        |   |                                                                        |      |  
|---------------------------------------------------------- |  | --------------------------- | ------ | - | ---------------------------------------------------------------------- | ---- | -
|                                                           |  | Year Ended December 31,2005 |        |   | Period fromFebruary 19, 2004(Date of Organization) toDecember 31, 2004 |     
|Interest income:                                           |  |                             |        |   |                                                                        |      |  
|Loans                                                      |  | $                           | 1,104  |   |                                                                        |     |  
|Securities                                                 |  |                             | 122    |   |                                                                        |     |  
|Other                                                      |  |                             | 555    |   |                                                                        |     |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Total interest income                                      |  |                             | 1,781  |   |                                                                        |     |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Interest expense:                                          |  |                             |        |   |                                                                        |      |  
|Deposits                                                   |  |                             | 720    |   |                                                                        |     |  
|Borrowings                                                 |  |                             | 5      |   |                                                                        | 5    |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Total interest expense                                     |  |                             | 725    |   |                                                                        | 5    |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Net interest income (loss)                                 |  |                             | 1,056  |   |                                                                        | (5   | )
|                                                           |  |                            
|Provision for loan losses                                  |  |                             | 564    |   |                                                                        |     |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Net interest income (loss) after provision for loan losses |  |                             | 492    |   |                                                                        | (5   | )
|                                                           |  |                             |        |   |                                                                        |      |  
|Noninterest income:                                        |  |                             |        |   |                                                                        |      |  
|Deposit account fees                                       |  |                             | 18     |   |                                                                        |     |  
|Net gain on sales of loans held for sale                   |  |                             | 155    |   |                                                                        |     |  
|Other                                                      |  |                             | 12     |   |                                                                        |     |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Total noninterest income                                   |  |                             | 185    |   |                                                                        |     |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Noninterest expenses:                                      |  |                             |        |   |                                                                        |      |  
|Salaries and employee benefits                             |  |                             | 1,275  |   |                                                                        | 155  |  
|Occupancy and equipment                                    |  |                             | 340    |   |                                                                        |     |  
|Data processing                                            |  |                             | 133    |   |                                                                        |     |  
|Professional services                                      |  |                             | 153    |   |                                                                        | 80   |  
|Advertising and promotion                                  |  |                             | 76     |   |                                                                        |     |  
|Office supplies and printing                               |  |                             | 105    |   |                                                                        | 6    |  
|Other                                                      |  |                             | 382    |   |                                                                        | 42   |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Total noninterest expenses                                 |  |                             | 2,464  |   |                                                                        | 283  |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Loss before income tax benefit                             |  |                             | (1,787 | ) |                                                                        | (288 | )
|                                                           |  |                            
|Income tax benefit                                         |  |                             | (778   | ) |                                                                        |     |  
|                                                           |  |                             |        |   |                                                                        |      |  
|Net loss                                                   |  | $                           | (1,009 | ) |                                                                        | (288 | )
|                                                           |  |                             |        |   |                                                                        |      |  
|Loss per share  basic and diluted                         |  | $                           | (.67   | ) |                                                                        | N/A  |  
|                                                           |  |                             |        |   |                                                                        |      |  

See Accompanying Notes to Consolidated Financial Statements.



F-3



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders
Equity

Year Ended December 31, 2005 and for the Period from February 19, 2004 (Date of Organization) to December 31,
2004

($ in thousands)



|                                                    |  |              |  |                           |    |                     |        |  |                                    |   |  |        |  
|--------------------------------------------------- |  | ------------ |  | ------------------------- | -- | ------------------- | ------ |  | ---------------------------------- | - |  | ------ | -
|                                                    |  | Common Stock |  | AdditionalPaid-In Capital |    | Accumulated Deficit |        |  | TotalStockholders(Deficit) Equity |  
|                                                    |  | Shares       |  | Amount                    |    |                     |       
|Balance at February 19, 2004 (Date of Organization) |  |             |  | $                         |   |                     |       |  |                                   |   |  |       |  
|Comprehensive income (loss)-                        |  |              |  |                           |    |                     |        |  |                                    |   |  |        |  
|Net loss                                            |  |             |  |                           |   |                     |       |  | (288                               | ) |  | (288   | )
|                                                    |  |              |  |                           |    |                     |        |  |                                    |   |  |        |  
|Balance at December 31, 2004                        |  |             |  |                           |   |                     |       |  | (288                               | ) |  | (288   | )
|Comprehensive income (loss)-                        |  |              |  |                           |    |                     |        |  |                                    |   |  |        |  
|Net loss                                            |  |             |  |                           |   |                     |       |  | (1,009                             | ) |  | (1,009 | )
|Common stock offering, net of offering costs of $54 |  | 1,500,000    |  |                           | 15 |                     | 14,931 |  |                                   |   |  | 14,946 |  
|Warrants exercised                                  |  | 14,200       |  |                           |   |                     | 142    |  |                                   |   |  | 142    |  
|                                                    |  |              |  |                           |    |                     |        |  |                                    |   |  |        |  
|Balance at December 31, 2005                        |  | 1,514,200    |  | $                         | 15 |                     | 15,073 |  | (1,297                             | ) |  | 13,791 |  
|                                                    |  |              |  |                           |    |                     |        |  |                                    |   |  |        |  

See Accompanying Notes to Consolidated Financial Statements.



F-4



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                 |  |                            |         |   |                                                                          |        |  
|-------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------------------------------------------------------ | ------ | -
|                                                                                 |  | Year EndedDecember 31,2005 |         |   | Period from February 19, 2004 (Date of Organization) toDecember 31, 2004 |       
|Cash flows from operating activities:                                            |  |                            |         |   |                                                                          |        |  
|Net loss                                                                         |  | $                          | (1,009  | ) |                                                                          | (288   | )
|Adjustments to reconcile net loss to net cash used in operating activities:      |  |                            |         |   |                                                                          |        |  
|Provision for loan losses                                                        |  |                            | 564     |   |                                                                          |       |  
|Depreciation and amortization                                                    |  |                            | 197     |   |                                                                          |       |  
|Deferred income tax benefit                                                      |  |                            | (778    | ) |                                                                          |       |  
|Net amortization on premiums and discounts on securities                         |  |                            | (40     | ) |                                                                          |       |  
|Net amortization of deferred loan fees and costs                                 |  |                            | 41      |   |                                                                          |       |  
|Net gain on sales of loans held for sale                                         |  |                            | (155    | ) |                                                                          |       |  
|Loans originated for sale                                                        |  |                            | (8,885  | ) |                                                                          |       |  
|Proceeds from sales of loans held for sale                                       |  |                            | 8,719   |   |                                                                          |       |  
|Increase in accrued interest payable                                             |  |                            | 149     |   |                                                                          |       |  
|Increase in accrued interest receivable                                          |  |                            | (208    | ) |                                                                          |       |  
|Increase in other assets                                                         |  |                            | (200    | ) |                                                                          | (25    | )
|Increase in accrued expenses and other liabilities                               |  |                            | 443     |   |                                                                          | 55     |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Net cash used in operating activities                                            |  |                            | (1,162  | ) |                                                                          | (258   | )
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Cash flows from investing activities:                                            |  |                            |         |   |                                                                          |        |  
|Proceeds from principal repayments and maturities on securities held to maturity |  |                            | 2,080   |   |                                                                          |       |  
|Purchase of securities held to maturity                                          |  |                            | (12,348 | ) |                                                                          |       |  
|Loan disbursements                                                               |  |                            | (90,830 | ) |                                                                          |       |  
|Principal repayments on loans                                                    |  |                            | 45,696  |   |                                                                          |       |  
|Purchase of premises and equipment                                               |  |                            | (3,817  | ) |                                                                          | (1,303 | )
|Purchase of Federal Home Loan Bank stock                                         |  |                            | (35     | ) |                                                                          |       |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Net cash used in investing activities                                            |  |                            | (59,254 | ) |                                                                          | (1,303 | )
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Cash flows from financing activities:                                            |  |                            |         |   |                                                                          |        |  
|Net increase in deposits                                                         |  |                            | 57,086  |   |                                                                          |       |  
|Net (decrease) increase in other borrowings                                      |  |                            | (859    | ) |                                                                          | 1,562  |  
|Net proceeds from common stock offering                                          |  |                            | 14,946  |   |                                                                          |       |  
|Warrants exercised                                                               |  |                            | 142     |   |                                                                          |       |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Net cash provided by financing activities                                        |  |                            | 71,315  |   |                                                                          | 1,562  |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Net increase in cash and cash equivalents                                        |  |                            | 10,899  |   |                                                                          | 1      |  
|                                                                                 |  |                           
|Cash and cash equivalents at beginning of period                                 |  |                            | 1       |   |                                                                          |       |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Cash and cash equivalents at end of period                                       |  | $                          | 10,900  |   |                                                                          | 1      |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Supplemental disclosure of cash flow information:                                |  |                            |         |   |                                                                          |        |  
|Cash paid during the period for-                                                 |  |                            |         |   |                                                                          |        |  
|Interest                                                                         |  | $                          | 576     |   |                                                                          | 5      |  
|                                                                                 |  |                            |         |   |                                                                          |        |  
|Income taxes                                                                     |  | $                          |        |   |                                                                          |       |  
|                                                                                 |  |                            |         |   |                                                                          |        |  

See Accompanying Notes to Consolidated Financial Statements.



F-5



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

At December 31, 2005 and for Year Ended December 31, 2005 and

For the Period from February 19, 2004 (Date of Organization)

to
December 31, 2004

(1) Summary of Significant Accounting Policies

Organization. Alarion Financial Services, Inc. (the Holding Company) owns 100% of the common stock of Alarion Bank (the
Bank). The Holding Companys primary activity is the operation of the Bank. The Bank is a state (Florida)-chartered commercial bank. The Bank began its organizational phase in February 2004. These consolidated financial statements
include the activities during the organizational phase in 2004 and for the year ended December 31, 2005. The Bank commenced operations on February 28, 2005. The Bank offers a variety of banking and financial services to individual and
corporate customers through its two banking offices located in Ocala and Gainesville, Florida. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation.

Reorganization and Share Exchange. On September 21, 2005, the Banks stockholders approved a Plan of Reorganization and Share
Exchange under which the Bank would become a wholly-owned subsidiary of the Holding Company. The closing of the transaction followed receipt of approval from the banking regulatory agencies. On November 16, 2005, the Banks stockholders
effectively exchanged their common stock for common stock of the Holding Company in a share exchange transaction. As a result, the 1,512,700 previously issued $5 par value common stock of the Bank were exchanged for 1,512,700 shares of the $.01 par
value common stock of the Holding Company. The Holding Companys share exchange with the Bank is accounted for as a reorganization of entities under common control at historical cost and the financial data for the period presented include the
results of the Holding Company and the Bank.

Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Holding Company and the Bank (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting practices of the Company
conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following summarizes the more significant of these polices and practices.

Use of Estimates. In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of
deferred tax assets.

Cash and Cash Equivalents. For purposes of the statement of cash flows, cash and cash equivalents
include cash and balances due from banks, interest-earning deposits and federal funds sold, all of which mature within ninety days.

At
December 31, 2005, the Bank was not required by law or regulation to maintain cash reserves with the Federal Reserve Bank, in accounts with other banks or in the vault.

(continued)



F-6



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Securities. Securities may be classified as either
trading, held to maturity or available for sale. Securities that are held principally for resale in the near term are considered trading securities and recorded at fair value with changes in fair value recorded in operations. Debt securities that
the Company has the positive intent and ability to hold to maturity are classified as held to maturity and are reported at amortized cost. Available-for-sale securities consist of securities not classified as trading securities nor as
held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are excluded from operations and reported in accumulated other comprehensive loss. Gains and losses on the sale of available-for-sale
securities are recorded on the trade date and are determined using the specific-identification method. Purchase premiums and discounts are recognized in interest-income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and
ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses,
and any deferred fees or costs.

Loan origination fees are capitalized and certain direct origination costs are deferred. Both are
recognized as an adjustment of the yield of the related loan.

The accrual of interest on loans is discontinued at the time the loan is
ninety days delinquent unless the loan is well collateralized and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest
accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 operations. Loan losses will be charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, will be 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, 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 and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes available.

(continued)



F-7



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Allowance for Loan Losses, Continued.The allowance
consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans, an allowance is established when the discounted cash flows or the collateral
value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience and certain peer group comparisons, adjusted for qualitative factors, such as
economic conditions and other trends or uncertainties that could affect managements estimate of probable losses.

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 residential real estate, home equity or consumer loans for impairment disclosures.

Loans Held
for Sale. The Company has a mortgage division within the Bank to originate and sell residential mortgage loans in the secondary market. Loans originated and intended for sale in the secondary market are carried at the lower of cost or
estimated fair value in the aggregate, determined by outstanding commitments from investors or current investors yield requirements. The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to
funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives in accordance with Statement on Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivatives Instruments and Hedging Activities. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in
the net gain or loss on sale of loans held for sale. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, fair value also considers the difference between current levels of interest rates
and the committed rates. The effect of SFAS 133 was not material to the Companys consolidated financial statements for 2005.

Loan
origination fees are deferred and direct loan origination costs are capitalized until the related loan is sold, at which time the net fees are included in the net gain on sale of loans held for sale in the consolidated statement of operations.

(continued)



F-8



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Premises and Equipment. Land is stated at cost.
Other premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the shorter of the estimated useful life of each type of asset or
related lease term.

Comprehensive Income (Loss).Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net loss. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated
balance sheet, such items, along with net loss, are components of comprehensive income (loss). As of December 31, 2005, the Company had no securities classified as available for sale, therefore the only component of comprehensive income (loss)
is the net loss.

Transfer of Financial Assets. Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income Taxes.Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary
differences between revenues and expenses reported for financial statement and those reported for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be realized or settled. Valuation allowances are provided against assets which are not likely to be realized. The Company recognized a deferred tax benefit and deferred tax asset including the
reversal of a valuation allowance established prior to business commencing because management believes it is more likely than not that it will utilize the deferred tax asset to offset income tax liabilities generated in future periods.

The Holding Company and the Bank file consolidated income tax returns. Income taxes are allocated between the Holding Company and the Bank as though
separate income tax returns were filed.

(continued)



F-9



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Stock Compensation Plan. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure(collectively, SFAS 123), encourages all entities to
adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(Opinion No. 25), whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. The Company
accounts for their stock option plan under the recognition and measurement principles of APB. No. 25 and as a result, has provided proforma disclosures of net loss and other disclosures as if the fair value based method of accounting had been
applied. No stock-based employee compensation cost is reflected in net loss, as all stock options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

For purposes of pro forma disclosures, the estimated fair value is included in expense in the period vesting occurs. As permitted by SFAS NO. 123, the
Company excludes estimated stock volatility is estimating the fair value of their stock options, which results in a minimum value measurement. The following table illustrates the assumptions used in determining the grant-date fair value of options
issued during the period presented and the effect on net loss as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation ($ in thousands, except per share amounts):



|                                                                                                                                           |  |                              |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------ | -
|                                                                                                                                           |  | Period EndedDecember 31,2005 |       
|Assumptions:                                                                                                                               |  |                              |        |  
|Weighted-average risk free interest rate                                                                                                   |  |                              | 4.70   | %
|                                                                                                                                           |  |                              |        |  
|Estimated option life (in years)                                                                                                           |  |                              | 6.50   |  
|                                                                                                                                           |  |                              |        |  
|Dividend yield                                                                                                                             |  |                              |       | %
|                                                                                                                                           |  |                              |        |  
|Estimated stock volatility                                                                                                                 |  |                              | N/A    |  
|                                                                                                                                           |  |                              |        |  
|Weighted-average grant-date fair value of options issued during the year, per option                                                       |  | $                            | 2.17   |  
|                                                                                                                                           |  |                              |        |  
|Net loss, as reported                                                                                                                      |  | $                            | (1,009 | )
|                                                                                                                                           | 
|Deduct: Total stock-based employee compensation determined under the minimum value based method for all awards, net of related tax
benefit |  |                              | (245   | )
|                                                                                                                                           |  |                              |        |  
|Proforma net loss                                                                                                                          |  | $                            | (1,254 | )
|                                                                                                                                           |  |                              |        |  
|Loss per share:                                                                                                                            |  |                              |        |  
|As reported                                                                                                                                |  | $                            | (.67   | )
|                                                                                                                                           |  |                              |        |  
|Proforma                                                                                                                                   |  | $                            | (.83   | )
|                                                                                                                                           |  |                              |        |  

(continued)



F-10



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Loss Per Share. Basic loss per share is computed on
the basis of the weighted-average number of common shares outstanding, which was 1,507,100 shares during the period ended December 31, 2005. There were no common shares outstanding during 2004. All outstanding warrants and stock options are not
dilutive due to the net loss of the Company.

Preopening and Organizational Costs. Preopening and organizational costs were
approximately $328,000 (net of taxes of $197,000). Prior to the commencement of banking operations, all costs had been charged to expense as incurred.

Off-Balance-Sheet Instruments. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, unused lines of credit
and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded.

Fair Values of Financial Instruments. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the Companys various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement
of the instrument or may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair values of financial instruments:

Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate their fair value.

Securities. Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.

Loans. For variable-rate loans that reprice frequently
and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain fixed-rate mortgage (e.g. one-to-four family residential), commercial real estate and commercial loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Loans for Sale. Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.

Federal Home Loan Bank Stock. Fair value of the Companys investment in Federal Home Loan Bank stock is based on its redemption value, which is its cost of $100 per share.

Deposits. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of
aggregated expected monthly maturities on time deposits.

(continued)



F-11



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Fair Values of Financial Instruments, Continued.

Accrued Interest. The carrying amounts of accrued interest approximate their fair values.

Off-Balance-Sheet Financial Instruments. Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.

Recent Accounting Pronouncements. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. This SOP requires acquired impaired loans for which it is probable that the investor will be unable to collect all contractually required payments receivable to be recorded at the present value of amounts
expected to be received. The SOP also prohibits carrying over or creation of valuation allowances in the initial accounting for these loans. The SOP was effective for loans acquired in fiscal years beginning after December 15, 2004. The
adoption of this SOP did not impact the Companys consolidated financial position or results of operations.

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised), Share-Based Payment (SFAS No. 123(R)). This Statement replaces SFAS
No. 123, and supersedes APB No. 25. SFAS No. 123(R) clarifies and expands SFAS No. 123s guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, accounting for
nonsubstantive vesting provisions, and attributing compensation cost to reporting periods. Under the provisions of SFAS No. 123(R), the alternative to use APB No. 25s intrinsic value method of accounting that was provided in SFAS
No. 123, as originally issued, is eliminated. Effective January 1, 2006, the Company will begin expensing the fair value of any future grants of stock options.

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes,and SFAS 3, Reporting Accounting Changes in Interim
Financial Statements An Amendment of APB Opinion No. 28. SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005.

(continued)



F-12



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(2) Securities

Management has classified all securities as held to maturity. The carrying amount of securities at
December 31, 2005 are as follows (in thousands):



|                                  |  |               |        |                      |   |                       |     |   |                       |       
|--------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- | --- | - | --------------------- | ------
|                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |     |   | ApproximateFair Value
|U.S. government agency securities |  | $             | 7,989  |                      |  |                       | (18 | ) |                       | 7,971 
|Mortgage-backed securities        |  |               | 2,319  |                      | 4 |                       |    |   |                       | 2,323 
|                                  |  |               |        |                      |   |                       |     |   |                       |       
|                                  |  | $             | 10,308 |                      | 4 |                       | (18 | ) |                       | 10,294
|                                  |  |               |        |                      |   |                       |     |   |                       |       

The scheduled maturities of securities held to maturity at December 31, 2005 are as follows
(in thousands):



|                           |  |               |        |                       |       
|-------------------------- |  | ------------- | ------ | --------------------- | ------
|                           |  | AmortizedCost |        | ApproximateFair Value
|Due from one to five years |  | $             | 7,989  |                       | 7,971 
|Mortgage-backed securities |  |               | 2,319  |                       | 2,323 
|                           |  |               |        |                       |       
|                           |  | $             | 10,308 |                       | 10,294
|                           |  |               |        |                       |       

At December 31, 2005, securities with a carrying value of approximately $3.0 million were
pledged for other borrowings and public funds.

The unrealized losses on securities were caused by interest rate changes and not credit
quality. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company
has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

(continued)



F-13



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(3) Loans

The components of loans are as follows (in thousands):



|                                        |  |                     |        |  
|--------------------------------------- |  | ------------------- | ------ | -
|                                        |  | At December 31,2005 |       
|Commercial real estate                  |  | $                   | 26,626 |  
|Residential real estate and home equity |  |                     | 5,784  |  
|Construction                            |  |                     | 7,079  |  
|Commercial                              |  |                     | 4,979  |  
|Consumer                                |  |                     | 456    |  
|                                        |  |                     |        |  
|Total loans                             |  |                     | 44,924 |  
|                                        | 
|Allowance for loan losses               |  |                     | (564   | )
|Net deferred loan costs                 |  |                     | 169    |  
|                                        |  |                     |        |  
|Loans, net                              |  | $                   | 44,529 |  
|                                        |  |                     |        |  

An analysis of the change in the allowance for loan losses follows (in thousands):



|                          |  |                             |    
|------------------------- |  | --------------------------- | ---
|                          |  | Year Ended December 31,2005
|Beginning balance         |  | $                           |   
|Provision for loan losses |  |                             | 564
|                          |  |                             |    
|Ending balance            |  | $                           | 564
|                          |  |                             |    

The Company had no impaired loans, nonaccrual loans or loans which were over ninety days past due
but still accruing interest in 2005 or at December 31, 2005.

(4) Premises and Equipment

A summary of premises and equipment follows (in thousands):



|                                               |  |                     |       |  
|---------------------------------------------- |  | ------------------- | ----- | -
|                                               |  | At December 31,2005 |      
|Land                                           |  | $                   | 2,063 |  
|Buildings                                      |  |                     | 1,130 |  
|Leasehold improvements                         |  |                     | 557   |  
|Furniture, fixtures and equipment              |  |                     | 1,370 |  
|                                               |  |                     |       |  
|Total, at cost                                 |  |                     | 5,120 |  
|Less accumulated depreciation and amortization |  |                     | (197  | )
|                                               |  |                     |       |  
|Premises and equipment, net                    |  | $                   | 4,923 |  
|                                               |  |                     |       |  

(continued)



F-14



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(4) Premises and Equipment, Continued

The Company leases an office facility under an operating lease. This lease requires
monthly lease payments and common area maintenance charges and has an option to renew for five years. Rent expense under this operating lease during the year ended December 31, 2005 and the period ended December 31, 2004 was approximately
$80,000 and $30,000, respectively. The future minimum lease payments as of December 31, 2005 are as follows (in thousands):



|                         |  |        |    
|------------------------ |  | ------ | ---
|Year Ending December 31, |  | Amount
|2006                     |  | $      | 80 
|2007                     |  |        | 80 
|2008                     |  |        | 80 
|2009                     |  |        | 80 
|2010                     |  |        | 80 
|                         |  |        |    
|                         |  | $      | 400
|                         |  |        |    

(5) Deposits

A schedule of maturities of time deposits follows (in thousands):



|                         |  |        |       
|------------------------ |  | ------ | ------
|Year Ending December 31, |  | Amount
|2006                     |  | $      | 21,316
|2007                     |  |        | 699   
|2008                     |  |        | 1,842 
|2009                     |  |        | 20    
|2010                     |  |        | 3,447 
|                         |  |        |       
|                         |  | $      | 27,324
|                         |  |        |       

(6) Other Borrowings

The Company enters into repurchase agreements with customers that sweep funds from deposit accounts into investment accounts. These investment accounts are not federally insured and are treated as borrowings. These
agreements require the Company to pledge securities as collateral for these borrowings. At December 31, 2005, the outstanding balance of such borrowings totaled approximately $690,000 and the Company pledged securities with a carrying value of
approximately $2.0 million as collateral for these agreements.

The Company also has a $50,000 unsecured line of credit with a correspondent
bank. At December 31, 2005, the outstanding balance is $13,000 and the current interest rate is 7.25%.

During the organizational
phase, the Company entered into two loan agreements with a correspondent bank. One was a $900,000 line of credit to provide working capital during the organizational phase and the other was a $985,000 loan to provide financing for the acquisition of
land for a future branch in Gainesville, Florida. Both were repaid in February 2005 from the proceeds of the common stock offering (see Note 13).

(continued)



F-15



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(7) Income Taxes

Allocation of Federal and state income taxes is as follows (in thousands):



|                   |  |                             |     |                                                                           |  
|------------------ |  | --------------------------- | --- | ------------------------------------------------------------------------- | -
|                   |  | Year Ended December 31,2005 |     | Period from February 19, 2004 (Date of Organization) to December 31, 2004
|Deferred:          |  |                             |     |                                                                           |  
|Federal            |  | $                           | 664 |                                                                           | 
|State              |  |                             | 114 |                                                                           | 
|                   |  |                             |     |                                                                           |  
|Income tax benefit |  | $                           | 778 |                                                                           | 
|                   |  |                             |     |                                                                           |  

The reasons for the differences between the statutory Federal income tax rate and the effective
tax rate are summarized as follows ($ in thousands):



|                                        |  |                              |     |                |                                                                           |   |        |   |      |                 |  |       |  
|--------------------------------------- |  | ---------------------------- | --- | -------------- | ------------------------------------------------------------------------- | - | ------ | - | ---- | --------------- |  | ----- | -
|                                        |  | Year Ended December 31, 2005 |     |                | Period from February 19, 2004 (Date of Organization) to December 31, 2004 |  
|                                        |  | Amount                       |     | % ofPretaxLoss |                                                                           |   | Amount |   |      | % ofPretax Loss | 
|Tax benefit at statutory rate           |  | $                            | 608 |                | 34.0                                                                      | % |        | $ | 98   |                 |  | 34.0  | %
|Increase in tax benefit resulting from- |  |                              |     |                |                                                                           |   |        |   |      |                 |  |       |  
|State taxes, net of Federal tax benefit |  |                              | 64  |                | 3.6                                                                       |   |        |   | 8    |                 |  | 3.5   |  
|Valuation allowance                     |  |                              |    |                |                                                                          |   |        |   | (106 | )               |  | (37.5 | )
|Reversal of valuation allowance         |  |                              | 106 |                | 5.9                                                                       |   |        |   |     |                 |  |      |  
|                                        |  |                              |     |                |                                                                           |   |        |   |      |                 |  |       |  
|Income tax benefit                      |  | $                            | 778 |                | 43.5                                                                      | % |        | $ |     |                 |  |      | %
|                                        |  |                              |     |                |                                                                           |   |        |   |      |                 |  |       |  

(continued)



F-16



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(7) Income Taxes, Continued

The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities are presented below (in thousands).



|                                  |  |                     |      |  
|--------------------------------- |  | ------------------- | ---- | -
|                                  |  | At December 31,2005 |     
|Deferred tax assets:              |  |                     |      |  
|Net operating loss carryforwards  |  | $                   | 523  |  
|Organizational and start-up costs |  |                     | 223  |  
|Allowance for loan losses         |  |                     | 173  |  
|Other                             |  |                     | 4    |  
|                                  |  |                     |      |  
|Deferred tax assets               |  |                     | 923  |  
|                                  |  |                     |      |  
|Deferred tax liabilities:         |  |                     |      |  
|Accrual to cash conversion        |  |                     | (17  | )
|Accumulated depreciation          |  |                     | (28  | )
|Deferred loan costs               |  |                     | (100 | )
|                                  |  |                     |      |  
|Deferred tax liabilities          |  |                     | (145 | )
|                                  |  |                     |      |  
|Net deferred tax asset            |  | $                   | 778  |  
|                                  |  |                     |      |  

At December 31, 2005, the Bank has approximately $1,390,000 of a net operating loss
carryforwards available to offset future taxable income. These carryforwards will begin to expire in 2025.

(continued)



F-17



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(8) Off-Balance-Sheet Financial Instruments

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, unused lines of credit and standby letters of credit and may involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

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.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on managements credit
evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of
a customer to a third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. The Company generally holds collateral supporting these commitments.

Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded. A summary of the amounts of the Companys financial instruments with off-balance-sheet risk at
December 31, 2005 follows (in thousands):



|                             |  |                 |       
|---------------------------- |  | --------------- | ------
|                             |  | Contract Amount
|Commitments to extend credit |  | $               | 18,471
|                             |  |                 |       
|Unused lines of credit       |  | $               | 15,388
|                             |  |                 |       
|Standby letters of credit    |  | $               | 171   
|                             |  |                 |       

(continued)



F-18



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(9) Significant Group Concentrations of Credit Risk

The Company grants the majority of its loans to borrowers throughout
the northeast Florida area, including Marion and Alachua counties. Although the Company has a diversified loan portfolio, a significant portion of its borrowers ability to honor their contracts is dependent upon the economy of this area. The
Company does not have any significant concentrations to any one industry or customer.

(10) Stock Option Plan

The Company adopted a stock option plan for its employees and directors (the Plan). Fifteen percent of the total amount of shares outstanding,
up to 450,000 shares, have been reserved under the Plan. Options granted to directors vest immediately and for employees, the options primarily vest over three years starting with the date of grant and ending on the third anniversary thereof. On
December 15, 2005, options to acquire 123,750 shares at $10 per share were granted to directors of the Company. Also on December 15, 2005, 100,400 shares at $10 per share were granted to employees.

The weighted-average remaining contractual life of options outstanding at December 31, 2005 was 9.9 years. At December 31 2005, 2,980 options
remain available for future grants under the Plan.

These options are exercisable as follows:



|                         |  |                 
|------------------------ |  | ----------------
|Year Ending December 31, |  | Number ofOptions
|Currently exercisable    |  | 162,425         
|2006                     |  | 38,675          
|2007                     |  | 23,050          
|                         |  |                 
|                         |  | 224,150         
|                         |  |                 

(11) Employee Benefit Plan

The Company participates in a 401(k) profit sharing plan available to all employees electing to participate after meeting certain length-of-service requirements. The Companys contributions to the profit sharing
plan are discretionary and are determined annually. The Company did not make a contribution during 2005.

(continued)



F-19



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(12) Related Party Transactions

The Company enters into transactions during the ordinary course of business with officers
and directors of the Company and entities in which they hold a significant financial interest. The following summarizes these transactions for the year ended December 31, 2005 (in thousands):



|                                                         |  |        |        |  
|-------------------------------------------------------- |  | ------ | ------ | -
|                                                         |  | Amount |       
|Loans:                                                   |  |        |        |  
|Loans originated during the period                       |  | $      | 11,577 |  
|Principal repayments                                     |  |        | (4,383 | )
|                                                         |  |        |        |  
|Balance at December 31, 2005                             |  | $      | 7,194  |  
|                                                         |  |        |        |  
|Deposits held from related parties                       |  | $      | 2,131  |  
|                                                         |  |        |        |  
|Management fees and leasing commissions paid during year |  | $      | 16     |  
|                                                         |  |        |        |  

The only related party transactions during 2004 related to advances of $55,000 received from
certain organizers of the Company. These advances were repaid from the line of credit loan discussed in footnote 6.

(13) Stockholders Equity and
Dividend Restrictions

The Company completed the sale of 1,500,000 shares of common stock at $10 per share ($.01 par value) prior to the
commencement of banking operations and incurred approximately $54,000 of stock offering costs. The initial proceeds were allocated as follows (in thousands):



|                           |  |   |       
|-------------------------- |  | - | ------
|Common stock               |  | $ | 15    
|Additional paid-in capital |  |   | 14,931
|                           |  |   |       
|                           |  | $ | 14,946
|                           |  |   |       

During the initial offering of common stock, the Company sold units, with each unit containing one
share of common stock and one warrant. Each warrant entitles the holder to purchase one share of additional common stock for $10 at anytime over a three-year period. As of December 31, 2005, 14,200 warrants were exercised and 1,485,800 remain
unexercised.

The Company is limited in the amount of dividends it may pay by the amount of dividends the Bank may pay to the Holding
Company. The Bank is limited in the amount of cash dividends that may be paid by Florida law. The amount of cash dividends that may be paid is based on the Banks net earnings of the current year combined with the Banks retained earnings
of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Bank must consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and
economic conditions. It is likely that these factors would further limit the amount of dividends which the Bank could declare. In addition, bank regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an
unsafe or unsound practice.

(continued)



F-20



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(14) Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and the Banks
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percents (set
forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005, that
the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2005, the most recent notification from
the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage percents as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks category. The Banks actual capital amounts and percents are also presented in the
table ($ in thousands):



|                                          |  |        |        |         |                              |   |        |                              |         |  |      |        |  |         |       |  |       |  
|----------------------------------------- |  | ------ | ------ | ------- | ---------------------------- | - | ------ | ---------------------------- | ------- |  | ---- | ------ |  | ------- | ----- |  | ----- | -
|                                          |  | Actual |        |         | For Capital AdequacyPurposes |   |        | For Well CapitalizedPurposes |        
|                                          |  | Amount |        | Percent |                              |   | Amount |                              | Percent |  |      | Amount |  | Percent |      
|As of December 31, 2005:                  |  |        |        |         |                              |   |        |                              |         |  |      |        |  |         |       |  |       |  
|Total capital (to Risk- Weighted Assets)  |  | $      | 14,357 |         | 24.76                        | % |        | $                            | 4,640   |  | 8.00 | %      |  | $       | 5,800 |  | 10.00 | %
|Tier I Capital (to Risk- Weighted Assets) |  |        | 13,793 |         | 23.78                        |   |        |                              | 2,320   |  | 4.00 |        |  |         | 3,480 |  | 6.00  |  
|Tier I Capital (to Average Assets)        |  |        | 13,793 |         | 21.00                        | * |        |                              | 2,627   |  | 4.00 | *      |  |         | 3,284 |  | 5.00  | *

---

|* | The Bank is required to maintain an 8.00% Tier I capital ratio throughout the first of three years of operations.
|- | -----------------------------------------------------------------------------------------------------------------

(15) Legal Contingencies

Various legal claims arise
from time to time in the normal course of business. At December 31, 2005, there is no pending or threatened litigation to which management is aware of.

(continued)



F-21



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(16) Fair Value of Financial Instruments

The estimated fair values of the Companys financial instruments are as
follows (in thousands):



|                                        |  |                     |        |            |       
|--------------------------------------- |  | ------------------- | ------ | ---------- | ------
|                                        |  | At December 31,2005
|                                        |  | Carrying Amount     |        | Fair Value
|Financial assets:                       |  |                     |        |            |       
|Cash and cash equivalents               |  | $                   | 10,900 |            | 10,900
|Securities held to maturity             |  |                     | 10,308 |            | 10,294
|Loans, net                              |  |                     | 44,529 |            | 44,163
|Loans held for sale                     |  |                     | 321    |            | 324   
|Accrued interest receivable             |  |                     | 208    |            | 208   
|Federal Home Loan Bank stock            |  |                     | 35     |            | 35    
|                                        |  |                    
|Financial liabilities:                  |  |                     |        |            |       
|Deposits                                |  |                     | 57,086 |            | 55,537
|Other borrowings                        |  |                     | 703    |            | 703   
|Accrued interest payable                |  |                     | 149    |            | 149   
|Off-balance-sheet financial instruments |  |                     |       |            |      

(continued)



F-22



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(17) Holding Company Only Financial Information

The Holding Companys unconsolidated financial information is as
follows (in thousands):

Condensed Balance Sheet



|                                           |  |                     |       
|------------------------------------------ |  | ------------------- | ------
|                                           |  | At December 31,2005
|Assets                                     |  |                     |       
|Cash                                       |  | $                   | 2     
|Investment in subsidiary                   |  |                     | 13,793
|Other assets                               |  |                     | 10    
|                                           |  |                     |       
|Total assets                               |  | $                   | 13,805
|                                           |  |                     |       
|Liabilities and Stockholders Equity       |  |                     |       
|Other borrowings                           |  |                     | 13    
|Other liabilities                          |  |                     | 1     
|Stockholders equity                       |  |                     | 13,791
|                                           |  |                     |       
|Total liabilities and stockholders equity |  | $                   | 13,805
|                                           |  |                     |       

Condensed Statements of Operations



|                                              |  |                             |        |   |                                                                           |      |  
|--------------------------------------------- |  | --------------------------- | ------ | - | ------------------------------------------------------------------------- | ---- | -
|                                              |  | Year Ended December 31,2005 |        |   | Period from February 19, 2004 (Date of Organization) to
December 31, 2004 |     
|Operating expenses, net of income tax benefit |  | $                           | 17     |   |                                                                           |     |  
|                                              |  |                             |        |   |                                                                           |      |  
|Net loss before loss of subsidiary            |  |                             | (17    | ) |                                                                           |     |  
|Loss of subsidiary                            |  |                             | (992   | ) |                                                                           | (288 | )
|                                              |  |                             |        |   |                                                                           |      |  
|Net loss                                      |  | $                           | (1,009 | ) |                                                                           | (288 | )
|                                              |  |                             |        |   |                                                                           |      |  

(continued)



F-23



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(17) Holding Company Only Financial Information, Continued

Condensed Statements of Cash Flows



|                                                                           |  |                            |        |   |                                                                         |      |  
|-------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ----------------------------------------------------------------------- | ---- | -
|                                                                           |  | Year EndedDecember 31,2005 |        |   | Period fromFebruary 19, 2004 (Date of Organization) toDecember 31, 2004 |     
|Cash flows from operating activities:                                      |  |                            |        |   |                                                                         |      |  
|Net loss                                                                   |  | $                          | (1,009 | ) |                                                                         | (288 | )
|Adjustment to reconcile net loss to net cash used in operating activities- |  |                            |        |   |                                                                         |      |  
|Equity in loss of subsidiary                                               |  |                            | 992    |   |                                                                         | 288  |  
|Increase in other assets                                                   |  |                            | (10    | ) |                                                                         |     |  
|Increase in other liabilities                                              |  |                            | 1      |   |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  
|Net cash used in operating activities                                      |  |                            | (26    | ) |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  
|Cash flows from investing activity-                                        |  |                            |        |   |                                                                         |      |  
|Investment in subsidiary                                                   |  |                            | (127   | ) |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  
|Cash flows from financing activities:                                      |  |                            |        |   |                                                                         |      |  
|Net increase in other borrowings                                           |  |                            | 13     |   |                                                                         |     |  
|Warrants exercised                                                         |  |                            | 142    |   |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  
|Net cash provided by financing activities                                  |  |                            | 155    |   |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  
|Net increase in cash and cash equivalents                                  |  |                            | 2      |   |                                                                         |     |  
|Cash and cash equivalents at beginning of the period                       |  |                            |       |   |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  
|Cash and cash equivalents at end of period                                 |  | $                          | 2      |   |                                                                         |     |  
|                                                                           |  |                            |        |   |                                                                         |      |  



F-24