Report of Independent Registered Public Accounting Firm

Alarion Financial Services, Inc.

Ocala, Florida:

We have audited the accompanying consolidated balance sheets of Alarion Financial Services, Inc. and Subsidiary (the Company) as of
December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended. 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
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 2006 and 2005, and the results of its operations and its cash flows for years then ended, in
conformity with U.S. generally accepted accounting principles.

HACKER, JOHNSON & SMITH PA

Tampa, Florida

March 29, 2007



F-1



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Consolidated Balance Sheets

($ in thousands, except per share amounts)



|                                                                                                                                  |  |                 |         |   |      |        |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ---- | ------ | -
|                                                                                                                                  |  | At December 31, |        
|                                                                                                                                  |  | 2006            |         |   | 2005 |       
|Assets                                                                                                                            |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Cash and due from banks                                                                                                           |  | $               | 2,781   |   |      | 2,408  |  
|Interest-earning deposits and federal funds sold                                                                                  |  |                 | 3,953   |   |      | 8,492  |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Cash and cash equivalents                                                                                                         |  |                 | 6,734   |   |      | 10,900 |  
|                                                                                                                                  |  |                
|Interest bearing time deposits in banks                                                                                           |  |                 | 1,000   |   |      |       |  
|Securities held to maturity (market value of $10,294)                                                                             |  |                 |        |   |      | 10,308 |  
|Securities available for sale                                                                                                     |  |                 | 13,837  |   |      |       |  
|Loans, net of allowance for loan losses of $1,345 and $564                                                                        |  |                 | 106,289 |   |      | 44,529 |  
|Loans held for sale                                                                                                               |  |                 | 2,436   |   |      | 321    |  
|Accrued interest receivable                                                                                                       |  |                 | 648     |   |      | 208    |  
|Premises and equipment, net                                                                                                       |  |                 | 6,724   |   |      | 4,923  |  
|Federal Home Loan Bank stock, at cost                                                                                             |  |                 | 595     |   |      | 35     |  
|Deferred income taxes                                                                                                             |  |                 | 990     |   |      | 778    |  
|Other assets                                                                                                                      |  |                 | 191     |   |      | 225    |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|Total assets                                                                                                                      |  | $               | 139,444 |   |      | 72,227 |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Liabilities and Stockholders Equity                                                                                              |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Liabilities:                                                                                                                      |  |                 |         |   |      |        |  
|Noninterest-bearing demand deposits                                                                                               |  |                 | 9,615   |   |      | 9,335  |  
|NOW, money-market and savings deposits                                                                                            |  |                 | 29,927  |   |      | 20,427 |  
|Time deposits < $100,000                                                                                                          |  |                 | 35,142  |   |      | 13,119 |  
|Time deposits > = $100,000                                                                                                        |  |                 | 32,958  |   |      | 14,205 |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Total deposits                                                                                                                    |  |                 | 107,642 |   |      | 57,086 |  
|                                                                                                                                  |  |                
|Federal Home Loan Bank advances                                                                                                   |  |                 | 10,000  |   |      |       |  
|Other borrowings                                                                                                                  |  |                 | 6,769   |   |      | 703    |  
|Accrued interest payable                                                                                                          |  |                 | 400     |   |      | 149    |  
|Accrued expenses and other liabilities                                                                                            |  |                 | 296     |   |      | 498    |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Total liabilities                                                                                                                 |  |                 | 125,107 |   |      | 58,436 |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Commitments (Notes 4 and 9)                                                                                                       |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|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, 1,607,140 and 1,514,200 shares issued and outstanding in 2006 and
2005 |  |                 | 16      |   |      | 15     |  
|Additional paid-in capital                                                                                                        |  |                 | 16,002  |   |      | 15,073 |  
|Accumulated deficit                                                                                                               |  |                 | (1,660  | ) |      | (1,297 | )
|Accumulated other comprehensive loss                                                                                              |  |                 | (21     | ) |      |       |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Total stockholders equity                                                                                                        |  |                 | 14,337  |   |      | 13,791 |  
|                                                                                                                                  |  |                 |         |   |      |        |  
|                                                                                                                                  |  |                
|Total liabilities and stockholders equity                                                                                        |  | $               | 139,444 |   |      | 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, |      
|                                                    |  | 2006                    |       |   | 2005 |       
|Interest income:                                    |  |                         |       |   |      |        |  
|Loans                                               |  | $                       | 5,652 |   |      | 1,104  |  
|Securities                                          |  |                         | 737   |   |      | 122    |  
|Other                                               |  |                         | 545   |   |      | 555    |  
|                                                    |  |                         |       |   |      |        |  
|Total interest income                               |  |                         | 6,934 |   |      | 1,781  |  
|                                                    |  |                         |       |   |      |        |  
|Interest expense:                                   |  |                         |       |   |      |        |  
|Deposits                                            |  |                         | 3,320 |   |      | 720    |  
|Borrowings                                          |  |                         | 383   |   |      | 5      |  
|                                                    |  |                         |       |   |      |        |  
|Total interest expense                              |  |                         | 3,703 |   |      | 725    |  
|                                                    |  |                         |       |   |      |        |  
|Net interest income                                 |  |                         | 3,231 |   |      | 1,056  |  
|Provision for loan losses                           |  |                         | 781   |   |      | 564    |  
|                                                    |  |                         |       |   |      |        |  
|Net interest income after provision for loan losses |  |                         | 2,450 |   |      | 492    |  
|                                                    |  |                         |       |   |      |        |  
|Noninterest income:                                 |  |                         |       |   |      |        |  
|Deposit account fees                                |  |                         | 132   |   |      | 18     |  
|Net gain on sales of loans held for sale            |  |                         | 748   |   |      | 155    |  
|Other                                               |  |                         | 53    |   |      | 12     |  
|                                                    |  |                         |       |   |      |        |  
|Total noninterest income                            |  |                         | 933   |   |      | 185    |  
|                                                    |  |                         |       |   |      |        |  
|Noninterest expenses:                               |  |                         |       |   |      |        |  
|Salaries and employee benefits                      |  |                         | 2,205 |   |      | 1,275  |  
|Occupancy and equipment                             |  |                         | 517   |   |      | 340    |  
|Data processing                                     |  |                         | 231   |   |      | 133    |  
|Professional services                               |  |                         | 161   |   |      | 153    |  
|Advertising and promotion                           |  |                         | 153   |   |      | 76     |  
|Office supplies and printing                        |  |                         | 135   |   |      | 105    |  
|Other                                               |  |                         | 543   |   |      | 382    |  
|                                                    |  |                         |       |   |      |        |  
|Total noninterest expenses                          |  |                         | 3,945 |   |      | 2,464  |  
|                                                    |  |                         |       |   |      |        |  
|Loss before income tax benefit                      |  |                         | (562  | ) |      | (1,787 | )
|Income tax benefit                                  |  |                         | (199  | ) |      | (778   | )
|                                                    |  |                         |       |   |      |        |  
|Net loss                                            |  | $                       | (363  | ) |      | (1,009 | )
|                                                    |  |                         |       |   |      |        |  
|Loss per share  basic and diluted                  |  | $                       | (.23  | ) |      | (.67   | )
|                                                    |  |                         |       |   |      |        |  

See Accompanying Notes to Consolidated Financial Statements.



F-3



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Consolidated Statements of Stockholders Equity

Years Ended December 31, 2006 and 2005

($ in thousands)



|                                                                                |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|------------------------------------------------------------------------------- |  | ------------ | - | ---------- | ------ | ----------- | ------- | ------ | ------------- | ------ | - | ------------- | --- | - | ------ | ------ | -
|                                                                                |  |              |   |            |        |             |         |        |               |        |   | Accumulated   |     |   | Total  |       
|                                                                                |  |              |   | Additional |        |             |         |        | Other         |        |   | Stockholders |    
|                                                                                |  | Common Stock |   | Paid-In    |        | Accumulated |         |        | Comprehensive |        |   | (Deficit)     |    
|                                                                                |  | Shares       |   |            | Amount |             | Capital |        | Deficit       |        |   | Loss          |     |   | Equity |       
|Balance at December 31, 2004                                                    |  |             |   |            | $      |            |         |       |               | (288   | ) |               |    |   |        | (288   | )
|                                                                                |  |              |   |            |        |            
|Comprehensive loss  net loss                                                   |  |             |   |            |        |            |         |       |               | (1,009 | ) |               |    |   |        | (1,009 | )
|                                                                                |  |              |   |            |        |            
|Common stock offering, net of offering costs of $54                             |  | 1,500,000    |   |            |        | 15          |         | 14,931 |               |       |   |               |    |   |        | 14,946 |  
|                                                                                |  |              |   |            |        |            
|Common stock warrants exercised                                                 |  | 14,200       |   |            |        |            |         | 142    |               |       |   |               |    |   |        | 142    |  
|                                                                                |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|                                                                                |  |              |   |            |        |            
|Balance at December 31, 2005                                                    |  | 1,514,200    |   |            |        | 15          |         | 15,073 |               | (1,297 | ) |               |    |   |        | 13,791 |  
|                                                                                |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|Comprehensive loss                                                              |  |             |   |            |        |            |         |       |               | (363   | ) |               |    |   |        | (363   | )
|Net loss                                                                        |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|                                                                                |  |              |   |            |        |            
|Net unrealized loss on securities available for sale, net of tax benefit of $13 |  |             |   |            |        |            |         |       |               |       |   |               | (21 | ) |        | (21    | )
|                                                                                |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|                                                                                |  |              |   |            |        |            
|Comprehensive loss                                                              |  | (384         | ) |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|                                                                                |  |              |   |            |        |            
|Common stock options exercised                                                  |  | 5,000        |   |            |        |            |         | 50     |               |       |   |               |    |   |        | 50     |  
|                                                                                |  |              |   |            |        |            
|Common stock warrants exercised                                                 |  | 87,940       |   |            |        | 1           |         | 879    |               |       |   |               |    |   |        | 880    |  
|                                                                                |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  
|                                                                                |  |              |   |            |        |            
|Balance at December 31, 2006                                                    |  | 1,607,140    |   |            | $      | 16          |         | 16,002 |               | (1,660 | ) |               | (21 | ) |        | 14,337 |  
|                                                                                |  |              |   |            |        |             |         |        |               |        |   |               |     |   |        |        |  

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 Ended December 31, |         
|                                                                            |  | 2006                    |          |   | 2005 |        
|Cash flows from operating activities:                                       |  |                         |          |   |      |         |  
|Net loss                                                                    |  | $                       | (363     | ) |      | (1,009  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |          |   |      |         |  
|Provision for loan losses                                                   |  |                         | 781      |   |      | 564     |  
|Depreciation and amortization                                               |  |                         | 260      |   |      | 197     |  
|Deferred income tax benefit                                                 |  |                         | (199     | ) |      | (778    | )
|Net amortization on premiums and discounts on securities                    |  |                         | (42      | ) |      | (40     | )
|Net amortization of deferred loan fees and costs                            |  |                         | 82       |   |      | 41      |  
|Net gain on sales of loans held for sale                                    |  |                         | (748     | ) |      | (155    | )
|Loans originated for sale                                                   |  |                         | (49,964  | ) |      | (8,885  | )
|Proceeds from sales of loans held for sale                                  |  |                         | 48,597   |   |      | 8,719   |  
|Increase in accrued interest payable                                        |  |                         | 251      |   |      | 149     |  
|Increase in accrued interest receivable                                     |  |                         | (440     | ) |      | (208    | )
|Decrease (increase) in other assets                                         |  |                         | 34       |   |      | (200    | )
|(Decrease) increase in accrued expenses and other liabilities               |  |                         | (202     | ) |      | 443     |  
|                                                                            |  |                         |          |   |      |         |  
|Net cash used in operating activities                                       |  |                         | (1,953   | ) |      | (1,162  | )
|                                                                            |  |                         |          |   |      |         |  
|Cash flows from investing activities:                                       |  |                         |          |   |      |         |  
|Proceeds from principal repayments and maturities of securities             |  |                         | 7,447    |   |      | 2,080   |  
|Purchase of securities                                                      |  |                         | (10,968  | ) |      | (12,348 | )
|Purchase of interest bearing deposits in banks                              |  |                         | (1,000   | ) |      |        |  
|Loan disbursements                                                          |  |                         | (125,564 | ) |      | (90,830 | )
|Principal repayments on loans                                               |  |                         | 62,941   |   |      | 45,696  |  
|Purchase of premises and equipment                                          |  |                         | (2,061   | ) |      | (3,817  | )
|Purchase of Federal Home Loan Bank stock                                    |  |                         | (560     | ) |      | (35     | )
|                                                                            |  |                         |          |   |      |         |  
|Net cash used in investing activities                                       |  |                         | (69,765  | ) |      | (59,254 | )
|                                                                            |  |                         |          |   |      |         |  
|Cash flows from financing activities:                                       |  |                         |          |   |      |         |  
|Net increase in deposits                                                    |  |                         | 50,556   |   |      | 57,086  |  
|Proceeds from Federal Home Loan Bank advances                               |  |                         | 10,000   |   |      |        |  
|Net increase (decrease) in other borrowings                                 |  |                         | 6,066    |   |      | (859    | )
|Net proceeds from sale of common stock                                      |  |                         |         |   |      | 14,946  |  
|Proceeds from common stock warrants and options exercised                   |  |                         | 930      |   |      | 142     |  
|                                                                            |  |                         |          |   |      |         |  
|Net cash provided by financing activities                                   |  |                         | 67,552   |   |      | 71,315  |  
|                                                                            |  |                         |          |   |      |         |  
|Net (decrease) increase in cash and cash equivalents                        |  |                         | (4,166   | ) |      | 10,899  |  
|                                                                            |  |                        
|Cash and cash equivalents at beginning of year                              |  |                         | 10,900   |   |      | 1       |  
|                                                                            |  |                         |          |   |      |         |  
|Cash and cash equivalents at end of year                                    |  | $                       | 6,734    |   |      | 10,900  |  
|                                                                            |  |                         |          |   |      |         |  

(continued)



F-5



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Consolidated Statements of Cash Flows, Continued

(In thousands)



|                                                                                                           |  |                         |        |   |      |    
|---------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | ---
|                                                                                                           |  | Year Ended December 31,
|                                                                                                           |  | 2006                    |        |   | 2005
|Supplemental disclosure of cash flow information:                                                          |  |                         |        |   |      |    
|Cash paid during the year for-                                                                             |  |                         |        |   |      |    
|Interest                                                                                                   |  | $                       | 3,452  |   |      | 576
|                                                                                                           |  |                         |        |   |      |    
|Income taxes                                                                                               |  | $                       |       |   |      |   
|                                                                                                           |  |                         |        |   |      |    
|Noncash transactions:                                                                                      |  |                         |        |   |      |    
|Accumulated other comprehensive loss, unrealized loss on securities available for sale, net of tax benefit |  | $                       | (21    | ) |      |   
|                                                                                                           |  |                         |        |   |      |    
|Transfer of securities held to maturity to available for sale                                              |  | $                       | 13,837 |   |      |   
|                                                                                                           |  |                         |        |   |      |    

See Accompanying Notes to Consolidated Financial Statements.



F-6



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements

At December 31, 2006 and 2005 and for the Years Then Ended

(1) Summary of Significant Accounting Policies

Organization. Alarion
Financial Services, Inc. (the Holding Company) owns 100% of the outstanding 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 commenced operations on February 28, 2005. The Bank offers a variety of banking and financial services to individual and corporate customers through its four banking offices located in Ocala,
Gainesville and Alachua, 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 was accounted for as a reorganization of entities under common control at historical cost and the financial data for the periods 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 consolidated statements 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, 2006 and 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-7



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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. In December 2006, the Company reclassified all securities held to maturity to securities available for sale (see note 2).

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-8



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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 peer group loss experience 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. Loans held for sale are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by charges to operations. At December 31, 2006 and 2005, the estimated fair value exceeded book value for all loans held to sale.

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 statements of operations.

(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

Premises and Equipment. Land is stated at cost. Other premises, equipment and leasehold improvements 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 which includes certain renewal options.

Comprehensive 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 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 in 2005 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-10



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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. Prior to January 1, 2006, the Companys stock option plan was accounted for under the recognition and measurement provisions of Accounting Principles Board Opinion
No. 25 (Opinion 25), Accounting for Stock Issued to Employees, and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation(as amended by
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation Transition and Disclosure)(collectively SFAS 123).No stock-based employee compensation cost was recognized in the Companys
consolidated statements of operations through December 31, 2005, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB Statement No. 123 (R), Share-Based Payment (SFAS 123 (R)), using the modified-prospective-transition method. Under the transition method, compensation cost recognized in 2006
includes: (a) compensation cost for all share-base payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value calculated in accordance with the original provisions of SFAS 123, and
(b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123 (R). Prior to December 31, 2005, the Company was
not considered a public company as defined in SFAS 123 and used the minimum value method to determine stock based compensation. Therefore, the stock options granted in 2005 that vested in 2006 are not required to be expensed by the Company upon
implementation of SFAS 123(R). Also, no common stock options were granted in 2006. The adoption of SFAS 123(R) had no effect on the Company in 2006.

Loss Per Share. Basic loss per share is computed on the basis of the weighted-average number of common shares outstanding, which was 1,544,912 and 1,507,100 shares during the years ended
December 31, 2006 and 2005, respectively. All outstanding stock warrants and options are not considered dilutive securities due to the net loss incurred by the Company.

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.

(continued)



F-11



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

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 and interest bearing time deposits in banks. The carrying amounts of these financial instruments
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 residential mortgage, 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 held 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 of time deposits.

Federal Home Loan Bank
Advances. Fair value of the advances from the Federal Home Loan Bank are estimated using a discounted cash flow analysis based on the Companys current incremental borrowing rate for similar types of borrowings.

Other Borrowings.Fair values of other borrowings approximates their fair value

(continued)



F-12



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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 February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Instruments(SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also
subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement was effective as of January 1, 2007 and had no effect on the Company.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing Financial Assets, an amendment of SFAS No. 140 (SFAS 156). This statement
amends SFAS 140 to require that all separately recognized servicing assets and liabilities be initially measured at fair value, if practical. The effective date of this statement is as of the beginning of its first fiscal year that begins after
September 15, 2006; however, early adoption is permitted as of the beginning of any fiscal year, provided the entity has not issued financial statements for the interim period. The initial recognition and measurement of servicing assets and
servicing liabilities are required to be applied prospectively to transactions occurring after the effective date. The adoption of SFAS 156 had no effect on the Company.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transitions. FIN 48 was effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 had no effect on the Company.

(continued)



F-13



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Recent Accounting Pronouncements, Continued.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment
of FASB Statements No. 87, 88, 106, and 132 (R), (SFAS 158) which requires the recognition of a plans over-funded or under-funded status as an asset or liability with an offsetting adjustment to Accumulated Other Comprehensive Income
(Loss). This statement was effective as of December 31, 2006. The adoption of SFAS 158 had no effect on the Company.

In September,
2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about
fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. In developing this statement, the FASB considered the need for
increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have any effect on the Company.

In September 2006,
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 (SAB 108). SAB 108 expresses the SEC Staffs views regarding the process of quantifying financial statement misstatements. SAB 108 states that in
evaluating the materiality of financial statement misstatements a corporation must quantify the impact of correcting misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial
statements. SAB 108 was effective for the fiscal years ended after November 15, 2006. The adoption of SAB 108 had no effect on the Company.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 (SFAS 159). This
statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the Boards long-term
measurement objectives for accounting for financial instruments. SFAS 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The adoption of this statement is not expected to have any effect on the Company.

(continued)



F-14



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(2) Securities

Management has
reclassified all securities as available-for-sale as of December 29, 2006. Prior, securities were classified as held to maturity. The carrying amount of securities are as follows (in thousands):



|                                  |  |               |        |                       |   |                        |     |   |                        |       
|--------------------------------- |  | ------------- | ------ | --------------------- | - | ---------------------- | --- | - | ---------------------- | ------
|Available for sale-               |  | AmortizedCost |        | Gross UnrealizedGains |   | Gross UnrealizedLosses |     |   | Approximate Fair Value
|At December 31, 2006:             |  |               |        |                       |   |                        |     |   |                        |       
|U.S. government agency securities |  | $             | 12,000 |                       |  |                        | (19 | ) |                        | 11,981
|Mortgage-backed securities        |  |               | 1,871  |                       |  |                        | (15 | ) |                        | 1,856 
|                                  |  |               |        |                       |   |                        |     |   |                        |       
|                                  |  | $             | 13,871 |                       |  |                        | (34 | ) |                        | 13,837
|                                  |  |               |        |                       |   |                        |     |   |                        |       
|                                  |  |               |        |                      
|Held to maturity-                 |  |               |        |                       |   |                        |     |   |                        |       
|At December 31, 2005:             |  |               |        |                       |   |                        |     |   |                        |       
|U.S. government agency securities |  |               | 7,989  |                       |  |                        | (18 | ) |                        | 7,971 
|Mortgage-backed securities        |  |               | 2,319  |                       | 4 |                        |    |   |                        | 2,323 
|                                  |  |               |        |                       |   |                        |     |   |                        |       
|                                  |  | $             | 10,308 |                       | 4 |                        | (18 | ) |                        | 10,294
|                                  |  |               |        |                       |   |                        |     |   |                        |       

In December 2006, the Company transferred securities with a book value of
approximately $13,871,000 from the held to maturity category to the available for sale category at its then fair value resulting in unrealized losses of approximately $21,000 net of tax benefit. The net unrealized loss was recorded in accumulated
other comprehensive loss. Due to this transfer, the Company will be prohibited from classifying securities as held to maturity for a period of two years.

The scheduled maturities of securities available for sale at December 31, 2006 are as follows (in thousands):



|                           |  |               |        |                        |       
|-------------------------- |  | ------------- | ------ | ---------------------- | ------
|                           |  | AmortizedCost |        | Approximate Fair Value
|Due in less than one year  |  | $             | 6,000  |                        | 5,991 
|Due from one to five years |  |               | 5,000  |                        | 4,991 
|Due from five to ten years |  |               | 1,000  |                        | 999   
|Mortgage-backed securities |  |               | 1,871  |                        | 1,856 
|                           |  |               |        |                        |       
|                           |  | $             | 13,871 |                        | 13,837
|                           |  |               |        |                        |       

At December 31, 2006 and 2005, securities with a carrying value of
approximately $8.0 million and $3.0 million, respectively, were pledged for other borrowings and public funds.

(continued)



F-15



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(2) Securities, Continued

Securities with gross unrealized losses at December 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):



|                                    |  |                         |     |                    |           |       |                        |     |   |            |      
|----------------------------------- |  | ----------------------- | --- | ------------------ | --------- | ----- | ---------------------- | --- | - | ---------- | -----
|                                    |  | Less Than Twelve Months |     | Over Twelve Months
|                                    |  | Gross Unrealized Losses |     |                    | FairValue |       | Gross UnrealizedLosses |     |   | Fair Value
|Securities available for sale:      |  |                         |     |                    |           |       |                        |     |   |            |      
|U.S. government agency securities   |  | $                       | (6  | )                  |           | 7,994 |                        | (13 | ) |            | 3,987
|Mortgage-backed securities          |  |                         | (15 | )                  |           | 1,856 |                        |    |   |            |     
|                                    |  |                         |     |                    |           |       |                        |     |   |            |      
|Total securities available for sale |  | $                       | (21 | )                  |           | 9,850 |                        | (13 | ) |            | 3,987
|                                    |  |                         |     |                    |           |       |                        |     |   |            |      

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.

The unrealized losses on thirteen investment securities available for sale were caused by interest rate changes. It is expected that the
securities would not be settled at a price less than 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.

The Company had no sales of securities during 2006 or 2005.

(continued)



F-16



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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, |        
|                                        |  | 2006            |         |   | 2005 |       
|Commercial real estate                  |  | $               | 58,146  |   |      | 26,626 |  
|Residential real estate and home equity |  |                 | 16,527  |   |      | 5,784  |  
|Construction                            |  |                 | 18,611  |   |      | 7,079  |  
|Commercial                              |  |                 | 12,751  |   |      | 4,979  |  
|Consumer                                |  |                 | 1,308   |   |      | 456    |  
|                                        |  |                 |         |   |      |        |  
|                                        |  |                
|Total loans                             |  |                 | 107,343 |   |      | 44,924 |  
|                                        |  |                
|Allowance for loan losses               |  |                 | (1,345  | ) |      | (564   | )
|Net deferred loan costs                 |  |                 | 291     |   |      | 169    |  
|                                        |  |                 |         |   |      |        |  
|                                        |  |                
|Loans, net                              |  | $               | 106,289 |   |      | 44,529 |  
|                                        |  |                 |         |   |      |        |  

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



|                          |  |                         |       |      |    
|------------------------- |  | ----------------------- | ----- | ---- | ---
|                          |  | Year Ended December 31,
|                          |  | 2006                    |       | 2005
|Beginning balance         |  | $                       | 564   |      |   
|Provision for loan losses |  |                         | 781   |      | 564
|                          |  |                         |       |      |    
|                          |  |                        
|Ending balance            |  | $                       | 1,345 |      | 564
|                          |  |                         |       |      |    

The Company had no impaired loans, nonaccrual loans or loans which were over
ninety days past due but still accruing interest in 2006 or 2005.

(continued)



F-17



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(4) Premises and Equipment

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



|                                               |  |                 |       |   |      |       |  
|---------------------------------------------- |  | --------------- | ----- | - | ---- | ----- | -
|                                               |  | At December 31, |      
|                                               |  | 2006            |       |   | 2005 |      
|Land                                           |  | $               | 2,967 |   |      | 2,063 |  
|Buildings                                      |  |                 | 1,346 |   |      | 1,130 |  
|Leasehold improvements                         |  |                 | 584   |   |      | 557   |  
|Furniture, fixtures and equipment              |  |                 | 1,904 |   |      | 1,370 |  
|Construction in process                        |  |                 | 380   |   |      |      |  
|                                               |  |                 |       |   |      |       |  
|Total, at cost                                 |  |                 | 7,181 |   |      | 5,120 |  
|Less accumulated depreciation and amortization |  |                 | (457  | ) |      | (197  | )
|                                               |  |                 |       |   |      |       |  
|Premises and equipment, net                    |  | $               | 6,724 |   |      | 4,923 |  
|                                               |  |                 |       |   |      |       |  

The Company has entered into a contract to purchase real estate for $958,000 on SR
200 in Ocala, Florida for a future Bank branch. Closing is anticipated in the first quarter 2007.

The Company has entered
into a contract for $681,000 to construct a banking facility. The amount remaining at December 31, 2006 was $628,000. Construction is expected to be completed during 2007.

The Company leases its Ocala corporate headquarters facility under an operating lease. This lease is for a term of five years, contains
an escalation clause, requires monthly lease payments and common area maintenance charges with options to renew through 2025. Rent expense under this operating lease during the years ended December 31, 2006 and 2005 was $80,000 annually. The
Company offsets occupancy expense with sub-leases on various suites in the building. This provided rental income, net of operating expenses, for 2006 and 2005 of $49,000 and $18,000 respectively. The Bank is also leasing the Alachua branch for one
year for a temporary branch location which commenced in October 2006. The future minimum lease payments, which include certain renewal options, as of December 31, 2006 are as follows (in thousands):



|                         |  |         |       |        |    
|------------------------ |  | ------- | ----- | ------ | ---
|Year Ending December 31, |  | Expense |       | Income
|2007                     |  | $       | 108   |        | 153
|2008                     |  |         | 80    |        | 98 
|2009                     |  |         | 80    |        | 69 
|2010                     |  |         | 96    |        | 48 
|2011                     |  |         | 100   |        | 11 
|2012 and thereafter      |  |         | 1,362 |        |   
|                         |  |         |       |        |    
|                         |  | $       | 1,826 |        | 379
|                         |  |         |       |        |    

(continued)



F-18



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(5) Deposits

A schedule of
maturities of time deposits at December 31, 2006 follows (in thousands):



|                         |  |        |       
|------------------------ |  | ------ | ------
|Year Ending December 31, |  | Amount
|2007                     |  | $      | 54,726
|2008                     |  |        | 7,510 
|2009                     |  |        | 306   
|2010                     |  |        | 3,515 
|2011                     |  |        | 2,043 
|                         |  |        |       
|                         |  | $      | 68,100
|                         |  |        |       

(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, 2006 and 2005, the outstanding balance of such borrowings
totaled approximately $5.3 million and $690,000 respectively and the Company pledged securities with a carrying value of approximately $8.0 million and $2.0 million respectively as collateral for these agreements. The Company also utilizes customer
funds in the CDARS program, which allows customers to obtain full FDIC insurance and has the Bank offer offsetting certificates of deposit in participating banks. These deposits from other banks are considered brokered deposits and totaled $1.5
million at December 31, 2006.

The Company also had a $50,000 unsecured line of credit with a correspondent bank. At
December 31, 2006, there was no outstanding balance. At December 31, 2005, the outstanding balance was $13,000. This line was cancelled in January 2007.

(7) Federal Home Loan Bank Advances

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



|         |  |               |   |  |        |       
|-------- |  | ------------- | - |  | ------ | ------
|Maturity |  | Interest Rate |   |  | Amount
|2007     |  | 5.25          | % |  | $      | 2,000 
|2016     |  | 4.47          | % |  |        | 5,000 
|2016     |  | 4.71          | % |  |        | 3,000 
|         |  |               |   |  |        |       
|         |  |               |   |  | $      | 10,000
|         |  |               |   |  |        |       

(continued)



F-19



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(7) Federal Home Loan Bank Advances, Continued

The Company has entered into a collateral agreement with the FHLB which consists of a blanket floating lien on the entire loan portfolio and the pledge of all the Companys FHLB stock. The two advances with 2016
maturity dates have call features benefiting the issuer with call dates of February 23, 2007 and August 29, 2008 respectively.

(8) Income
Taxes

Allocation of the Federal and state income tax benefit is as follows (in thousands):



|                   |  |                         |     |      |    
|------------------ |  | ----------------------- | --- | ---- | ---
|                   |  | Year Ended December 31,
|                   |  | 2006                    |     | 2005
|Deferred:          |  |                         |     |      |    
|Federal            |  | $                       | 170 |      | 664
|State              |  |                         | 29  |      | 114
|                   |  |                         |     |      |    
|Income tax benefit |  | $                       | 199 |      | 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, |    
|                                                                                          |  | 2006                    |     |   | 2005           |     
|                                                                                          |  | Amount                  |     |   | % ofPretaxLoss |      |   | Amount |   | % ofPretaxLoss | 
|Tax benefit at statutory rate                                                             |  | $                       | 191 |   |                | 34.0 | % |        | $ | 608            |  | 34.0 | %
|Increase (decrease) in tax benefit resulting from state taxes, net of Federal tax benefit |  |                         | 20  |   |                | 3.6  |   |        |   | 64             |  | 3.6  |  
|Reversal of valuation allowance                                                           |  |                         |    |   |                |     |   |        |   | 106            |  | 5.9  |  
|Other                                                                                     |  |                         | (12 | ) |                | (2.2 | ) |        |   |               |  |     |  
|                                                                                          |  |                         |     |   |                |      |   |        |   |                |  |      |  
|Income tax benefit                                                                        |  | $                       | 199 |   |                | 35.4 | % |        | $ | 778            |  | 43.5 | %
|                                                                                          |  |                         |     |   |                |      |   |        |   |                |  |      |  

(continued)



F-20



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(8) 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, |      
|                                                 |  | 2006            |       |   | 2005 |     
|Deferred tax assets:                             |  |                 |       |   |      |      |  
|Net operating loss carryforwards                 |  | $               | 637   |   |      | 523  |  
|Organizational and start-up costs                |  |                 | 207   |   |      | 223  |  
|Allowance for loan losses                        |  |                 | 427   |   |      | 173  |  
|Unrealized loss on securities available for sale |  |                 | 13    |   |      |     |  
|Other                                            |  |                 | 10    |   |      | 4    |  
|                                                 |  |                 |       |   |      |      |  
|                                                 |  |                
|Deferred tax assets                              |  |                 | 1,294 |   |      | 923  |  
|                                                 |  |                 |       |   |      |      |  
|                                                 |  |                
|Deferred tax liabilities:                        |  |                 |       |   |      |      |  
|Accrual to cash conversion                       |  |                 | (61   | ) |      | (17  | )
|Accumulated depreciation                         |  |                 | (47   | ) |      | (28  | )
|Deferred loan costs                              |  |                 | (196  | ) |      | (100 | )
|                                                 |  |                 |       |   |      |      |  
|                                                 |  |                
|Deferred tax liabilities                         |  |                 | (304  | ) |      | (145 | )
|                                                 |  |                 |       |   |      |      |  
|                                                 |  |                
|Net deferred tax asset                           |  | $               | 990   |   |      | 778  |  
|                                                 |  |                 |       |   |      |      |  

At December 31, 2006, the Bank has approximately $1,700,000 of net operating
loss carryforwards available to offset future taxable income. These carryforwards will begin to expire in 2025.

(continued)



F-21



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(9) 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 consolidated 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. At December 31, 2006, the Company held collateral supporting substantially all of these
commitments and management does not anticipate any potential losses if these letters of credit are funded.

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, 2006 follows (in
thousands):



|                             |  |                |       
|---------------------------- |  | -------------- | ------
|                             |  | ContractAmount
|Commitments to extend credit |  | $              | 12,045
|                             |  |                |       
|                             | 
|Unused lines of credit       |  | $              | 28,567
|                             |  |                |       
|                             | 
|Standby letters of credit    |  | $              | 965   
|                             |  |                |       

(continued)



F-22



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(10) 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.

(11) 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 (currently 240,321 shares), have been reserved under the Plan. Stock options are granted at an exercise price equal to or greater
than the fair market value of the common stock on the date of grant. Options granted to directors vest immediately and for employees, the options primarily vest over two years starting with the date of grant and ending on the second anniversary
thereof. At December 31, 2006 17,320 options remain available for granting. A summary of stock option transactions under the Plan for the years ended December 31, 2006 and 2005 follows:



|                                                             |  |                   |   |  |                               |       |                                            |           |                          |   |        
|------------------------------------------------------------ |  | ----------------- | - |  | ----------------------------- | ----- | ------------------------------------------ | --------- | ------------------------ | - | -------
|                                                             |  | Number of Options |   |  | WeightedAverageExercise Price |       | Weighted Average RemainingContractual Term |           | AggregateIntrinsic Value
|                                                             |  |                   |  
|Options granted in 2005 and outstanding at December 31, 2005 |  | 224,151           |   |  | $                             | 10.00 |                                            |           |                          |   |        
|Options exercised                                            |  | (5,000            | ) |  |                               | 10.00 |                                            |           |                          |   |        
|Options forfeited                                            |  | (1,150            | ) |  |                               | 10.00 |                                            |           |                          |   |        
|                                                             |  |                   |   |  |                               |       |                                            |           |                          |   |        
|Options outstanding at December 31, 2006                     |  | 218,001           |   |  | $                             | 10.00 |                                            | 8.9 years |                          | $ | 109,000
|                                                             |  |                   |   |  |                               |       |                                            |           |                          |   |        
|Options exercisable at December 31, 2006                     |  | 195,827           |   |  | $                             | 10.00 |                                            | 8.9 years |                          | $ | 97,913 
|                                                             |  |                   |   |  |                               |       |                                            |           |                          |   |        

The total intrinsic value of options exercised during the year ended
December 31, 2006 was $2,500. No tax benefit was recognized in connection with the exercise of these stock options.

(continued)



F-23



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(12) Employee Benefit Plan

The
Company has a 401(k) profit sharing plan available to all employees electing to participate after meeting certain length-of-service requirements. The Company contributed $18,736 to the plan in 2006. There were no contributions in 2005.

(13) 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 (in
thousands):



|                                                         |  |                 |        |   |      |        |  
|-------------------------------------------------------- |  | --------------- | ------ | - | ---- | ------ | -
|                                                         |  | At December 31, |       
|                                                         |  | 2006            |        |   | 2005 |       
|Loans:                                                   |  |                 |        |   |      |        |  
|Balance at beginning of year                             |  | $               | 7,194  |   |      |       |  
|Loans originated during the year                         |  |                 | 4,763  |   |      | 11,577 |  
|Principal repayments                                     |  |                 | (4,777 | ) |      | (4,383 | )
|                                                         |  |                 |        |   |      |        |  
|                                                         |  |                
|Balance at end of year                                   |  | $               | 7,180  |   |      | 7,194  |  
|                                                         |  |                 |        |   |      |        |  
|                                                         |  |                
|Deposits held from related parties-                      |  |                 |        |   |      |        |  
|Balance at end of year                                   |  | $               | 4,197  |   |      | 2,131  |  
|                                                         |  |                 |        |   |      |        |  
|                                                         |  |                
|Management fees and leasing commissions paid during year |  | $               | 21     |   |      | 16     |  
|                                                         |  |                 |        |   |      |        |  

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

(14) Stockholders Equity and Dividend Restrictions

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.
Warrants totaling 87,940 in 2006 and 14,200 in 2005 were exercised with 1,397,860 warrants remaining unexercised as of December 31, 2006.

The Company has notified its shareholders that 50% of the warrants are being called effective February 28, 2007. Existing shareholders with warrants must exercise 50% of the initial warrant amount by the deadline
or that portion expires. The remaining 50% will expire on February 28, 2008 unless called earlier by the Company.

(continued)



F-24



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(14) Stockholders Equity and Dividend Restrictions, Continued

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.

(15) 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, 2006, that the Bank meets all capital adequacy requirements to which it is subject.

(continued)



F-25



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements, Continued

(15) Regulatory Matters, Continued

As of December 31, 2006, 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 Adequacy Purposes |   |        | For Well Capitalized Purposes |        
|                                          |  | Amount |        | Percent |                               |   | Amount |                               | Percent |  |      | Amount |  | Percent |       
|As of December 31, 2006:                  |  |        |        |         |                               |   |        |                               |         |  |      |        |  |         |        |  |       |  
|Total Capital (to Risk- Weighted Assets)  |  | $      | 13,888 |         | 11.56                         | % |        | $                             | 9,611   |  | 8.00 | %      |  | $       | 12,013 |  | 10.00 | %
|Tier I Capital (to Risk- Weighted Assets) |  |        | 12,543 |         | 10.44                         |   |        |                               | 4,806   |  | 4.00 |        |  |         | 7,208  |  | 6.00  |  
|Tier I Capital (to Average Assets)        |  |        | 12,543 |         | 9.35                          | * |        |                               | 5,366   |  | 4.00 | *      |  |         | 6,707  |  | 5.00  | *
|                                          |  |        |        |         |                               |  
|As of December 31, 2005:                  |  |        |        |         |                               |   |        |                               |         |  |      |        |  |         |        |  |       |  
|Total Capital (to Risk- Weighted Assets)  |  |        | 13,589 |         | 23.43                         |   |        |                               | 4,640   |  | 8.00 |        |  |         | 5,800  |  | 10.00 |  
|Tier I Capital (to Risk- Weighted Assets) |  |        | 13,025 |         | 22.46                         |   |        |                               | 2,320   |  | 4.00 |        |  |         | 3,480  |  | 6.00  |  
|Tier I Capital (to Average Assets)        |  |        | 13,025 |         | 19.83                         | * |        |                               | 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.
|- | -----------------------------------------------------------------------------------------------------------------

(continued)



F-26



---

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,
|                                        |  | 2006            |  | 2005     
|                                        |  | CarryingAmount  |  | FairValue |  | CarryingAmount |  | FairValue
|Financial assets:                       |  |                 |  |           |  |                |  |          
|Cash and cash equivalents               |  |                 |  |           |  |                |  |          
|$ 6,734                                 |  | 6,734           |  | 10,900    |  | 10,900         |  |          
|Interest bearing time deposits in banks |  | 1,000           |  | 1,000     |  |               |  |         
|Securities held to maturity             |  |                |  |          |  | 10,308         |  | 10,294   
|Securities available for sale           |  | 13,837          |  | 13,837    |  |               |  |         
|Loans, net                              |  | 106,289         |  | 104,356   |  | 44,529         |  | 44,163   
|Loans held for sale                     |  | 2,436           |  | 2,479     |  | 321            |  | 324      
|Accrued interest receivable             |  | 648             |  | 648       |  | 208            |  | 208      
|Federal Home Loan Bank stock            |  | 595             |  | 595       |  | 35             |  | 35       
|                                        |  |                 |  |          
|Financial liabilities:                  |  |                 |  |           |  |                |  |          
|Deposits                                |  | 107,642         |  | 107,173   |  | 57,086         |  | 55,537   
|Other borrowings                        |  | 6,769           |  | 6,735     |  | 703            |  | 703      
|Federal Home Loan Bank advances         |  | 10,000          |  | 9,981     |  |               |  |         
|Accrued interest payable                |  | 400             |  | 400       |  | 149            |  | 149      
|Off-balance-sheet financial instruments |  |                |  |          |  |               |  |         

(continued)



F-27



---

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 Sheets



|                                           |  |                 |        |      |       
|------------------------------------------ |  | --------------- | ------ | ---- | ------
|                                           |  | At December 31,
|                                           |  | 2006            |        | 2005
|Assets                                     |  |                 |        |      |       
|                                           |  |                
|Cash                                       |  | $               | 810    |      | 2     
|Investment in subsidiary                   |  |                 | 13,484 |      | 13,793
|Other assets                               |  |                 | 55     |      | 10    
|                                           |  |                 |        |      |       
|                                           |  |                
|Total assets                               |  | $               | 14,349 |      | 13,805
|                                           |  |                 |        |      |       
|                                           |  |                
|Liabilities and Stockholders Equity       |  |                 |        |      |       
|                                           |  |                
|Other borrowings                           |  |                 |       |      | 13    
|Other liabilities                          |  |                 | 12     |      | 1     
|Stockholders equity                       |  |                 | 14,337 |      | 13,791
|                                           |  |                 |        |      |       
|Total liabilities and stockholders equity |  | $               | 14,349 |      | 13,805
|                                           |  |                 |        |      |       

Condensed Statements of Operations



|                                              |  |                         |      |   |      |        |  
|--------------------------------------------- |  | ----------------------- | ---- | - | ---- | ------ | -
|                                              |  | Year Ended December 31, |     
|                                              |  | 2006                    |      |   | 2005 |       
|Operating expenses, net of income tax benefit |  | $                       | 75   |   |      | 17     |  
|                                              |  |                         |      |   |      |        |  
|                                              |  |                        
|Net loss before loss of subsidiary            |  |                         | (75  | ) |      | (17    | )
|                                              |  |                        
|Loss of subsidiary                            |  |                         | (288 | ) |      | (992   | )
|                                              |  |                         |      |   |      |        |  
|                                              |  |                        
|Net loss                                      |  | $                       | (363 | ) |      | (1,009 | )
|                                              |  |                         |      |   |      |        |  

(continued)



F-28



---

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, |     
|                                                                                                                                              |  | 2006                   |      |   | 2005 |       
|Cash flows from operating activities:                                                                                                         |  |                        |      |   |      |        |  
|Net loss                                                                                                                                      |  | $                      | (363 | ) |      | (1,009 | )
|Adjustment to reconcile net loss to net cash used in operating activities:                                                                    |  |                        |      |   |      |        |  
|Equity in loss of subsidiary                                                                                                                  |  |                        | 288  |   |      | 992    |  
|Increase in other assets                                                                                                                      |  |                        | (45  | ) |      | (10    | )
|Increase in other liabilities                                                                                                                 |  |                        | 11   |   |      | 1      |  
|                                                                                                                                              |  |                        |      |   |      |        |  
|Net cash used in operating activities                                                                                                         |  |                        | (109 | ) |      | (26    | )
|                                                                                                                                              |  |                        |      |   |      |        |  
|Cash flows from investing activity- Investment in subsidiary                                                                                  |  |                        |     |   |      | (127   | )
|                                                                                                                                              |  |                        |      |   |      |        |  
|Cash flows from financing activities:                                                                                                         |  |                        |      |   |      |        |  
|Net (decrease) increase in other borrowings                                                                                                   |  |                        | (13  | ) |      | 13     |  
|Common stock warrants and options exercised                                                                                                   |  |                        | 930  |   |      | 142    |  
|                                                                                                                                              |  |                        |      |   |      |        |  
|Net cash provided by financing activities                                                                                                     |  |                        | 917  |   |      | 155    |  
|                                                                                                                                              |  |                        |      |   |      |        |  
|Net increase in cash                                                                                                                          |  |                        | 808  |   |      | 2      |  
|Cash at beginning of the year                                                                                                                 |  |                        | 2    |   |      |       |  
|                                                                                                                                              |  |                        |      |   |      |        |  
|Cash at end of year                                                                                                                           |  | $                      | 810  |   |      | 2      |  
|                                                                                                                                              |  |                        |      |   |      |        |  
|Supplemental disclosure of cash flow information:                                                                                             |  |                        |      |   |      |        |  
|Cash paid during the year for- Interest                                                                                                       |  | $                      |     |   |      |       |  
|                                                                                                                                              |  |                        |      |   |      |        |  
|Noncash transaction- Accumulated other comprehensive loss, unrealized loss on securities available for sale of subsidiary, net of tax
benefit |  | $                      | (21  | ) |      |       |  
|                                                                                                                                              |  |                        |      |   |      |        |  



F-29