Exhibit 13.1

ALARION FINANCIAL SERVICES, INC.

Holding Company for

LOGO

Audited Consolidated Financial Statements

At December 31, 2007 and 2006 and For the Years Then Ended

(Together
with Report of Independent Registered Public Accounting Firm)



---

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, 2007 and 2006, 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, 2007 and 2006, 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 24, 2008            



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

($ in
thousands, except per share amounts)



|                                                                                                                                  |  |                 |         |   |      |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ---- | ------- | -
|                                                                                                                                  |  | At December 31, |        
|                                                                                                                                  |  | 2007            |         |   | 2006 |        
|Assets                                                                                                                            |  |                 |         |   |      |         |  
|Cash and due from banks                                                                                                           |  | $               | 1,805   |   |      | 2,781   |  
|Interest-earning deposits and federal funds sold                                                                                  |  |                 | 1,833   |   |      | 3,953   |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Cash and cash equivalents                                                                                                         |  |                 | 3,638   |   |      | 6,734   |  
|Interest bearing time deposits in banks                                                                                           |  |                 | 2,046   |   |      | 1,000   |  
|Securities available for sale                                                                                                     |  |                 | 20,537  |   |      | 13,837  |  
|Loans, net of allowance for loan losses of $2,046 and $1,345                                                                      |  |                 | 164,051 |   |      | 106,289 |  
|Loans held for sale                                                                                                               |  |                 |        |   |      | 2,436   |  
|Accrued interest receivable                                                                                                       |  |                 | 931     |   |      | 648     |  
|Premises and equipment, net                                                                                                       |  |                 | 9,603   |   |      | 6,724   |  
|Federal Home Loan Bank stock, at cost                                                                                             |  |                 | 836     |   |      | 595     |  
|Deferred income taxes                                                                                                             |  |                 | 909     |   |      | 990     |  
|Other assets                                                                                                                      |  |                 | 853     |   |      | 191     |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Total assets                                                                                                                      |  | $               | 203,404 |   |      | 139,444 |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Liabilities and Stockholders Equity                                                                                              |  |                 |         |   |      |         |  
|Liabilities:                                                                                                                      |  |                 |         |   |      |         |  
|Noninterest-bearing demand deposits                                                                                               |  |                 | 13,159  |   |      | 9,615   |  
|NOW, money-market and savings deposits                                                                                            |  |                 | 34,932  |   |      | 29,927  |  
|Time deposits < $100,000                                                                                                          |  |                 | 67,867  |   |      | 36,572  |  
|Time deposits > = $100,000                                                                                                        |  |                 | 48,285  |   |      | 32,958  |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Total deposits                                                                                                                    |  |                 | 164,243 |   |      | 109,072 |  
|Federal Home Loan Bank advances                                                                                                   |  |                 | 13,000  |   |      | 10,000  |  
|Other borrowings                                                                                                                  |  |                 | 4,807   |   |      | 5,339   |  
|Accrued interest payable                                                                                                          |  |                 | 799     |   |      | 400     |  
|Accrued expenses and other liabilities                                                                                            |  |                 | 304     |   |      | 296     |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Total liabilities                                                                                                                 |  |                 | 183,153 |   |      | 125,107 |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Commitments (Notes 4, 9 and 17)                                                                                                   |  |                 |         |   |      |         |  
|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, 2,183,485 and 1,607,140 shares issued and outstanding in 2007 and
2006 |  |                 | 22      |   |      | 16      |  
|Additional paid-in capital                                                                                                        |  |                 | 21,856  |   |      | 16,002  |  
|Accumulated deficit                                                                                                               |  |                 | (1,657  | ) |      | (1,660  | )
|Accumulated other comprehensive income (loss)                                                                                     |  |                 | 30      |   |      | (21     | )
|                                                                                                                                  |  |                 |         |   |      |         |  
|Total stockholders equity                                                                                                        |  |                 | 20,251  |   |      | 14,337  |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|                                                                                                                                  |  |                 |         |   |      |         |  
|Total liabilities and stockholders equity                                                                                        |  | $               | 203,404 |   |      | 139,444 |  
|                                                                                                                                  |  |                 |         |   |      |         |  

See Accompanying Notes to Consolidated Financial Statements.



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, |          
|                                                              |  | 2007                    |           | 2006 |          
|Interest income:                                              |  |                         |           |      |           |  
|Loans                                                         |  | $                       | 10,453    |      | 5,652     |  
|Securities                                                    |  |                         | 968       |      | 737       |  
|Other                                                         |  |                         | 642       |      | 545       |  
|                                                              |  |                         |           |      |           |  
|Total interest income                                         |  |                         | 12,063    |      | 6,934     |  
|                                                              |  |                         |           |      |           |  
|Interest expense:                                             |  |                         |           |      |           |  
|Deposits                                                      |  |                         | 6,179     |      | 3,340     |  
|Borrowings                                                    |  |                         | 640       |      | 363       |  
|                                                              |  |                         |           |      |           |  
|Total interest expense                                        |  |                         | 6,819     |      | 3,703     |  
|                                                              |  |                         |           |      |           |  
|Net interest income                                           |  |                         | 5,244     |      | 3,231     |  
|Provision for loan losses                                     |  |                         | 701       |      | 781       |  
|                                                              |  |                         |           |      |           |  
|Net interest income after provision for loan losses           |  |                         | 4,543     |      | 2,450     |  
|                                                              |  |                         |           |      |           |  
|Noninterest income:                                           |  |                         |           |      |           |  
|Deposit account fees                                          |  |                         | 253       |      | 132       |  
|Net gain on sales of loans held for sale                      |  |                         | 197       |      | 499       |  
|Loan brokerage fees                                           |  |                         | 570       |      | 249       |  
|Other                                                         |  |                         | 69        |      | 53        |  
|                                                              |  |                         |           |      |           |  
|Total noninterest income                                      |  |                         | 1,089     |      | 933       |  
|                                                              |  |                         |           |      |           |  
|Noninterest expenses:                                         |  |                         |           |      |           |  
|Salaries and employee benefits                                |  |                         | 3,216     |      | 2,205     |  
|Occupancy and equipment                                       |  |                         | 734       |      | 517       |  
|Data processing                                               |  |                         | 371       |      | 231       |  
|Professional services                                         |  |                         | 179       |      | 161       |  
|Advertising and promotion                                     |  |                         | 194       |      | 153       |  
|Office supplies and printing                                  |  |                         | 143       |      | 135       |  
|Other                                                         |  |                         | 743       |      | 543       |  
|                                                              |  |                         |           |      |           |  
|Total noninterest expenses                                    |  |                         | 5,580     |      | 3,945     |  
|                                                              |  |                         |           |      |           |  
|Earnings (loss) before income tax expense (benefit)           |  |                         | 52        |      | (562      | )
|Income tax expense (benefit)                                  |  |                         | 49        |      | (199      | )
|                                                              |  |                         |           |      |           |  
|Net earnings (loss)                                           |  | $                       | 3         |      | (363      | )
|                                                              |  |                         |           |      |           |  
|Earnings (loss) per share  basic                             |  | $                       |          |      | (.23      | )
|                                                              |  |                         |           |      |           |  
|Earnings (loss) per share  diluted                           |  | $                       |          |      | (.23      | )
|                                                              |  |                         |           |      |           |  
|Weighted-average number of common shares outstanding, basic   |  |                         | 2,124,883 |      | 1,544,912 |  
|                                                              |  |                         |           |      |           |  
|Weighted-average number of common shares outstanding, diluted |  |                         | 2,141,885 |      | 1,544,912 |  
|                                                              |  |                         |           |      |           |  
|Dividends per share                                           |  | $                       |          |      |          |  
|                                                              |  |                         |           |      |           |  

See Accompanying Notes to Consolidated Financial Statements.



3



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders Equity

Years Ended December 31, 2007 and 2006

($ in thousands)



|                                                                                    |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|----------------------------------------------------------------------------------- |  | ------------ |  | ----------------- | -- | ----------- | ------ | ------- | ------------------------------- | - | ------ | ------------------ | - | ------ | ------ | -
|                                                                                    |  | Common Stock |  | AdditionalPaid-In |    | Accumulated |        |         | AccumulatedCompre-hensiveIncome |   |        | TotalStockholders |  
|                                                                                    |  | Shares       |  | Amount            |    | Capital     |        | Deficit |                                 |   | (Loss) |                    |   | Equity |       
|Balance at December 31, 2005                                                        |  | 1,514,200    |  | $                 | 15 |             | 15,073 |         | (1,297                          | ) |        |                   |   |        | 13,791 |  
|                                                                                    |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|Comprehensive loss                                                                  |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|Net loss                                                                            |  |             |  |                   |   |             |       |         | (363                            | ) |        |                   |   |        | (363   | )
|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 |  
|                                                                                    |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|Comprehensive income                                                                |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|Net earnings                                                                        |  |             |  |                   |   |             |       |         | 3                               |   |        |                   |   |        | 3      |  
|Net change in unrealized loss on securities available for sale, net of taxes of $32 |  |             |  |                   |   |             |       |         |                                |   |        | 51                 |   |        | 51     |  
|                                                                                    |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|Comprehensive income                                                                |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        | 54     |  
|Share-based compensation                                                            |  |             |  |                   |   |             | 96     |         |                                |   |        |                   |   |        | 96     |  
|Common stock options exercised                                                      |  | 1,030        |  |                   |   |             | 10     |         |                                |   |        |                   |   |        | 10     |  
|Common stock warrants exercised                                                     |  | 575,315      |  |                   | 6  |             | 5,748  |         |                                |   |        |                   |   |        | 5,754  |  
|                                                                                    |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  
|Balance at December 31, 2007                                                        |  | 2,183,485    |  | $                 | 22 |             | 21,856 |         | (1,657                          | ) |        | 30                 |   |        | 20,251 |  
|                                                                                    |  |              |  |                   |    |             |        |         |                                 |   |        |                    |   |        |        |  

See Accompanying Notes to Consolidated Financial Statements.



4



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                                     |  |                         |         |   |      |         |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | ------- | -
|                                                                                                     |  | Year Ended December 31, |        
|                                                                                                     |  | 2007                    |         |   | 2006 |        
|Cash flows from operating activities:                                                                |  |                         |         |   |      |         |  
|Net earnings (loss)                                                                                  |  | $                       | 3       |   |      | (363    | )
|Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |  |                         |         |   |      |         |  
|Provision for loan losses                                                                            |  |                         | 701     |   |      | 781     |  
|Share-based compensation                                                                             |  |                         | 96      |   |      |        |  
|Depreciation and amortization                                                                        |  |                         | 353     |   |      | 260     |  
|Deferred income tax expense (benefit)                                                                |  |                         | 49      |   |      | (199    | )
|Net amortization on premiums and discounts on securities                                             |  |                         |        |   |      | (42     | )
|Net amortization of deferred loan fees and costs                                                     |  |                         | 164     |   |      | 82      |  
|Net gain on sales of loans held for sale                                                             |  |                         | (197    | ) |      | (499    | )
|Loans originated for sale                                                                            |  |                         | (5,424  | ) |      | (50,213 | )
|Proceeds from sales of loans held for sale                                                           |  |                         | 8,057   |   |      | 48,597  |  
|Net increase in accrued interest payable                                                             |  |                         | 399     |   |      | 251     |  
|Net increase in accrued interest receivable                                                          |  |                         | (283    | ) |      | (440    | )
|Net (increase) decrease in other assets                                                              |  |                         | (662    | ) |      | 34      |  
|Net increase (decrease) in accrued expenses and other liabilities                                    |  |                         | 8       |   |      | (202    | )
|                                                                                                     |  |                         |         |   |      |         |  
|Net cash provided by (used in) operating activities                                                  |  |                         | 3,264   |   |      | (1,953  | )
|                                                                                                     |  |                         |         |   |      |         |  
|Cash flows from investing activities:                                                                |  |                         |         |   |      |         |  
|Proceeds from principal repayments and maturities on securities held to maturity                     |  |                         |        |   |      | 7,447   |  
|Proceeds from principal repayments and maturities on securities available for sale                   |  |                         | 17,377  |   |      |        |  
|Purchase of securities held to maturity                                                              |  |                         |        |   |      | (10,968 | )
|Purchase of securities available for sale                                                            |  |                         | (23,994 | ) |      |        |  
|Purchase of time deposits                                                                            |  |                         | (1,046  | ) |      | (1,000  | )
|Loan disbursements, net of repayments                                                                |  |                         | (58,627 | ) |      | (62,623 | )
|Purchase of premises and equipment                                                                   |  |                         | (3,232  | ) |      | (2,061  | )
|Purchase of Federal Home Loan Bank stock                                                             |  |                         | (241    | ) |      | (560    | )
|                                                                                                     |  |                         |         |   |      |         |  
|Net cash used in investing activities                                                                |  |                         | (69,763 | ) |      | (69,765 | )
|                                                                                                     |  |                         |         |   |      |         |  
|Cash flows from financing activities:                                                                |  |                         |         |   |      |         |  
|Net increase in deposits                                                                             |  |                         | 56,601  |   |      | 50,556  |  
|Net (decrease) increase in other borrowings                                                          |  |                         | (1,962  | ) |      | 6,066   |  
|Net increase in advances from Federal Home Loan Bank                                                 |  |                         | 3,000   |   |      | 10,000  |  
|Proceeds from common stock options and warrants exercised                                            |  |                         | 5,764   |   |      | 930     |  
|                                                                                                     |  |                         |         |   |      |         |  
|Net cash provided by financing activities                                                            |  |                         | 63,403  |   |      | 67,552  |  
|                                                                                                     |  |                         |         |   |      |         |  
|Net decrease in cash and cash equivalents                                                            |  |                         | (3,096  | ) |      | (4,166  | )
|Cash and cash equivalents at beginning of year                                                       |  |                         | 6,734   |   |      | 10,900  |  
|                                                                                                     |  |                         |         |   |      |         |  
|Cash and cash equivalents at end of year                                                             |  | $                       | 3,638   |   |      | 6,734   |  
|                                                                                                     |  |                         |         |   |      |         |  

(continued)



5



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows, Continued

(In thousands)



|                                                                                                                            |  |                         |       |      |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | ------ | -
|                                                                                                                            |  | Year Ended December 31, |      
|                                                                                                                            |  | 2007                    |       | 2006 |       
|Supplemental disclosure of cash flow information:                                                                           |  |                         |       |      |        |  
|Cash paid during the year for- Interest, net of capitalized interest of $149 in 2007                                        |  | $                       | 6,569 |      | 3,452  |  
|                                                                                                                            |  |                         |       |      |        |  
|Income taxes                                                                                                                |  | $                       |      |      |       |  
|                                                                                                                            |  |                         |       |      |        |  
|Noncash transactions:                                                                                                       |  |                         |       |      |        |  
|Accumulated other comprehensive income (loss), net change in unrealized loss on securities available for sale, net of taxes |  | $                       | 51    |      | (21    | )
|                                                                                                                            |  |                         |       |      |        |  
|Transfer of securities held to maturity to available for sale                                                               |  | $                       |      |      | 13,837 |  
|                                                                                                                            |  |                         |       |      |        |  

See Accompanying Notes to Consolidated Financial Statements.



6



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

At December 31, 2007 and 2006 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 five 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.

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, 2007 and
2006, 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)



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 income (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)



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 considered impaired. 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 all other 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, the estimated fair value exceeded book value for all loans held to sale. There were no loans held for sale at
December 31, 2007.

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.

Premises and Equipment. Land is stated at cost. Other premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Interest costs are capitalized in connection with
construction of new banking offices. 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.

(continued)



9



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(1) | Summary of Significant Accounting Policies, Continued
|--- | -----------------------------------------------------



Comprehensive Income (Loss).Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
earnings (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 earnings (loss), are components of comprehensive income (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 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.

Stock Compensation Plan. 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 that transition method, compensation cost recognized includes:
(a) compensation cost for all share-based 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, Accounting for
Stock-Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure) (collectively 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 2007 and 2006 were not required to be expensed by the Company upon implementation of SFAS 123(R).

(continued)



10



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(1) | Summary of Significant Accounting Policies, Continued
|--- | -----------------------------------------------------



Earnings (Loss) Per Share. Earnings (loss) per share (EPS) of common stock has been computed on the basis of the
weighted-average number of shares of common stock outstanding. Outstanding stock options and warrants were not considered dilutive securities for 2006 due to the net loss incurred by the Company. Outstanding stock options and warrants are considered
dilutive securities for the fiscal year 2007 for the purposes of calculating diluted EPS, which is computed using the treasury stock method. The following table represents the calculations of the weighted-average number of shares for diluted EPS.



|                                                                                                 |  |                       
|------------------------------------------------------------------------------------------------ |  | ----------------------
|                                                                                                 |  | Weighted-AverageShares
|Year Ended December 31, 2007:                                                                    |  |                       
|For basic EPS                                                                                    |  | 2,124,883             
|Effect of dilutive securities-incremental shares from assumed conversion of options and warrants |  | 17,002                
|                                                                                                 |  |                       
|For diluted EPS                                                                                  |  | 2,141,885             
|                                                                                                 |  |                       

For the year ended December 31, 2007, the following options were excluded from the
calculation of diluted earnings per share due to the exercise price exceeding the average market price for the period:



|                              |  |               |       |                |     
|----------------------------- |  | ------------- | ----- | -------------- | ----
|Number of Outstanding
Options |  | ExercisePrice |       | ExpirationDate
|67,850                        |  | $             | 10.50 |                | 2017

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)



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.The carrying amounts of other borrowings approximates their fair value.

(continued)



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 Pronouncements.In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for the Company as of January 1, 2008. Management is in the process of evaluating the impact of SFAS 157 and does
not anticipate it will have any effect on the Companys consolidated financial condition or results of operations.

In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 provides the Company with an option to report selected financial assets and liabilities at fair value. This
statement is effective for the Company as of January 1, 2008. Management is in the process of evaluating the impact of SFAS 159 and does not anticipate it will have any effect on the Companys consolidated financial condition or results of
operations.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed
in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finders fees, advisory, legal, accounting, valuation and other professional and consulting fees are required to be
expensed as incurred. Management is in the process of evaluating the impact of SFAS 141(R) and does not anticipate it will have any effect on the Companys current consolidated financial condition or results of operations.

(continued)



13



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(2) | Securities
|--- | ----------



Securities have been classified according to managements intent. The carrying amount and fair value of securities are as follows (in thousands):



|                                  |  |               |        |                      |    |                       |     |   |                      |       
|--------------------------------- |  | ------------- | ------ | -------------------- | -- | --------------------- | --- | - | -------------------- | ------
|                                  |  | AmortizedCost |        | GrossUnrealizedGains |    | GrossUnrealizedLosses |     |   | ApproximateFairValue
|Available for Sale:               |  |               |        |                      |    |                       |     |   |                      |       
|At December 31, 2007:             |  |               |        |                      |    |                       |     |   |                      |       
|U.S. government agency securities |  | $             | 14,993 |                      | 48 |                       |    |   |                      | 15,041
|Mortgage-backed securities        |  |               | 5,496  |                      | 19 |                       | (19 | ) |                      | 5,496 
|                                  |  |               |        |                      |    |                       |     |   |                      |       
|                                  |  | $             | 20,489 |                      | 67 |                       | (19 | ) |                      | 20,537
|                                  |  |               |        |                      |    |                       |     |   |                      |       
|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
|                                  |  |               |        |                      |    |                       |     |   |                      |       

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, 2007 are as follows (in thousands):



|                           |  |               |        |                      |       
|-------------------------- |  | ------------- | ------ | -------------------- | ------
|                           |  | AmortizedCost |        | ApproximateFairValue
|Due in less than one year  |  | $             | 4,993  |                      | 5,008 
|Due from one to five years |  |               | 10,000 |                      | 10,033
|Due from five to ten years |  |               |       |                      |      
|Mortgage-backed securities |  |               | 5,496  |                      | 5,496 
|                           |  |               |        |                      |       
|                           |  | $             | 20,489 |                      | 20,537
|                           |  |               |        |                      |       

At December 31, 2007 and 2006, securities with a carrying value of approximately $6.5 million
and $8.0 million, respectively, were pledged for other borrowings and public funds.

(continued)



14



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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, 2007, aggregated by investment category and length of time that individual securities have
been in a continuous loss position, is as follows (in thousands):



|                           |  |                       |     |   |           |      
|-------------------------- |  | --------------------- | --- | - | --------- | -----
|                           |  | Over Twelve Months   
|                           |  | GrossUnrealizedLosses |     |   | FairValue
|Mortgage-backed securities |  | $                     | (19 | ) |           | 2,978
|                           |  |                       |     |   |           |      

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 2007 or 2006.



|(3) | Loans
|--- | -----

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



|                                        |  |                 |         |   |      |         |  
|--------------------------------------- |  | --------------- | ------- | - | ---- | ------- | -
|                                        |  | At December 31, |        
|                                        |  | 2007            |         |   | 2006 |        
|Commercial real estate                  |  | $               | 80,652  |   |      | 58,146  |  
|Residential real estate and home equity |  |                 | 28,784  |   |      | 16,527  |  
|Construction                            |  |                 | 39,722  |   |      | 18,611  |  
|Commercial                              |  |                 | 13,889  |   |      | 12,751  |  
|Consumer                                |  |                 | 2,699   |   |      | 1,308   |  
|                                        |  |                 |         |   |      |         |  
|Total loans                             |  |                 | 165,746 |   |      | 107,343 |  
|Allowance for loan losses               |  |                 | (2,046  | ) |      | (1,345  | )
|Net deferred loan costs                 |  |                 | 351     |   |      | 291     |  
|                                        |  |                 |         |   |      |         |  
|Loans, net                              |  | $               | 164,051 |   |      | 106,289 |  
|                                        |  |                 |         |   |      |         |  

(continued)



15



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(3) | Loans, Continued
|--- | ----------------



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



|                          |      |                        |       |  |      
|------------------------- | ---- | ---------------------- | ----- |  | -----
|                          |      | Year EndedDecember 31,
|                          | 2007 |                        | 2006 
|Beginning balance         |      | $                      | 1,345 |  | 564  
|Provision for loan losses |      |                        | 701   |  | 781  
|                          |      |                        |       |  |      
|Ending balance            |      | $                      | 2,046 |  | 1,345
|                          |      |                        |       |  |      

The Company had no impaired loans, nonaccrual loans or loans which were over ninety days past due
but still accruing interest in 2007 or 2006. During January 2008 a loan totaling $749,000 became nonaccrual.



|(4) | Premises and Equipment
|--- | ----------------------

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



|                                               |  |                 |        |   |      |       |  
|---------------------------------------------- |  | --------------- | ------ | - | ---- | ----- | -
|                                               |  | At December 31, |       
|                                               |  | 2007            |        |   | 2006 |      
|Land                                           |  | $               | 3,849  |   |      | 2,967 |  
|Buildings                                      |  |                 | 1,852  |   |      | 1,346 |  
|Leasehold improvements                         |  |                 | 596    |   |      | 584   |  
|Furniture, fixtures and equipment              |  |                 | 2,278  |   |      | 1,904 |  
|Construction in process                        |  |                 | 1,837  |   |      | 380   |  
|                                               |  |                 |        |   |      |       |  
|Total, at cost                                 |  |                 | 10,412 |   |      | 7,181 |  
|Less accumulated depreciation and amortization |  |                 | (809   | ) |      | (457  | )
|                                               |  |                 |        |   |      |       |  
|Premises and equipment, net                    |  | $               | 9,603  |   |      | 6,724 |  
|                                               |  |                 |        |   |      |       |  

The Company has entered into a contract for $529,000 to construct a banking facility on SR200 in
Ocala, Florida. Construction is expected to be completed during 2008.

The Company has entered into a contract for $1,097,000 to construct a
banking facility on SE Maricamp Rd in Ocala, Florida. The amount remaining at December 31, 2007 was $1,047,000. Construction is expected to be completed during 2008.

The Company has entered into a contract for $1,242,000 to construct a banking facility on SW 34thStreet in Gainesville, Florida. Construction is expected to be completed during 2008.

(continued)



16



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(4) | Premises and Equipment, Continued
|--- | ---------------------------------



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, 2007 and 2006 was $80,000. The Company offsets occupancy
expense with sub-leases on various suites in the building. This provided rental income, net of operating expenses, for 2007 and 2006 of $35,000 and $49,000 respectively. The Bank also leased the Alachua branch from a related party for nine months in
2007 before purchasing in October 2007. Rent expense under this operating lease was $26,000 in 2007. The future minimum lease payments, which include certain renewal options, as of December 31, 2007 are as follows (in thousands):



|                         |  |         |       |        |    
|------------------------ |  | ------- | ----- | ------ | ---
|Year Ending December 31, |  | Expense |       | Income
|2008                     |  | $       | 106   |        | 106
|2009                     |  |         | 80    |        | 39 
|2010                     |  |         | 96    |        | 8  
|2011                     |  |         | 100   |        | 6  
|2012                     |  |         | 100   |        | 4  
|2013 and thereafter      |  |         | 1,262 |        |   
|                         |  |         |       |        |    
|                         |  | $       | 1,744 |        | 163
|                         |  |         |       |        |    



|(5) | Deposits
|--- | --------

A schedule of maturities of time deposits
at December 31, 2007 follows (in thousands):



|                         |  |        |        
|------------------------ |  | ------ | -------
|Year Ending December 31, |  | Amount
|2008                     |  | $      | 90,865 
|2009                     |  |        | 16,346 
|2010                     |  |        | 4,622  
|2011                     |  |        | 2,111  
|2012                     |  |        | 2,208  
|                         |  |        |        
|                         |  | $      | 116,152
|                         |  |        |        

(continued)



17



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(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, 2007 and 2006, the outstanding balance of such borrowings totaled approximately $4.8 million and $5.3 million respectively and the Company pledged securities with a carrying value of
approximately $5.5 million and $8.0 million respectively as collateral for these agreements.



|(7) | Federal Home Loan Bank Advances
|--- | -------------------------------

The maturity and
interest rate of the Federal Home Loan Bank (FHLB) advances at December 31, 2007 are as follows ($ in thousands):



|         |  |              |   |      |                 |        |  |       
|-------- |  | ------------ | - | ---- | --------------- | ------ |  | ------
|Maturity |  | InterestRate |   |      | At December 31,
|         |  | 2007         |   | 2006
|2007     |  | 5.25         | % |      | $               |       |  | 2,000 
|2016     |  | 4.47         | % |      |                 | 5,000  |  | 5,000 
|2016     |  | 4.71         | % |      |                 | 3,000  |  | 3,000 
|2017     |  | 4.22         | % |      |                 | 5,000  |  |      
|         |  |              |   |      |                 |        |  |       
|         |  |              |   |      | $               | 13,000 |  | 10,000
|         |  |              |   |      |                 |        |  |       

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 May 23, 2008 and August 29, 2008
respectively. The advance with 2017 maturity date has a call features benefiting the issuer with a call date of May 19, 2008.



|(8) | Income Taxes
|--- | ------------

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



|                       |  |                        |    |      |      |  
|---------------------- |  | ---------------------- | -- | ---- | ---- | -
|                       |  | Year EndedDecember 31, |   
|                       |  | 2007                   |    | 2006 |     
|Deferred:              |  |                        |    |      |      |  
|Federal                |  | $                      | 42 |      | (170 | )
|State                  |  |                        | 7  |      | (29  | )
|                       |  |                        |    |      |      |  
|Income taxes (benefit) |  | $                      | 49 |      | (199 | )
|                       |  |                        |    |      |      |  

(continued)



18



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(8) | Income Taxes, Continued
|--- | -----------------------



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, |                   
|                                         | 2007   |                         |                    | 2006 |     
|                                         | Amount |                         | % ofPretaxEarnings |      |      | Amount |  |   | % ofPretaxLoss |  
|Income taxes (benefit) at statutory rate |        | $                       | 18                 |      | 34.0 | %      |  | $ | (191           | ) |  | (34.0 | )%
|Increase (decrease) resulting from:      |        |                         |                    |      |      |        |  |   |                |   |  |       |   
|State taxes, net of Federal tax benefit  |        |                         | 5                  |      | 9.6  |        |  |   | (20            | ) |  | (3.6  | ) 
|Share-based compensation                 |        |                         | 18                 |      | 34.6 |        |  |   |               |   |  |       |   
|Other nondeductible expenses             |        |                         | 8                  |      | 16.0 |        |  |   | 12             |   |  | 2.2   |   
|                                         |        |                         |                    |      |      |        |  |   |                |   |  |       |   
|Income taxes (benefit)                   |        | $                       | 49                 |      | 94.2 | %      |  | $ | (199           | ) |  | (35.4 | )%
|                                         |        |                         |                    |      |      |        |  |   |                |   |  |       |   

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, |      
|                                                  |  | 2007            |       |   | 2006 |      
|Deferred tax assets:                              |  |                 |       |   |      |       |  
|Net operating loss carryforwards                  |  | $               | 529   |   |      | 637   |  
|Organizational and start-up costs                 |  |                 | 191   |   |      | 207   |  
|Allowance for loan losses                         |  |                 | 702   |   |      | 427   |  
|Unrealized loss on securities available for sale  |  |                 |      |   |      | 14    |  
|Other                                             |  |                 | 17    |   |      | 9     |  
|                                                  |  |                 |       |   |      |       |  
|Deferred tax assets                               |  |                 | 1,439 |   |      | 1,294 |  
|                                                  |  |                 |       |   |      |       |  
|Deferred tax liabilities:                         |  |                 |       |   |      |       |  
|Accrual to cash conversion                        |  |                 | (51   | ) |      | (61   | )
|Premises and equipment                            |  |                 | (205  | ) |      | (47   | )
|Deferred loan costs                               |  |                 | (256  | ) |      | (196  | )
|Unrealized gains on securities available for sale |  |                 | (18   | ) |      |      |  
|                                                  |  |                 |       |   |      |       |  
|Deferred tax liabilities                          |  |                 | (530  | ) |      | (304  | )
|                                                  |  |                 |       |   |      |       |  
|Net deferred tax asset                            |  | $               | 909   |   |      | 990   |  
|                                                  |  |                 |       |   |      |       |  

At December 31, 2007, the Bank has approximately $1,406,000 of net operating loss
carryforwards available to offset future taxable income. These carryforwards will begin to expire in 2025.

(continued)



19



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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, 2007, 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, 2007 follows (in thousands):



|                             |  |                |       
|---------------------------- |  | -------------- | ------
|                             |  | ContractAmount
|Commitments to extend credit |  | $              | 9,111 
|                             |  |                |       
|Unused lines of credit       |  | $              | 35,199
|                             |  |                |       
|Standby letters of credit    |  | $              | 906   
|                             |  |                |       

(continued)



20



---

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 327,522 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, 2007, 67,685 options remain available for granting. A summary of stock option transactions under the Plan for the years ended December 31, 2007 and 2006 follows:



|                                         |  |                  |   |  |                              |       |                                         |            |                         |   |  
|---------------------------------------- |  | ---------------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---------- | ----------------------- | - | -
|                                         |  | Number ofOptions |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |            | AggregateIntrinsicValue
|Options 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 |                                         |            |                         |   |  
|Options exercised                        |  | (1,030           | ) |  |                              | 10.18 |                                         |            |                         |   |  
|Options forfeited                        |  | (31,013          | ) |  |                              | 10.00 |                                         |            |                         |   |  
|Options granted                          |  | 67,850           |   |  |                              | 10.50 |                                         |            |                         |   |  
|                                         |  |                  |   |  |                              |       |                                         |            |                         |   |  
|Options outstanding at December 31, 2007 |  | 253,808          |   |  | $                            | 10.13 |                                         | 8.38 years |                         | $ | 
|                                         |  |                  |   |  |                              |       |                                         |            |                         |   |  
|Options exercisable at December 31, 2007 |  | 215,216          |   |  | $                            | 10.07 |                                         | 8.14 years |                         | $ | 
|                                         |  |                  |   |  |                              |       |                                         |            |                         |   |  

(continued)



21



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(11) | Stock Option Plan, Continued
|---- | ----------------------------



There were no options granted in 2006. The fair value of each option granted for the year ended December 31, 2007 is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following assumptions:



|                                                                  |  |                            |      |  
|----------------------------------------------------------------- |  | -------------------------- | ---- | -
|                                                                  |  | Year EndedDecember 31,2007 |     
|Risk-free interest rate                                           |  |                            | 4.22 | %
|Dividend yield                                                    |  |                            |     | %
|Expected stock volatility                                         |  |                            | 6.54 | %
|Expected life in years                                            |  |                            | 5.50 |  
|Per share grant-date fair value of options issued during the year |  | $                          | 2.18 |  
|                                                                  |  |                            |      |  

As part of its adoption of SFAS 123(R), the Company examined its historical pattern of option
exercises in an effort to determine if there were any pattern based on certain employee populations. From this analysis, the Company could not identify any patterns in the exercise of options. As such, the Company used the guidance in Staff
Accounting Bulletin No. 107 to determine the estimated life of options issued subsequent to the adoption of SFAS 123(R). Expected volatility is based on historical volatility of similar size financial institutions. The risk-free rate for
periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on the Companys history and expectation of dividend payments.

There were 1,030 options exercised during the fiscal year ended December 31, 2007 and 5,000 during the fiscal year ended December 31, 2006.
There was no intrinsic value or tax benefit related to these options exercised. At December 31, 2007 there was approximately $74,000 of total unrecognized compensation expense related to the nonvested share-based compensation arrangements
granted under the plans. The cost is expected to be recognized over a weighted-average period of twenty-one months. The total fair value of shares vesting and recognized as compensation expense was approximately $96,000 for the year ended
December 31, 2007, and the associated income tax benefit recognized was $8,000 for the period ended December 31, 2007.



|(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 $87,000 to the plan in 2007, and $19,000 in 2006.

(continued)



22



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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(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,
|                                                           |  | 2007            |       | 2006
|Loan balances at end of year                               |  | $               | 6,885 |      | 7,180
|                                                           |  |                 |       |      |      
|Deposits held from related parties- Balance at end of year |  | $               | 7,792 |      | 4,197
|                                                           |  |                 |       |      |      
|Management fees and leasing commissions paid during year   |  | $               |      |      | 21   
|                                                           |  |                 |       |      |      

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 was for one year and expired in September 2007. During 2007, the Company purchased this property.



|(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 any time
over a three-year period. Warrants totaling 575,315 in 2007 and 87,940 in 2006 were exercised with 650,857 warrants remaining unexercised as of December 31, 2007.

The Company called 50% of the initial warrant amount in February 2007. The remaining 50% will expire on February 28, 2008 unless called earlier by the Company.

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

(continued)



23



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(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, 2007, that the Bank meets
all capital adequacy requirements to which it is subject.

As of December 31, 2007, 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 CapitalAdequacy Purposes |   |        | For WellCapitalizedPurposes |        
|                                          |  | Amount |        | Percent |                              |   | Amount |                             | Percent |  |      | Amount |  | Percent |       
|As of December 31, 2007:                  |  |        |        |         |                              |   |        |                             |         |  |      |        |  |         |        |  |       |  
|Total Capital (to Risk- Weighted Assets)  |  | $      | 20,844 |         | 11.52                        | % |        | $                           | 14,475  |  | 8.00 | %      |  | $       | 18,094 |  | 10.00 | %
|Tier I Capital (to Risk- Weighted Assets) |  |        | 18,798 |         | 10.39                        |   |        |                             | 7,237   |  | 4.00 |        |  |         | 10,855 |  | 6.00  |  
|Tier I Capital (to Average Assets)        |  |        | 18,798 |         | 9.20                         | * |        |                             | 8,173   |  | 4.00 | *      |  |         | 10,216 |  | 5.00  | *
|                                          |  |        |        |         |                              |  
|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  | *



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

(continued)



24



---

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,
|                                        |  | 2007            |         | 2006     
|                                        |  | CarryingAmount  |         | FairValue |         | CarryingAmount |         | FairValue
|Financial assets:                       |  |                 |         |           |         |                |         |           |        
|Cash and cash equivalents               |  | $               | 3,638   |           | 3,638   |                | 6,734   |           | 6,734  
|Interest bearing time deposits in banks |  |                 | 2,046   |           | 2,046   |                | 1,000   |           | 1,000  
|Securities available for sale           |  |                 | 20,537  |           | 20,537  |                | 13,837  |           | 13,837 
|Loans, net                              |  |                 | 164,051 |           | 162,835 |                | 106,289 |           | 104,356
|Loans held for sale                     |  |                 |        |           |        |                | 2,436   |           | 2,479  
|Accrued interest receivable             |  |                 | 931     |           | 931     |                | 648     |           | 648    
|Federal Home Loan Bank stock            |  |                 | 836     |           | 836     |                | 595     |           | 595    
|                                        |  |                 |         |          
|Financial liabilities:                  |  |                 |         |           |         |                |         |           |        
|Deposits                                |  |                 | 164,243 |           | 164,301 |                | 109,072 |           | 108,603
|Other borrowings                        |  |                 | 4,807   |           | 4,807   |                | 5,339   |           | 5,339  
|Federal Home Loan Bank advances         |  |                 | 13,000  |           | 12,484  |                | 10,000  |           | 9,981  
|Accrued interest payable                |  |                 | 799     |           | 799     |                | 400     |           | 400    
|Off-balance-sheet financial instruments |  |                 |        |           |        |                |        |           |       



|(17) | Legal Contingencies
|---- | -------------------

Various legal claims arise
from time to time in the normal course of business which, in the opinion of management, will not have a material effect on the Companys financial statements.

(continued)



25



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(18) | Holding Company Only Financial Information
|---- | ------------------------------------------



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

Condensed Balance Sheets



|                                           |  |                 |        |      |       
|------------------------------------------ |  | --------------- | ------ | ---- | ------
|                                           |  | At December 31,
|                                           |  | 2007            |        | 2006
|Assets                                     |  |                 |        |      |       
|Cash                                       |  | $               | 539    |      | 810   
|Investment in subsidiary                   |  |                 | 19,638 |      | 13,484
|Other assets                               |  |                 | 82     |      | 55    
|                                           |  |                 |        |      |       
|Total assets                               |  | $               | 20,259 |      | 14,349
|                                           |  |                 |        |      |       
|Liabilities and Stockholders Equity       |  |                 |        |      |       
|Other liabilities                          |  |                 | 8      |      | 12    
|Stockholders equity                       |  |                 | 20,251 |      | 14,337
|                                           |  |                 |        |      |       
|Total liabilities and stockholders equity |  | $               | 20,259 |      | 14,349
|                                           |  |                 |        |      |       

Condensed Statements of Operations



|                                              |  |                        |      |   |      |      |  
|--------------------------------------------- |  | ---------------------- | ---- | - | ---- | ---- | -
|                                              |  | Year EndedDecember 31, |     
|                                              |  | 2007                   |      |   | 2006 |     
|Revenues                                      |  | $                      | 52   |   |      |     |  
|Operating expenses, net of income tax benefit |  |                        | 152  |   |      | 75   |  
|                                              |  |                        |      |   |      |      |  
|Net loss before earnings (loss) of subsidiary |  |                        | (100 | ) |      | (75  | )
|Earnings (loss) of subsidiary                 |  |                        | 103  |   |      | (288 | )
|                                              |  |                        |      |   |      |      |  
|Net earnings (loss)                           |  | $                      | 3    |   |      | (363 | )
|                                              |  |                        |      |   |      |      |  

(continued)



26



---

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued



|(18) | Holding Company Only Financial Information, Continued
|---- | -----------------------------------------------------



Condensed Statements of Cash Flows



|                                                                                                                                              |  |                        |        |   |      |      |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | ---- | -
|                                                                                                                                              |  | Year EndedDecember 31, |       
|                                                                                                                                              |  | 2007                   |        |   | 2006 |     
|Cash flows from operating activities:                                                                                                         |  |                        |        |   |      |      |  
|Net loss                                                                                                                                      |  | $                      | 3      |   |      | (363 | )
|Adjustment to reconcile net earnings (loss) to net cash used in operating activities:                                                         |  |                        |        |   |      |      |  
|Share-based compensation                                                                                                                      |  |                        | 96     |   |      |     |  
|Equity in (earnings) loss of subsidiary                                                                                                       |  |                        | (103   | ) |      | 288  |  
|Increase in other assets                                                                                                                      |  |                        | (27    | ) |      | (45  | )
|(Decrease) increase in other liabilities                                                                                                      |  |                        | (4     | ) |      | 11   |  
|                                                                                                                                              |  |                        |        |   |      |      |  
|Net cash used in operating activities                                                                                                         |  |                        | (35    | ) |      | (109 | )
|                                                                                                                                              |  |                        |        |   |      |      |  
|Cash flows from investing activity-                                                                                                           |  |                        |        |   |      |      |  
|Investment in subsidiary                                                                                                                      |  |                        | (6,000 | ) |      |     |  
|                                                                                                                                              |  |                        |        |   |      |      |  
|Cash flows from financing activities:                                                                                                         |  |                        |        |   |      |      |  
|Net decrease in other borrowings                                                                                                              |  |                        |       |   |      | (13  | )
|Common stock warrants and options exercised                                                                                                   |  |                        | 5,764  |   |      | 930  |  
|                                                                                                                                              |  |                        |        |   |      |      |  
|Net cash provided by financing activities                                                                                                     |  |                        | 5,764  |   |      | 917  |  
|                                                                                                                                              |  |                        |        |   |      |      |  
|Net (decrease) increase in cash                                                                                                               |  |                        | (271   | ) |      | 808  |  
|Cash at beginning of the year                                                                                                                 |  |                        | 810    |   |      | 2    |  
|                                                                                                                                              |  |                        |        |   |      |      |  
|Cash at end of year                                                                                                                           |  | $                      | 539    |   |      | 810  |  
|                                                                                                                                              |  |                        |        |   |      |      |  
|Supplemental disclosure of cash flow information:                                                                                             |  |                        |        |   |      |      |  
|Noncash transaction- Accumulated other comprehensive loss, unrealized loss on securities available for sale of subsidiary, net of tax benefit |  | $                      | 51     |   |      | (21  | )
|                                                                                                                                              |  |                        |        |   |      |      |  



27