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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB/A

AMENDMENT NO. 3



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

For the Fiscal Year Ended December 31, 2005

OR



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

Commission File Number 000-51843



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ALARION FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)



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

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



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

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



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

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

The
issuers revenues for its most recent fiscal year were $1,887,000.

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

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

The aggregate market value of the Common Stock of the issuer held by non-affiliates of the issuer (1,316,298 shares) on February 28, 2006, was
approximately $13,162,980. As of such date, no organized trading market existed for the Common Stock of the issuer. The aggregate market value was computed by reference the sale price of the Common Stock of the issuer at its last sales price of $10
per share. For the purposes of this response, directors, officers and holders of 5% or more of the issuers Common Stock are considered the affiliates of the issuer at that date.

As of July 12, 2006, there were issued and outstanding 1,534,350 shares of the issuers Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders held on May 5, 2006 filed with the Securities and Exchange Commission pursuant to Regulation 14A on March 22, 2006 are incorporated into Part III, Items 9
through 12 and 14 of this Annual Report on Form 10-KSB/A.



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TABLE OF CONTENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|PART I                                                  |  | 1   
|                                                        | 
|Item 1. Description of Business                         |  | 1   
|Forward-Looking Statements                              |  | 1   
|General                                                 |  | 1   
|Critical Accounting Policies                            |  | 2   
|Lending Activities                                      |  | 3   
|Loan Loss Allowance                                     |  | 4   
|Deposit Activities                                      |  | 5   
|Investments                                             |  | 6   
|Correspondent Banking                                   |  | 6   
|Effect of Governmental Policies                         |  | 6   
|Interest and Usury                                      |  | 7   
|Supervision and Regulation                              |  | 7   
|Liquidity                                               |  | 15  
|Competition                                             |  | 15  
|Employees                                               |  | 16  
|                                                        | 
|Item 2. Description of Properties                       |  | 16  
|                                                        | 
|PART III                                                |  | 18  
|                                                        | 
|Item 12. Certain Relationships and Related Transactions |  | 18  
|                                                        | 
|Item 13. Exhibits                                       |  | 19  
|                                                        | 
|SIGNATURES                                              |  | 20  
|                                                        | 
|EXHIBIT INDEX                                           |  | 22  



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##### Table of Contents

PART I

Item 1. Description of Business

Forward-Looking Statements

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

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

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

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

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

Our ability to attract and retain quality
employees; and

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

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

General

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

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



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The Bank commenced business operations on February 28, 2005 in Ocala, Florida. The Bank opened a
temporary Gainesville, Florida branch on March 2, 2005, and moved the branch to the permanent facility on September 1, 2005.

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

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

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

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

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

Critical Accounting Policies

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



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

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

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

Lending Activities

The Bank offers a range of lending services, including real estate, consumer and commercial
loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Banks market area. The Banks net loans at December 31, 2005 were $ 44.5 million,
or 62% of total assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, money market rates, availability of funds, and government regulations. The
Bank has no foreign loans or loans for highly leveraged transactions.

The Banks loans are concentrated in five major areas:
commercial real estate loans, residential real estate loans, construction, commercial loans (for equipment purchases, working capital and various other business purposes) and consumer loans. A majority of the Banks loans are made on a secured
basis. As of December 31, 2005, approximately 88% of the Banks loan portfolio consisted of loans secured by real estate, of which approximately 59% of the total loan portfolio is secured by commercial properties. Our emphasis is on loans
secured by commercial real estate, rather than riskier receivables or business inventory loans. Risks of these types of loans include the general business conditions of the local economy and borrowers ability to conduct their businesses to
generate sufficient profits to repay their loans under the agreed upon terms and conditions. Personal guarantees may be obtained from the principals of business borrowers and third parties to support the borrowers ability to service the debt
and reduce the risk of non-payment. Commercial loans may be made at variable or fixed rates of interest. Commercial lines of credit are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other commercial loans with
terms or amortization schedules of longer than one year may carry interest rates which vary with the prime lending rate and will become payable in full and are generally refinanced in three to five years. Commercial loans not secured by real estate
amounted to approximately 11% of the Banks total loan portfolio as of December 31, 2005.



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The Banks real estate loans are secured by mortgages and consist primarily of loans to individuals
and businesses for the purchase, improvement of or investment in real estate and for the construction of single-family residential units or the development of single-family residential building lots. These real estate loans may be made at fixed or
variable interest rates. The Bank generally does not make fixed-rate commercial real estate loans for terms exceeding five years. Loans in excess of five years are generally adjustable. The Banks residential real estate loans generally are
repayable in monthly installments based on up to a 30-year amortization schedule with variable interest rates.

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

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

Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers.

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

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

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

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

Our underwriting
take into consideration the amount financed, term, amortization, and pricing, as well as all relevant borrower credit factors. Basic credit factors include the borrowers overall creditworthiness, debt service capacity and secondary sources of
repayment. Underwriting standards relevant to real estate financing also address market valuation of the mortgaged property, the level of the borrowers equity or proposed ownership capital investment, projected income producing property
revenue and overall property marketability. In almost all instances, we require a first or second lien on the real estate which secures the loan. In cases where we have accepted a second, or more junior, lien we require an estoppel letter from the
senior lien holders. We also typically require a title insurance policy insuring our interest in the real estate collateral. We require independent appraisals on all assets valued at over $250,000 and occasionally accept tax roll valuations when the
loan-to-value ratio is less than 70%.

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

On occasion, we also make unsecured loans. We underwrite each unsecured loan based on the
borrowers and any guarantors cash flow and past credit history. In addition, we limit the terms of such unsecured extensions of credit to one year for commercial loans and three years for consumer loans. With respect to sources of
repayment, we require identification of primary and secondary sources to help ensure retirement of debts as scheduled. Furthermore, we obtain borrowers financial data and income tax returns to document favorable net-worth-to-debt ratios and
sufficient liquidity to repay the debts in a timely fashion. Finally, we have a policy of not renewing unsecured credit extensions more than two times.

Loan Loss Allowance

In considering the adequacy of our allowance for loan losses, the Bank has considered that as of
December 31, 2005, approximately 59% of outstanding loans are in the commercial real estate loan category. At December 31, 2005, commercial loans including commercial real estate represented 70% of our loan portfolio. Commercial loans are
generally considered by management as having greater risk than other categories of loans in our loan portfolio. We believe that the real estate collateral securing our commercial real estate loans reduces the risk of loss inherently present in
commercial loans.

At December 31, 2005, our consumer loan portfolio consisted primarily of lines of credit and installment loans
secured by automobiles and other consumer goods. We believe that the risk associated with these types of loans has been adequately provided for in the loan loss allowance.



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

The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are to be charged off against the allowance
when management believes the collectibility of principal is unlikely. The monthly provision for loan losses is based on, and allocated by using, peer group averages and actual loan loss experience of the Banks peers. In addition, loss
experience will be monitored in establishing the provision. During the year ended December 31, 2005, no loans were charged off against the allowance for loan losses.

Deposit Activities

Deposits are the major source of the Banks funds for lending and other investment
activities. The Bank considers the majority of its regular savings, demand, NOW and money market deposit accounts to be core deposits. These accounts comprised approximately 52% of the Banks total deposits at December 31, 2005.
Approximately 48% of the Banks deposits at December 31, 2005 were time deposits. Generally, the Bank attempts to maintain the rates paid on its deposits at a competitive level. Time deposits of $100,000 and over made up approximately 25%
of the Banks total deposits at December 31, 2005. The majority of the deposits of the Bank are generated from Alachua and Marion County.



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Investments

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

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

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

Correspondent Banking

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

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

Effect of Governmental Policies

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



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Interest and Usury

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

Supervision and Regulation

Banks and their holding companies, and many of their affiliates, are extensively
regulated under both federal and state law. The following is a brief summary of certain statutes, rules, and regulations affecting the Company and the Bank. This summary is qualified in its entirety by reference to the particular statutory and
regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation, and examination of banks by regulatory
agencies are intended primarily for the protection of depositors, rather than shareholders.

Bank Holding Company Regulation.
The Holding Company is a bank holding company, registered with the Federal Reserve under the BHC Act. As such, the Company is subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal
Reserve. The BHC Act requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, (ii) taking any
action that causes a bank to become a subsidiary of the bank holding company, or (iii) merging or consolidating with any other bank holding company.

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

Banks are subject to the provisions of the CRA. Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess such banks record
in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods. The regulatory agencys assessment of the banks record is made available to the public. Further, such assessment is
required of any bank which has applied to:



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



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



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



| |  | merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution
|- |  | --------------------------------------------------------------------------------------------------------------------------

In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record
of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.

The BHC Act
generally prohibits a bank holding company from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any
activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the
Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting
securities brokerage activities, performing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions, and certain insurance underwriting
activities have all been determined by regulations of the Federal Reserve to be permissible activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate
any activity or terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability
of any bank subsidiary of that bank holding company.

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

The law also
includes a minimum federal standard of financial privacy. Financial institutions are required to have written privacy policies that must be disclosed to customers. The disclosure of a financial institutions privacy policy must take place at
the time a customer relationship is established and not less than annually during the continuation of the relationship.



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The act also provides for the functional regulation of bank securities activities. The law repeals the exemption that
banks were afforded from the definition of broker, and replaces it with a set of limited exemptions that allow the continuation of some historical activities performed by banks. In addition, the act amends the securities laws to include
banks within the general definition of dealer. Regarding new bank products, the law provides a procedure for handling products sold by banks that have securities elements. In the area of the Community Reinvestment Act activities, the law generally
requires that financial institutions address the credit needs of low-to-moderate income individuals and neighborhoods in the communities in which they operate. Bank regulators are required to take the Community Reinvestment Act ratings of a bank or
of the bank subsidiaries of a holding company into account when acting upon certain branch and bank merger and acquisition applications filed by the institution. Under the law, financial holding companies and banks that desire to engage in new
financial activities are required to have satisfactory or better Community Reinvestment Act ratings when they commence the new activity.

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

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

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

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



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



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



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##### Table of Contents

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

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

Capital Requirements. The
Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off balance sheet exposures, adjusted for risk weights ranging from 0%
to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2
capital consists of the general allowance for credit losses except for certain limitations. An institutions qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum
requirement for the leverage ratio is 3%, but all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. At December 31, 2005 both the Company and the Bank met all capital requirements to
which they were subject.

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

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



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##### Table of Contents

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



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



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



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



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



| |  | an institution is critically undercapitalized if its tangible equity is equal to or less than 2% of its total assets.
|- |  | -------------------------------------------------------------------------------------------------------------------------

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

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



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



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

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



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##### Table of Contents

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



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



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



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



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

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

Additionally, FDICIA requires, among
other things, that:



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



| |  | the appropriate federal banking agency annually examine all insured depository institutions, with some exceptions for small, well capitalized institutions and
state-chartered institutions examined by state regulators.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

FDICIA also contains a number of consumer banking provisions, including disclosure requirements and
substantive contractual limitations with respect to deposit accounts.

As of December 31, 2005, the Bank met the capital requirements
of a well capitalized institution. Bank holding companies are not subject to prompt corrective action of FDICIA.

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

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

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

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

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



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##### Table of Contents

creates a rebuttable presumption of control if a member or group acquires a certain percentage or more of a bank holding
companys or state banks voting stock, or if one or more other control factors set forth in the Act are present.

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

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

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

USA Patriot Act

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



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##### Table of Contents

Other Laws

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



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



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



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



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



| |  |  | Fair Credit Reporting Act  governs the manner in which consumer debts may be collected by collection agencies.
| | - |  | ---------------------------------------------------------------------------------------------------------------

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



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



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

Liquidity

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

Competition

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



15



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##### Table of Contents

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

Employees

As of December 31, 2005, the Company and the Bank collectively had 30 full-time employees
(including executive officers) and 5 part-time employees. The employees are not represented by a collective bargaining unit. The Company considers relations with employees to be good.

Item 2. Description of Properties

The following table sets forth information on the Banks offices
as of July 1, 2006.



|                                                     |  |                
|---------------------------------------------------- |  | ---------------
|Location                                             |  | Facility Status
|Headquarters & Main Office                           |  | Leased by Bank 
|One Northeast First Avenue                           |  |                
|Ocala, Florida                                       |  |                
|                                                     | 
|Gainesville Branch Office                            |  | Owned by Bank  
|4373 Newberry Road                                   |  |                
|Gainesville, Florida                                 |  |                
|                                                     | 
|34thStreet Branch Office                             |  | Owned by Bank  
|4200 SW 34thStreet                                   |  |                
|Gainesville, Florida                                 |  |                
|                                                     | 
|Future 17thStreet Branch Office (under construction) |  | Owned by Bank  
|Intersection of 17thStreet and SE 25thStreet         |  |                
|Ocala, Florida                                       |  |                

AFSIs headquarters and the Banks main office is leased by the Bank from Bernadette
Castro, 303 NE First, LLC, and Austin International Realty, LLC. The Bank entered into a master lease for an initial term of five years and six months, with three five-year renewal options. The lease rate for the entire building is $80,000 annually
for the first five years, $100,000 per year for the next five years, $103,000 for each of the succeeding five years, and $106,090 for each of the five years in the final renewal term. This facility is a four-story, 24,000 square-foot building. The
ground floor, approximately 4,000 square feet, is occupied by the Bank for its main office. The Bank also occupies 1,000 square feet on the fourth floor for administrative purposes. The Bank also occupies an adjacent drive-through facility (117 East
Silver Springs Boulevard) and a customer parking lot (303 Northeast First Avenue).

The Gainesville branch office is located in a newly
constructed building consisting of approximately 6,000 square feet, of which space unused for branch operations will be utilized for loan operations staff.

The 34thStreet branch is currently operated out of a rented modular facility while
the Bank constructs its permanent facility. The property cost $1,150,000, with construction expected to cost $700,000 and to be completed in 2007 or 2008.



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##### Table of Contents

Land has been acquired by the Bank for a future branch office in Ocala. The Bank anticipates opening the
17thStreet Branch Office in the third quarter of 2006. The 17thStreet property cost $1,040,000 for the land and it is anticipated that it will cost $700,000 for construction. The Bank intends to initially this branch in a
modular facility placed on the property, until the permanent facility has been completed in 2007 or 2008.

None of these properties are
encumbered by any liens or mortgages. Other than in the ordinary course of the Banks lending and investment business, and excepting the Banks possible sale of a portion of its Gainesville branch, the Company does not invest in real
estate, real estate mortgages or mortgage-backed securities. Such activities are described in Description of Business and Managements Discussion and Analysis.



17



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##### Table of Contents

PART III

Item 12. Certain Relationships and Related Transactions

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

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

As of December 31, 2005, the Bank had an aggregate total of $5,254,000 outstanding in loans and other extensions of credit to Affiliates. At December 31, 2005, the Bank had unsecured loans (primarily lines of
credit) outstanding with aggregate outstanding balances of $1,809,000, of which $977,063 were to insiders. All such loans (both those to insiders and those to unaffiliated borrowers) were underwritten to the same policy standards and are due on
demand. No insider received any preferential treatment with regard to interest rates, maturity, payment schedule or other features of the loans. All of the outstanding loans to directors and executive officers are performing pursuant to their terms.
As of December 31, 2005, the Bank had the following outstanding loans to AFSIs and the Banks directors and executive officers:



|                              |  |                       |  |                                    |              |     |                                         |   |              |  |                  |  |       |             |  |     |  
|----------------------------- |  | --------------------- |  | ---------------------------------- | ------------ | --- | --------------------------------------- | - | ------------ |  | ---------------- |  | ----- | ----------- |  | --- | -
|Name                          |  | Maturity Date of Loan |  | Largest Amount Outstanding in
2005 |              |     | Amount Outstanding At December 31, 2005 |   | Loan Type    |  | Interest Rate    |  |       | LoantoValue | 
|Barret, Spencer Director      |  | Demand                |  | $                                  | 100,000.00   |     |                                         | $ | 93,153.05    |  | CD Secured LOC   |  | 7.250 | %           |  | 93  | %
|Bosshardt, Carol Director     |  | Demand                |  | $                                  | 997,625.00   | (1) |                                         | $ | 969,925.00   |  | Unsecured LOC    |  | 7.250 | %           |  | N/A |  
|Bosshardt, Carol Director     |  | Demand                |  | $                                  | 1,250.00     |     |                                         | $ |             |  | Unsecured LOC    |  | 7.250 | %           |  | N/A |  
|Bosshardt, Carol Director     |  | 6/20/2006             |  | $                                  |             |     |                                         | $ |             |  | Unsecured        |  | 6.250 | %           |  | N/A |  
|Cope, David Director          |  | Demand                |  | $                                  | 997,443.50   |     |                                         | $ | 997,443.50   |  | Residential Lots |  | 7.250 | %           |  | 66  | %
|Czuryla, Walter Bank EVP      |  | Demand                |  | $                                  | 4,409.83     |     |                                         | $ | 4,407.08     |  | Unsecured ODP    |  | 7.250 | %           |  | N/A |  
|Fletcher, Gloria Director     |  | 4/7/2015              |  | $                                  | 249,000.00   |     |                                         | $ | 249,000.00   |  | Comm Office Bldg |  | 5.850 | %           |  | 34  | %
|Fletcher, Gloria Director     |  | 7/13/2015             |  | $                                  | 716,016.36   |     |                                         | $ | 716,016.36   |  | Commercial R/E   |  | 6.290 | %           |  | 70  | %
|Hill, Michael Director        |  | Demand                |  | $                                  | 2,119.29     |     |                                         | $ | 3.04         |  | Unsecured ODP    |  | 7.250 | %           |  | N/A |  
|Kirkpatrick, Kenneth Director |  | 9/6/2016              |  | $                                  | 1,499,096.44 |     |                                         | $ | 1,499,096.44 |  | Commercial R/E   |  | 6.385 | %           |  | 68  | %
|Kirkpatrick, Kenneth Director |  | 7/19/2009             |  | $                                  | 15,950.00    |     |                                         | $ | 14,460.98    |  | Vehicle          |  | 6.150 | %           |  | NM  |  
|Kurtz, Jon President and CEO  |  | Demand                |  | $                                  | 17.50        |     |                                         | $ |             |  | Unsecured ODP    |  | 7.250 | %           |  | N/A |  
|Page, Robert Bank EVP         |  | Demand                |  | $                                  | 2,728.23     |     |                                         | $ | 2,728.23     |  | Unsecured ODP    |  | 7.250 | %           |  | N/A |  
|White, Job E. Director        |  | 10/21/2020            |  | $                                  | 357,857.81   |     |                                         | $ | 357,857.81   |  | HELOC            |  | 7.250 | %           |  | 84  | %
|White, Job E. Director        |  | Demand                |  | $                                  | 997,625.00   | (1) |                                         | $ | 969,925.00   |  | Unsecured LOC    |  | 7.250 | %           |  | N/A |  
|White, Job E. Director        |  | 9/30/2007             |  | $                                  | 350,000.00   |     |                                         | $ | 350,000.00   |  | Commercial R/E   |  | 7.250 | %           |  | 50  | %
|White, Job E. Director        |  | 6/20/2006             |  | $                                  |             |     |                                         | $ |             |  | Unsecured        |  | 6.250 | %           |  | N/A |  
|Williams, Tommy Director      |  | Demand                |  | $                                  | 997,625.00   | (1) |                                         | $ | 969,925.00   |  | Unsecured LOC    |  | 7.250 | %           |  | N/A |  
|Williams, Tommy Director      |  | 6/20/2006             |  | $                                  |             |     |                                         | $ |             |  | Unsecured        |  | 6.250 | %           |  | N/A |  

---

|(1) | These three line items represent one line of credit to an entity jointly controlled by the three listed directors. The directors have indicated that they intend to reduce this
balance with the proceeds of an asset sale in the fourth quarter of 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Bank may continue to make such loans to
insiders, depending on the borrowers credit worthiness, loan demand from other borrowers, the Banks capital position and its legal lending limit.



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##### Table of Contents

Item 13. Exhibits

Exhibits marked with an (a) were filed with the Form 10-KSB filed with the Securities and
Exchange Commission (SEC) on March 15, 2006. Exhibits marked with a (b) were filed with the Form 10-KSB/A filed with the SEC on May 5, 2006.



|    |  |      |  |                                                                                                                                                    
|--- |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 3.1  |  | Articles of Incorporation                                                                                                                          
|    |  |     
|(a) |  | 3.2  |  | Bylaws                                                                                                                                             
|    |  |     
|(a) |  | 4.1  |  | Specimen Common Stock Certificate                                                                                                                  
|    |  |     
|(a) |  | 4.2  |  | Warrant Plan and Specimen Warrant Plan                                                                                                             
|    |  |     
|    |  | 4.3  |  | 2005 Stock Plan                                                                                                                                    
|    |  |     
|(a) |  | 10.1 |  | Employment Agreement with Jon M. Kurtz                                                                                                             
|    |  |     
|(a) |  | 10.2 |  | Lease for Main Office                                                                                                                              
|    |  |     
|(b) |  | 13.1 |  | Financial Statements                                                                                                                               
|    |  |     
|(a) |  | 14.1 |  | Code of Ethics                                                                                                                                     
|    |  |     
|(a) |  | 21.1 |  | Schedule of Subsidiaries                                                                                                                           
|    |  |     
|    |  | 23.1 |  | Consent of Hacker, Johnson & Smith PA                                                                                                              
|    |  |     
|    |  | 31.1 |  | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act                                               
|    |  |     
|    |  | 31.2 |  | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act                                               
|    |  |     
|    |  | 32.1 |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|    |  |     
|    |  | 32.2 |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be duly signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ocala, State of Florida, on the 12thday of July, 2006.



ALARION FINANCIAL SERVICES, INC./s/ Jon M. KurtzJon M. KurtzChairman and Chief Executive Officer/s/ Jankie DhanpatJankie DhanpatChief Financial Officer(Principal Financial officer and principal accounting
officer)




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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on July 12, 2006.

Signature



|                           |  |                                                
|-------------------------- |  | -----------------------------------------------
|                           |  | /s/ Jon M. Kurtz                               
|                           |  | Jon M. Kurtz                                   
|                           |  | Chief Executive Officer and President          
|                           | 
|/s/ Jon M. Kurtz           |  | Chief Executive Officer, President and Director
|Jon M. Kurtz               |  |                                                
|                           | 
|/s/ Loralee W. Miller      |  | Chairperson of the Board                       
|Loralee W. Miller          |  |                                                
|                           | 
|/s/ Michael P. Hill        |  | Director and Vice Chairman of the Board        
|Michael P. Hill            |  |                                                
|                           | 
|/s/ Spencer Barrett        |  | Director                                       
|Spencer Barrett            |  |                                                
|                           | 
|                           |  | Director                                       
|Carol R. Bosshardt         |  |                                                
|                           | 
|                           |  | Director                                       
|David G. Cope              |  |                                                
|                           | 
|/s/ Gloria W. Fletcher     |  | Director                                       
|Gloria W. Fletcher         |  |                                                
|                           | 
|/s/ Kenneth B. Kirkpatrick |  | Director                                       
|Kenneth B. Kirkpatrick     |  |                                                
|                           | 
|/s/ Ignacio L. Leon        |  | Director                                       
|Ignacio L. Leon            |  |                                                
|                           | 
|/s/ Job E. White           |  | Director                                       
|Job E. White               |  |                                                
|                           | 
|/s/ Tommy W. Williams, Jr. |  | Director                                       
|Tommy W. Williams, Jr.     |  |                                                



| |  |  |  | 
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| |  | 
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| |  |  |  | 



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Alarion Financial Services, Inc.

Form 10-KSB

For Fiscal Year Ending December 31, 2005

EXHIBIT INDEX

Exhibits marked with an (a) were filed with the Form 10-KSB filed with the Securities and Exchange Commission (SEC) on March 15, 2006. Exhibits
marked with a (b) were filed with the Form 10-KSB/A filed with the SEC on May 5, 2006.



|            |  |         |  |                                                                                                                                                   
|----------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit
|(a)         |  | 3.1     |  | Articles of Incorporation                                                                                                                         
|            |  |        
|(a)         |  | 3.2     |  | Bylaws                                                                                                                                            
|            |  |        
|(a)         |  | 4.1     |  | Specimen Common Stock Certificate                                                                                                                 
|            |  |        
|(a)         |  | 4.2     |  | Warrant Plan and Specimen Warrant Certificate                                                                                                     
|            |  |        
|            |  | 4.3     |  | 2005 Stock Plan                                                                                                                                   
|            |  |        
|(a)         |  | 10.1    |  | Employment Agreement with Jon M. Kurtz                                                                                                            
|            |  |        
|(a)         |  | 10.2    |  | Lease for Main Office                                                                                                                             
|            |  |        
|(b)         |  | 13.1    |  | Financial Statements                                                                                                                              
|            |  |        
|(a)         |  | 14.1    |  | Code of Ethics                                                                                                                                    
|            |  |        
|(a)         |  | 21.1    |  | Schedule of Subsidiaries                                                                                                                          
|            |  |        
|            |  | 23.1    |  | Consent of Hacker, Johnson & Smith PA                                                                                                             
|            |  |        
|            |  | 31.1    |  | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act                                              
|            |  |        
|            |  | 31.2    |  | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act                                              
|            |  |        
|            |  | 32.1    |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            |  |        
|            |  | 32.2    |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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