Alarion Financial Services 10-Q 2010 Q3 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

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

For the transition period from             to            

Commission file number 000-51843

ALARION FINANCIAL SERVICES, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

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) 237-4500

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). *    Yes  ¨    No  ¨

* The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common stock, par value $.01 per share 2,653,208 shares outstanding at November 12, 2010

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

INDEX

		Page
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
Condensed Consolidated Balance Sheets - at September 30, 2010 (Unaudited) and at December 31, 2009			2
Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months ended September 30, 2010 and 2009			3
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Nine Months ended September 30, 2010 and 2009			4-5
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months ended September 30, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7-14
Review by Independent Registered Public Accounting Firm			15
Report of Independent Registered Public Accounting Firm			16
Item 2.	Management’s Discussion and Analysis		17-24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 1.A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities		26
Item 3.	Defaults upon Senior Securities		26
Item 4.	(Removed and Reserved)		26
Item 5.	Other Information		26
Item 6.	Exhibits		27
SIGNATURES			28

1

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

($ in thousands, except per share amounts)

	At September 30, 2010			At December 31, 2009
	(unaudited)
Assets
Cash and due from banks	$	4,111			3,993
Interest bearing time deposits in banks		—			5,895
Interest-earning deposits and federal funds sold		11,473			12,210
Cash and cash equivalents		15,584			22,098
Interest bearing time deposits in banks		—			2,287
Securities available for sale		53,646			31,282
Loans, net of allowance for loan losses of $4,967 and $3,035		222,603			234,680
Accrued interest receivable		996			939
Premises and equipment, net		13,418			13,310
Other real estate owned		4,485			1,583
Federal Home Loan Bank stock, at cost		1,409			1,499
Deferred income taxes		2,619			1,156
Other assets		1,460			1,749
Total assets	$	316,220			310,583
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits		28,815			18,136
NOW, money-market and savings deposits		75,940			73,537
Time deposits < $100,000		88,206			97,322
Time deposits > = $100,000		67,789			60,994
Total deposits		260,750			249,989
Federal Home Loan Bank advances		21,000			21,000
Other borrowings		4,315			7,633
Accrued interest payable		437			640
Accrued expenses and other liabilities		1,773			615
Total liabilities		288,275			279,877
Stockholders’ equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized:
Preferred stock, Series A, $.01 par value; $1,000 liquidation value; 6,514 shares outstanding		—			—
Preferred stock, Series B, $.01 par value; $1,000 liquidation value; 326 shares outstanding		—			—
Additional paid-in capital, preferred		6,840			6,840
Preferred stock discount		(216	)		(265	)
Common stock, $.01 par value; 4,000,000 shares authorized, 2,653,208 shares issued and outstanding		27			27
Additional paid-in capital, common		26,689			26,680
Accumulated deficit		(5,307	)		(2,531	)
Accumulated other comprehensive loss		(88	)		(45	)
Total stockholders’ equity		27,945			30,706
Total liabilities and stockholders’ equity	$	316,220			310,583

See accompanying Notes to Condensed Consolidated Financial Statements.

2

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

($ in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
Interest income:
Loans	$	3,185		3,312		9,646			9,577
Securities		258		234		909			564
Other		13		125		55			419
Total interest income		3,456		3,671		10,610			10,560
Interest expense:
Deposits		1,066		1,417		3,390			4,655
Borrowings		174		205		524			616
Total interest expense		1,240		1,622		3,914			5,271
Net interest income		2,216		2,049		6,696			5,289
Provision for loan losses		600		295		5,894			682
Net interest income after provision for loan losses		1,616		1,754		802			4,607
Noninterest income:
Deposit account fees		86		95		284			277
Loan brokerage fees		324		241		968			649
Net gain on sale of securities		478		—		478			—
Other		61		—		192			20
Total noninterest income		949		336		1,922			946
Noninterest expense:
Salaries and employee benefits		943		943		3,011			2,761
Occupancy and equipment		309		299		899			833
Data processing		151		150		446			430
Professional services		128		96		333			258
Advertising and promotion		51		39		124			101
Office supplies and printing		38		32		101			94
Impairment of Silverton Bank stock		—		—		—			625
Other real estate owned expense		219		29		477			44
FDIC assessment		128		94		337			384
Other		159		216		895			647
Total noninterest expense		2,126		1,898		6,623			6,177
Earnings (loss) before income tax expense (benefit)		439		192		(3,899	)		(624	)
Income tax expense (benefit)		169		84		(1,438	)		(193	)
Net earnings (loss)		270		108		(2,461	)		(431	)
Preferred stock dividend requirements and accretion of preferred stock to par		105		106		315			291
Net earnings (loss) available to common shareholders	$	165		2		(2,776	)		(722	)
Earnings (loss) per share – basic	$	0.06		—		(1.05	)		(0.27	)
Earnings (loss) per share – diluted	$	0.06		—		(1.05	)		(0.27	)
Weighted-average number of common shares outstanding, basic		2,653,208		2,653,208		2,653,208			2,653,208
Weighted-average number of common shares outstanding, diluted		2,653,208		2,653,208		2,653,208			2,653,208
Dividends per common share	$	—		—		—			—

See accompanying Notes to Condensed Consolidated Financial Statements.

3

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2010 and 2009

($ in thousands)

	Preferred Stock													Common Stock									Accumulated
									Additional									Additional					Other		Total
	Series A				Series B				Paid-in									Paid-In		Accumulated			Comprehensive		Stockholders’
	Shares		Amount		Shares		Amount		Capital		Discount			Shares		Amount		Capital		Deficit			Income		Equity
Balance at December 31, 2008		—	$	—		—	$	—		—		—			2,653,208	$	27		26,613		(2,142	)		138		24,636
Comprehensive loss:
Net loss (unaudited)		—		—		—		—		—		—			—		—		—		(431	)		—		(431	)
Net change in unrealized gain on securities available for sale, net of taxes of $91 (unaudited)		—		—		—		—		—		—			—		—		—		—			152		152
Comprehensive loss (unaudited)																										(279	)
Share-based compensation (unaudited)		—		—		—		—		—		—			—		—		61		—			—		61
Proceeds from issuance of 6,514 shares of Series A preferred stock to U.S. Treasury (unaudited)		6,514		—		—		—		6,514		—			—		—		—		—			—		6,514
Preferred stock warrants exercised by U.S. Treasury (unaudited)		—		—		326		—		326		(326	)		—		—		—		—			—		—
Preferred stock dividend requirements and Series B preferred stock accretion (unaudited)		—		—		—		—		—		46			—		—		—		(291	)		—		(245	)
Balance at September 30, 2009 (unaudited)		6,514	$	—		326	$	—		6,840		(280	)		2,653,208	$	27		26,674		(2,864	)		290		30,687

(continued)

4

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited), Continued

Nine Months Ended September 30, 2010 and 2009

($ in thousands)

	Preferred Stock													Common Stock									Accumulated
									Additional									Additional					Other			Total
	Series A				Series B				Paid-in									Paid-In		Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Discount			Shares		Amount		Capital		Deficit			Loss			Equity
Balance at December 31, 2009		6,514	$	—		326	$	—		6,840		(265	)		2,653,208	$	27		26,680		(2,531	)		(45	)		30,706
Comprehensive loss:
Net loss (unaudited)		—		—		—		—		—		—			—		—		—		(2,461	)		—			(2,461	)
Net change in unrealized loss on securities available for sale, net of taxes of $(25) (unaudited)		—		—		—		—		—		—			—		—		—		—			(43	)		(43	)
Comprehensive loss (unaudited)																											(2,504	)
Share-based compensation (unaudited)		—		—		—		—		—		—			—		—		9		—			—			9
Preferred stock dividend requirements and Series B preferred stock accretion (unaudited)		—		—		—		—		—		49			—		—		—		(315	)		—			(266	)
Balance at September 30, 2010 (unaudited)		6,514	$	—		326	$	—		6,840		(216	)		2,653,208	$	27		26,689		(5,307	)		(88	)		27,945

See accompanying Notes to Condensed Consolidated Financial Statements.

5

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(2,461	)		(431	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		5,894			682
Share-based compensation		9			61
Depreciation and amortization		437			469
Deferred income tax benefit		(1,438	)		(193	)
Net amortization of deferred loan fees and costs		74			38
Net decrease in loans held for sale		836			—
Write-off of other real estate owned		247			—
Gain on sale of securities available for sale		(478	)		—
Loss on sale of other real estate owned		5			20
Net decrease in accrued interest payable		(203	)		(366	)
Net increase in accrued interest receivable		(57	)		(146	)
Net decrease (increase) in other assets		289			(68	)
Impairment of Silverton Bank stock		—			625
Net increase in accrued expenses and other liabilities		1,158			855
Net cash provided by operating activities		4,312			1,546
Cash flows from investing activities:
Proceeds from sales, principal repayments and maturities on securities available for sale		30,356			6,920
Purchase of securities available for sale		(52,310	)		(21,798	)
Net decrease (increase) in time deposits		2,287			1,693
Net loan repayments (disbursements)		2,108			(25,002	)
Purchases of premises and equipment		(545	)		(274	)
Proceeds from sale of other real estate owned		11			62
Redemption (purchase) of Federal Home Loan Bank stock		90			(143	)
Net cash used in investing activities		(18,003	)		(38,542	)
Cash flows from financing activities:
Net increase in deposits		10,761			37,331
Net (decrease) increase in other borrowings		(3,318	)		901
Net decrease in advances from Federal Home Loan Bank		—			(1,000	)
Proceeds from preferred stock issued		—			6,514
Preferred stock dividend requirements and Series B stock accretion		(266	)		(245	)
Net cash provided by financing activities		7,177			43,501
Net (decrease) increase in cash and cash equivalents		(6,514	)		6,505
Cash and cash equivalents at beginning of period		22,098			9,471
Cash and cash equivalents at end of period	$	15,584			15,976
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,117			5,637
Income taxes	$	—			—
Noncash transactions:
Accumulated other comprehensive (loss) income, net change in unrealized (loss) gain on securities available for sale, net of taxes	$	(43	)		152
Transfer of loans to other real estate owned	$	3,354			1,146
Transfer of other real estate owned to loans	$	189			64

See accompanying Notes to Condensed Consolidated Financial Statements.

6

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.Basis of Presentation. In the opinion of the management of Alarion Financial Services, Inc. (the “Holding Company”), the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position at September 30, 2010 and the results of operations for the three- and nine-month periods ended September 30, 2010 and 2009 and cash flows for the nine-month periods ended September 30, 2010 and 2009. The results of operations for the three- and nine-month periods ended September 30, 2010, are not necessarily indicative of results that may be expected for the year ending December 31, 2010.

The Holding Company owns 100% of the common stock of Alarion Bank (the “Bank”) and North Central Florida Developers Corporation (“NCFDC”) (together the “Company”). The Holding Company’s primary activity is the operation of the Bank and NCFDC. The Bank is a state (Florida)-chartered commercial bank. The Bank offers a variety of banking and financial services to individual and corporate customers through its six banking offices located in Ocala and Gainesville, Florida. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation. NCFDC holds loans or assets that might require a longer term hold to realize full economic value.

2.Securities.Securities have been classified according to management’s intent. The carrying amount of securities available for sale and their approximate fair values are as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At September 30, 2010:
Mortgage-backed securities	$	53,786		161		(301	)		53,646
At December 31, 2009:
U.S. Government agency securities		1,029		—		(24	)		1,005
Mortgage-backed securities		30,325		150		(198	)		30,277
	$	31,354		150		(222	)		31,282

The scheduled maturities of securities at September 30, 2010 are as follows (in thousands):

	Amortized Cost		Fair Value
Mortgage-backed securities	$	53,786		53,646

At September 30, 2010 and December 31, 2009, securities with a carrying value of approximately $11.5 million and $18.2 million, respectively, were pledged for other borrowings and public funds.

(continued)

7

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

2.Securities, Continued.Securities sold during the nine months ended September 30, 2010 are summarized as follows (in thousands):

Principal received from sales		$	22,600
	��
Gross gains			478
Gross losses			—
Net gain		$	478

There were no sales of securities for the nine months ended September 30, 2009.

Securities with gross unrealized losses at September 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

	Less Than Twelve Months
	Gross Unrealized Losses		Fair Value
Securities Available for Sale-
Mortgage-backed securities	$	301		37,293

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

(continued)

8

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

3.Loans. The components of loans are summarized as follows (in thousands):

	At September 30, 2010			At December 31, 2009
Commercial real estate	$	143,047			144,234
Residential real estate and home equity		48,173			45,877
Residential mortgages held for sale		5,489			6,325
Construction		7,777			15,400
Commercial		20,021			22,362
Consumer		2,693			3,130
Total loans		227,200			237,328
Add/Deduct:     Allowance for loan losses		(4,967	)		(3,035	)
Deferred loan costs, net		370			387
Loans, net	$	222,603			234,680

4.Loan Impairment and Loan Losses.An analysis of the change in the allowance for loan losses follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Balance at beginning of period	$	4,452			2,686			3,035			2,714
Provision for loan losses		600			295			5,894			682
Recoveries		6			—			60			—
Charge-offs		(91	)		(100	)		(4,022	)		(515	)
Balance at September 30	$	4,967			2,881			4,967			2,881

(continued)

9

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4.Loan Impairment and Loan Losses, Continued.The following is a summary of information regarding nonaccrual and impaired loans (in thousands):

	At September 30, 2010			At December 31, 2009
Nonaccrual loans	$	5,377			2,842
Accruing loans past due ninety days or more	$	—			—
Collateral dependent loans identified as impaired:
Gross loans with no related allowance for losses(1)		7,653			1,932
Gross loans with related allowance for losses recorded		371			1,667
Less allowances on these loans		(19	)		(246	)
Net loans with related allowance		352			1,421
Net investment in collateral dependent impaired loans		8,005			3,353
Noncollateral dependent loans identified as impaired:
Gross loans with no related allowance for losses		1,602			1,034
Gross loans with related allowance for losses recorded		6,167			2,094
Less allowance on these loans		(1,453	)		(513	)
Net loans with related allowance		4,714			1,581
Net investment in noncollateral dependent impaired loans		6,316			2,615
Net investment in impaired loans	$	14,321			5,968

⁽¹⁾ At September 30, 2010 and December 31, 2009, includes loans with partial charge-offs of $1.2 million and $0, respectively, relating to loans with a net carrying value of $2.3 million and $1,932,000.

(continued)

10

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

4.Loan Impairment and Loan Losses, Continued.The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest income recognized on impaired loans	$	64		54		180		115
Interest income received on impaired loans	$	64		54		180		115
Average net recorded investment in impaired loans	$	17,193		4,705		13,397		3,750

5.Earnings (Loss) Per Common Share.Earnings (loss) per share (“EPS”) of common stock have been computed on the basis of the weighted-average number of shares of common stock outstanding. Outstanding stock options and warrants are not considered dilutive securities for the nine month periods ended September 30, 2010 and 2009 due to the net loss incurred by the Company. All outstanding stock options and warrants are not considered dilutive securities for the three month periods ended September 30, 2010 and 2009 due to the exercise price exceeding the average market price 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 EPS (in thousands, except per share amounts):

	2010								2009
	Earnings (Loss)			Weighted- Average Shares		Per Share Amount			Earnings (Loss)			Weighted- Average Shares		Per Share Amount
Three Months Ended September 30:
Basic EPS:
Net earnings available to common stockholders	$	165			2,653	$	0.06		$	2			2,653	$	—
Effect of dilutive securities-
Incremental shares from assumed conversion of options					—								—
Diluted EPS:
Net earnings available to common stockholders and assumed conversions	$	165			2,653	$	0.06		$	2			2,653	$	—
Nine Months Ended September 30:
Basic EPS:
Net loss available to common stockholders	$	(2,776	)		2,653	$	(1.05	)	$	(722	)		2,653	$	(0.27	)
Effect of dilutive securities-
Incremental shares from assumed conversion of options and warrants					—								—
Diluted EPS:
Net loss available to common stockholders and assumed conversions	$	(2,776	)		2,653	$	(1.05	)	$	(722	)		2,653	$	(0.27	)

(continued)

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

6.Share-Based Compensation. The Company adopted a stock option plan for its employees and directors (the “Plan”). Fifteen percent of the total amount of common shares outstanding, up to 450,000 shares (currently 397,981 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 September 30, 2010, there were 101,829 options available for future grants under the Plan. A summary of stock option transactions under the Plan for the nine-month period ended September 30, 2010, follows:

	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at December 31, 2009		276,069		$	10.12
Options forfeited		(3,433	)		10.42
Options outstanding at September 30, 2010		272,636		$	10.12		6.13 years	$	—
Options exercisable at September 30, 2010		266,295		$	10.13		6.07 years	$	—

No options have been granted during 2010. The fair value of each option granted for the nine-month period ended September 30, 2009 were estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate		1.46	%
Dividend yield		—	%
Expected stock volatility		10.00	%
Expected life in years		5.50
Per share grant-date fair value of options issued during the period	$	1.29

The Company has examined its historical pattern of option exercises in an effort to determine if there were any patterns 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 issued by the Securities and Exchange Commission to determine the estimated life of options. 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.

(continued)

12

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

6.Share-Based Compensation, Continued. There were no options exercised during the nine-month periods ended September 30, 2010 and 2009. At September 30, 2010, there was approximately $4,000 of total unrecognized compensation expense related to the nonvested share-based compensation arrangement granted under the plan. The cost is expected to be recognized over a weighted-average period of four months. The total fair value of shares vesting and recognized as compensation was approximately $9,000 and $61,000 for the nine-month periods ended September 30, 2010 and 2009, respectively.

7.Fair Value Measurements. Our listing of financial assets subject to fair value measurements on a recurring basis are as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of September 30, 2010-
Mortgage-backed securities	$	53,646		—		53,646		—
As of December 31, 2009:
U.S. Government agency securities	$	1,005		—		1,005		—
Mortgage-backed securities		30,277		—		30,277		—
	$	31,282		—		31,282		—

There were no transfers of securities between levels of inputs for the nine months ended September 30, 2010.

Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):

											Total
											Losses
											Recorded In
											Operations for
											the Nine-Month
											Period Ended
	Net Carrying Value at September 30, 2010								Total Losses		September 30,
	Total		Level 1		Level 2		Level 3				2010
As of September 30, 2010:
Impaired loans	$	352		—		—		352		19		19
Other real estate owned	$	4,485		—		—		4,485		210		156

In addition, loans with a carrying value of $7,653,000 at September 30, 2010 were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

(continued)

13

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

7.Fair Value Measurements, Continued. Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):

											Total
											Losses
											Recorded
											In Operations
											For the Year
											Ended
	Net Carrying Value at December 31, 2009								Total Losses		December 31,
	Total		Level 1		Level 2		Level 3				2009
As of December 31, 2009:
Impaired loans	$	1,421		—		—		1,421		246		238
Other real estate owned	$	1,583		—		—		1,583		76		76

In addition, loans with a carrying value of $1,932,000 at December 31, 2009 were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

8.Fair Value of Financial Instruments.The estimated fair values of the Company’s financial instruments are as follows (in thousands):

	At September 30, 2010				At December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	15,584		15,584		22,098		22,098
Interest bearing time deposits in banks		—		—		2,287		2,287
Securities available for sale		53,646		53,646		31,282		31,282
Loans, net		222,603		223,778		234,680		237,399
Accrued interest receivable		996		996		939		939
Federal Home Loan Bank stock		1,409		1,409		1,499		1,499
Financial liabilities:
Deposits		260,750		263,036		249,989		253,975
Other borrowings		4,315		4,315		7,633		7,633
Federal Home Loan Bank advances		21,000		18,963		21,000		19,788
Accrued interest payable		437		437		640		640
Off-balance-sheet financial instruments		—		—		—		—

14

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith PA, the Company’s independent registered public accounting firm, has made a limited review of the financial data as of September 30, 2010, and for the three- and nine-month periods ended September 30, 2010 and 2009 presented in this document, in accordance with standards established by the Public Company Accounting Oversight Board (United States).

Their report furnished pursuant to Article 10 of Regulation S-X is included herein.

15

Report of Independent Registered Public Accounting Firm

Alarion Financial Services, Inc.

Ocala, Florida:

We have reviewed the accompanying condensed consolidated balance sheet of Alarion Financial Services, Inc. and Subsidiaries (the “Company”) as of September 30, 2010, the related condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2010 and 2009, and the related condensed consolidated statements of cash flows and changes in stockholders’ equity for the nine-month periods ended September 30, 2010 and 2009. These interim condensed financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 30, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA

Tampa, Florida

November 15, 2010

16

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

General

Alarion Financial Services, Inc. (the “Holding Company”) owns 100% of the common stock of Alarion Bank (the “Bank”) and North Central Florida Developers Corporation (collectively the “Company”). The Holding Company’s primary activity is the operation of the Bank and North Central Florida Developers Corporation. The Bank is a state (Florida)-chartered commercial bank. The Company offers a variety of banking and financial services to individual and corporate customers through its six banking offices located in Ocala and Gainesville, Florida. North Central Florida Developers Corporation holds loans or assets that might require a longer term hold to realize full economic value.

The Bank’s deposits are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The Holding Company’s operations are subject to supervision and regulation of the Federal Reserve Board. The operations of the Bank are subject to the supervision and regulation of the FDIC and the Florida Office of Financial Regulation.

The Bank provides a variety of consumer and commercial banking services to individuals, businesses and industries. The basic services offered by the Bank include: demand interest-bearing and noninterest-bearing accounts, money-market deposit accounts, NOW accounts, time deposits, credit cards, cash management, direct deposits, notary services, money orders, night depository, travelers’ checks, cashier’s checks, domestic collections, savings bonds, bank drafts, automated teller services, drive-in tellers, and banking by mail. 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 Company provide customers with extended banking hours. The Company 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 and borrowings, 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.

17

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

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

Capital Resources, Commitments and Capital Requirements

The Bank’s principal sources of funds are those generated by the Bank, including net increases in deposits and borrowings, principal and interest payments on loans, and proceeds from maturities and sales of investment securities.

The Bank uses its capital resources principally to fund existing and continuing loan commitments and to purchase investment securities. Off-balance-sheet commitments to extend credit represent legally binding agreements to lend to customers with fixed expiration dates or other termination clauses. Since many commitments are expected to expire without being funded, committed amounts do not necessarily represent future cash requirements.

The following table summarizes the Bank’s contractual obligations, including certain on-balance sheet and off-balance sheet obligations, at September 30, 2010 (in thousands):

Contractual Obligations	Total
Time deposit maturities	$	155,995
Advances from Federal Home Loan Bank		21,000
Other borrowings		4,315
Commitments to extend credit		585
Unused lines of credit		19,093
Standby letters of credit		359
Total	$	201,347

Management believes that the Bank has adequate resources to fund all its commitments, that a majority of all of its existing commitments will be funded within 12 months and, if so desired, that the Bank can adjust the rates and terms on time deposits and other deposit accounts to retain or obtain new deposits in a changing interest rate environment.

18

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal 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 consolidated 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 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 percentages of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. If such minimum amounts and percentages are met, the Bank is considered “adequately capitalized.” If the actual amounts exceed the requirements of “adequately capitalized,” and meet even more stringent minimum standards, they are considered “well capitalized.” Management believes as of September 30, 2010, the Bank meets the capital requirements for a “well capitalized” financial institution.

The table below shows the total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios of the Bank at September 30, 2010 and December 31, 2009, and the minimum required amounts and percentages ($ in thousands).

	Actual					For Capital Adequacy Purposes					For Well Capitalized Purposes
	Amount		Percent			Amount		Percent			Amount		Percent
As of September 30, 2010:
Total capital (to Risk-Weighted Assets)	$	26,632		11.48	%	$	18,559		8.00	%	$	23,199		10.00	%
Tier I Capital (to Risk-Weighted Assets)		23,707		10.22			9,279		4.00			13,918		6.00
Tier I Capital (to Average Assets)		23,707		7.55			12,560		4.00			15,700		5.00
As of December 31, 2009:
Total capital (to Risk-Weighted Assets)		28,332		11.49			19,726		8.00			24,658		10.00
Tier I Capital (to Risk-Weighted Assets)		25,297		10.26			9,862		4.00			14,794		6.00
Tier I Capital (to Average Assets)		25,297		8.37			12,089		4.00			15,112		5.00

19

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Results of Operations

The following table shows selected ratios for the periods ended or at the dates indicated:

	Nine Months Ended September 30, 2010			Year Ended December 31, 2009			Nine Months Ended September 30, 2009
Average equity as a percentage of average assets		9.21	%		10.56	%		10.57	%
Total equity to total assets at end of period		8.84	%		9.89	%		10.15	%
Return on average assets (1)		(1.04	)%		—	%		(.21	)%
Return on average equity (1)		(11.26	)%		0.02	%		(1.92	)%
Noninterest expense to average assets (1)		2.80	%		2.75	%		2.90	%
Nonperforming loans to total loans at end of period (2)		2.42	%		1.21	%		.15	%

(1) Annualized for the nine-months ended September 30, 2010 and 2009.

(2) Nonperforming loans consist of nonaccrual loans and accruing loans contractually past due ninety days or more.

Changes in Financial Condition

Total assets increased $6 million or 2%, from $311 million at December 31, 2009 to $316 million at September 30, 2010, primarily as a result of a $22 million increase in securities somewhat offset by a decrease in net loans of $12 million. Deposits increased $11 million from $250 million at December 31, 2009 to $261 million at September 30, 2010.

20

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Net Interest Margin and Interest Rate Spread

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest/dividend income; (iv) interest-rate spread; and (v) net interest margin. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields and costs include certain fees which are considered to constitute adjustments to yields.

	Three Months Ended September 30,
	2010							2009
	Average Balance		Interest and Dividends		Average Yield/ Rate			Average Balance		Interest And Dividends		Average Yield/ Rate
	($ in thousands)
Interest-earning assets:
Loans	$	223,451		3,185		5.65	%	$	224,112		3,312		5.86	%
Securities		34,670		258		2.95			24,513		234		3.79
Other (1)		32,530		13		0.16			20,839		125		2.38
Total interest-earning assets		290,651		3,456		4.72			269,464		3,671		5.40
Noninterest-earning assets		26,363							24,126
Total assets	$	317,014						$	293,590
Interest-bearing liabilities:
Deposits		238,063		1,066		1.78			215,411		1,417		2.61
FHLB advances and other borrowings		24,787		174		2.79			28,426		205		2.86
Total interest-bearing liabilities		262,850		1,240		1.87			243,837		1,622		2.64
Noninterest-bearing deposits		24,236							18,347
Noninterest-bearing liabilities		1,956							1,024
Stockholders’ equity		27,972							30,382
Total liabilities and stockholders’ equity	$	317,014						$	293,590
Net interest income			$	2,216						$	2,049
Interest-rate spread						2.85	%						2.76	%
Net interest margin (2)						3.02	%						3.02	%
Ratio of interest-earning assets to interest-bearing liabilities		1.11							1.11

(1) Includes interest-earning deposits, federal funds sold, time deposits and Federal Home Loan Bank stock.

(2) Net interest margin is annualized net interest income divided by average interest-earning assets.

21

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest/dividend income; (iv) interest-rate spread; and (v) net interest margin. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields and costs include certain fees which are considered to constitute adjustments to yields.

	Nine Months Ended September 30,
	2010							2009
	Average Balance		Interest and Dividends		Average Yield/ Rate			Average Balance		Interest and Dividends		Average Yield/ Rate
	($ in thousands)
Interest-earning assets:
Loans	$	228,663		9,646		5.64	%	$	216,943		9,577		5.90	%
Securities		36,990		909		3.29			19,672		564		3.83
Other (1)		24,673		55		0.30			25,587		419		2.19
Total interest-earning assets		290,326		10,610		4.89			262,202		10,560		5.38
Noninterest-earning assets		25,936							22,288
Total assets	$	316,262						$	284,490
Interest-bearing liabilities:
Deposits		237,574		3,390		1.91			207,385		4,655		3.00
FHLB advances and other borrowings		25,597		524		2.74			28,325		616		2.91
Total interest-bearing liabilities		263,171		3,914		1.99			235,710		5,271		2.99
Noninterest-bearing deposits		22,302							17,871
Noninterest-bearing liabilities		1,652							852
Stockholders’ equity		29,137							30,057
Total liabilities and stockholders’ equity	$	316,262						$	284,490
Net interest income			$	6,696						$	5,289
Interest-rate spread						2.90	%						2.39	%
Net interest margin (2)						3.08	%						2.70	%
Ratio of interest-earning assets to interest-bearing liabilities		1.10							1.11

(1) Includes interest-earning deposits, federal funds sold, time deposits and Federal Home Loan Bank stock.

(2) Net interest margin is annualized net interest income divided by average interest-earning assets.

22

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Comparison of the Three-Month Periods Ended September 30, 2010 and 2009

General Operating Results.Net earnings available to common shareholders for the three-month period ended September 30, 2010 was $165,000, or $0.06 per basic and diluted common share, compared to $2,000, or $0.00 per basic and diluted share, for the comparable period in 2009. The $163,000 increase resulted primarily from a $167,000 increase in net interest income, partially offset by an increase in noninterest expense of $228,000, and a $305,000 increase in the provision for loan losses.

Interest Income.Interest income decreased $215,000 to $3.5 million for the three-month period ended September 30, 2010, compared to the three-month period ended September 30, 2009. The decrease was due to a decrease in the average yield earned on interest-earning assets from 5.40% for the three months ended September 30, 2009 to 4.72% for the three months ended September 30, 2010, partially offset by a $21.2 million increase in average interest-earning assets outstanding for the three months ended September 30, 2010 compared to the 2009 period.

Interest Expense.Interest expense decreased $382,000 from $1.6 million for the three-month period ended September 30, 2009 to $1.2 million for the three-month period ended September 30, 2010. The decrease was primarily due to a decrease in the average cost of interest-bearing liabilities from 2.64% for the three months ended September 30, 2009 to 1.87% for the comparable 2010 period, partially offset by an increase of $19 million in average interest-bearing liabilities outstanding.

Provision for Loan Losses.The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectability of the Company’s loan portfolio. The Company recorded provisions for loan losses for the three-month periods ended September 30, 2010 and 2009 of $600,000 and $295,000, respectively. Management believes that the allowance for loan losses, which was $4.97 million or 2.19% of gross loans at September 30, 2010 is adequate.

Noninterest Income.Noninterest income increased $613,000 during the 2010 period. The increase was primarily due to an $83,000 increase in loan brokerage fees and a $478,000 increase in net gain on sale of securities compared to the three-month period ended September 30, 2009.

Noninterest Expense.Noninterest expense increased by $228,000 from $1.9 million for the three-month period ended September 30, 2009 to $2.1 million for the three-month period ended September 30, 2010. The increase was primarily due to an increase of $190,000 in OREO expense and $34,000 in FDIC assessment.

Income Taxes.The income tax expense was $169,000 for the three-month period ended September 30, 2010, compared to an income tax benefit of $84,000 for the corresponding period in 2009.

23

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Comparison of the Nine-Month Periods Ended September 30, 2010 and 2009

General Operating Results.Net loss available to common shareholders for the nine-month period ended September 30, 2010 was $2,776,000, or $(1.05) per basic and diluted common share, compared to $722,000, or $(0.27) per basic and diluted share, for the comparable period in 2009. The $2.1 million increase resulted primarily from an increase in noninterest expense of $446,000 and a $5.2 million increase in provision for loan losses, partially offset by a $1.4 million increase in net interest income, and a $976,000 increase in noninterest income.

Interest Income.Interest income increased $50,000 to $10.6 million for the nine-month period ended September 30, 2010, compared to the nine-month period ended September 30, 2009. The increase was due to a $28.1 million increase in average interest earning assets outstanding for the nine months ended September 30, 2010 compared to the 2009 period, partially offset by a decrease in the average yield earned on interest earning assets from 5.38% for the nine months ended September 30, 2009 to 4.89% for the nine months ended September 30, 2010.

Interest Expense.Interest expense decreased $1.4 million from $5.3 million for the nine-month period ended September 30, 2009 to $3.9 million for the nine-month period ended September 30, 2010. The decrease was primarily due to a decrease in the average cost of interest-bearing liabilities from 2.99% for the nine months ended September 30, 2009 to 1.99% for the comparable 2010 period, partially offset by an increase of $27.5 million in average interest-bearing liabilities.

Provision for Loan Losses.The provision for loan losses is charged to operations to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Company, industry standards, general economic conditions, particularly as they relate to the Company’s market area, and other factors related to the collectability of the Company’s loan portfolio. The Company recorded provisions for loan losses for the nine-month periods ended September 30, 2010 and 2009 of $5.9 million and $682,000, respectively. Management believes that the allowance for loan losses, which was $4.97 million or 2.19% of gross loans at September 30, 2010 is adequate.

Noninterest Income.Noninterest income increased $976,000 during the 2010 period. The increase was primarily due to a $319,000 increase in loan brokerage fees and a $478,000 increase in net gain on sale of securities when compared to the nine-month period ended September 30, 2009.

Noninterest Expense.Noninterest expense increased by $446,000 from $6.2 million for the nine-month period ended September 30, 2009 to $6.6 million for the nine-month period ended September 30, 2010. The increase was primarily due to increases of $250,000 in salaries and employee benefits, $66,000 in occupancy and equipment expense, $16,000 in data processing expense, $433,000 for OREO expense, and $248,000 in other noninterest expense, all related to the overall growth of the Company.

Income Taxes.The income tax benefit was $1.4 million for the nine-month period ended September 30, 2010, compared to an income tax benefit of $193,000 for the corresponding period in 2009.

24

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable

Item 4. Controls and Procedures

a. Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of September 30, 2010, the Principal Executive and Principal Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were adequate.

b. Changes in internal controls. The Company made no significant changes in its internal controls over financial reporting during the quarter ended September 30, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

c. Limitations on Effectiveness of Controls. The Company, including its Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

25

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which Alarion Financial Services, Inc. or its subsidiaries is a party or to which any of their property is subject.

Item 1.A. Risk Factors

Not applicable

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable

Item 3. Defaults upon Senior Securities

Not applicable

Item 4. (Removed and Reserved)

Item 5. Other Information

Not applicable

26

ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Item 6. Exhibits

Exhibits marked with an (a) were filed in the Holding Company’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 15, 2006. The Exhibits marked with a (b) were filed in the Holding Company’s Form 10-Q, filed with the Securities and Exchange Commission on May 15, 2008. Exhibit (c) was filed in the Annual Report on Form 10-KSB/A filed with the Commission on July 17, 2006. The Exhibits marked with a (d) were filed in Form 8-K filed with the Commission on January 27, 2009.

Exhibit No.	Description of Exhibit
3.1    (a)	Articles of Incorporation
3.2    (a)	Bylaws
3.3    (d)	Articles of Amendment to the Articles of Incorporation authorizing the Series A Preferred Shares
3.4    (d)	Articles of Amendment to the Articles of Incorporation authorizing the Series B Preferred Shares
4.1    (a)	Specimen Common Stock Certificate
4.2    (d)	Form of Certificate for Series A Preferred Stock
4.3    (c)	2005 Stock Plan
4.4    (d)	Form of Certificate for Series B Preferred Stock
10.1    (a)	Employment Agreement with Jon M. Kurtz
10.2    (a)	Lease for Main Office
10.4    (b)	Employment Agreement with Robert L. Page
10.5    (d)	Letter Agreement between the Company and the UST
10.6    (d)	Form of Compliance Letter Agreement
10.7    (d)	Securities Purchase Agreement – Standard Terms between the Company and the United States Department of the Treasury
10.8    (d)	Side Letter Agreement between the Company and the UST
10.9    (d)	Form of Waiver
21.1	Schedule of Subsidiaries
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - President and Principal Executive Officer
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Principal Financial and Accounting Officer
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – President and Principal Executive Officer
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Financial and Accounting Officer

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ALARION FINANCIAL SERVICES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: November 12, 2010

Alarion Financial Services, Inc.
By:	/s/ Jon M. Kurtz
Name:	Jon M. Kurtz, President and
	Principal Executive Officer
By:	/s/ Matthew Ivers
Name:	Matthew Ivers, Senior Vice President
	and Principal Financial and Accounting
	Officer

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