UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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: 000-49976

ALLIANCE BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

VIRGINIA	46-0488111
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

14200 Park Meadow Drive, Suite 200 South, Chantilly, Virginia 20151

(Address of principal executive offices) (Zip Code)

(703) 814-7200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  x    No  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of July 27, 2012, the number of outstanding shares of registrant’s common stock, par value $4.00 per share was: 5,109,969.

ALLIANCE BANKSHARES CORPORATION

INDEX

		Page
PART I           FINANCIAL INFORMATION
Item 1.	Financial Statements		3
Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December  31, 2011 (Audited)			3
Consolidated Statements of Operations for the three months ended June  30, 2012 and 2011 (Unaudited)			4
Consolidated Statements of Operations for the six months ended June  30, 2012 and 2011 (Unaudited)			5
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012			6
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and 2011 (Unaudited)			7
Consolidated Statements of Cash Flows for the six months ended June  30, 2012 and 2011 (Unaudited)			8
Notes to Consolidated Financial Statements (Unaudited)			9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		72
Item 4.	Controls and Procedures		75
PART II        OTHER INFORMATION			76
Item 1.	Legal Proceedings		76
Item 1A.	Risk Factors		76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		76
Item 3.	Defaults Upon Senior Securities		76
Item 4.	Mine Safety Disclosures		76
Item 5.	Other Information		76
Item 6.	Exhibits		77
SIGNATURES			78

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Alliance Bankshares Corporation

Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

(Dollars in thousands, except share and per share amounts)

	June 30, 2012			December 31, 2011
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	74,777		$	45,837
Federal funds sold		22,880			16,567
Trading security, at fair value		300			596
Investment securities available-for-sale, at fair value		103,353			123,463
Restricted stock, at cost		4,150			4,772
Loans, net of allowance for loan losses of $5,055 and $5,393		288,416			301,483
Premises and equipment, net		1,211			1,415
Other real estate owned, net		4,031			3,748
Deferred tax assets, net		1,442			1,553
Accrued interest and other assets		7,258			7,049
TOTAL ASSETS	$	507,818		$	506,483
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Non-interest bearing deposits	$	119,553		$	112,450
Savings and NOW deposits		66,643			51,475
Money market deposits		18,087			23,370
Time deposits		177,916			193,148
Total deposits		382,199			380,443
Repurchase agreements		40,388			40,420
Federal Home Loan Bank advances ($29,559 and $29,350 at fair value)		44,559			44,350
Trust Preferred Capital Notes		10,310			10,310
Other liabilities		3,223			2,838
Commitments and contingent liabilities		—			—
Total liabilities		480,679			478,361
SHAREHOLDERS’ EQUITY:
Common stock, $4 par value; 15,000,000 shares authorized; 5,109,969 shares issued and outstanding at June 30, 2012 and December 31, 2011		20,440			20,440
Capital surplus		25,933			25,915
Retained (deficit)		(19,621	)		(18,269	)
Accumulated other comprehensive income, net		387			36
Total shareholders’ equity		27,139			28,122
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	507,818		$	506,483

See Notes to Consolidated Financial Statements (Unaudited).

3

Alliance Bankshares Corporation

Consolidated Statements of Operations

For the Three Months Ended June 30, 2012 and 2011

(Dollars in thousands, except per share amounts)

	2012			2011
INTEREST INCOME:
Loans	$	4,089		$	4,555
Investment securities		331			1,167
Trading security		9			12
Federal funds sold		24			12
Total interest income		4,453			5,746
INTEREST EXPENSE:
Savings and NOW deposits		30			30
Time deposits		694			971
Money market deposits		32			45
Repurchase agreements		49			52
FHLB advances		268			256
Trust preferred capital notes		129			93
Total interest expense		1,202			1,447
Net interest income		3,251			4,299
Provision for loan losses		—			769
Net interest income after provision for loan losses		3,251			3,530
OTHER INCOME (LOSS):
Deposit account service charges		41			39
Net gain on sale of available-for-sale securities		—			835
Gain (loss) and fair value adjustments on trading security		(100	)		94
Fair value adjustments on FHLB advance		(672	)		(224	)
Other operating income		39			75
Total other income (loss)		(692	)		819
OTHER EXPENSES:
Salaries and employee benefits		1,148			1,404
Professional fees		608			503
Occupancy expense		532			564
Equipment expense		136			155
Other real estate owned expense		54			16
FDIC assessments		210			290
Merger expenses		410			—
Other operating expenses		609			832
Total other expenses		3,707			3,764
Income (loss) before income taxes		(1,148	)		585
Income tax expense (benefit)		(229	)		191
NET INCOME (LOSS)	$	(919	)	$	394
Net income (loss) per common share, basic	$	(0.18	)	$	0.08
Net income (loss) per common share, diluted	$	(0.18	)	$	0.08

See Notes to Consolidated Financial Statements (unaudited)

4

Alliance Bankshares Corporation

Consolidated Statements of Operations

For the Six Months Ended June 30, 2012 and 2011

(Dollars in thousands, except per share amounts)

	2012			2011
INTEREST INCOME:
Loans	$	8,272		$	9,100
Investment securities		655			2,488
Trading security		18			45
Federal funds sold		39			22
Total interest income		8,984			11,655
INTEREST EXPENSE:
Savings and NOW deposits		59			62
Time deposits		1,441			1,968
Money market deposits		61			94
Repurchase agreements		94			140
FHLB advances		536			515
Trust preferred capital notes		243			185
Total interest expense		2,434			2,964
Net interest income		6,550			8,691
Provision for loan losses		450			1,075
Net interest income after provision for loan losses		6,100			7,616
OTHER INCOME (LOSS):
Deposit account service charges		74			76
Net gain on sale of available-for-sale securities		3			914
Gain (loss) and fair value adjustments on trading security		(171	)		(33	)
Fair value adjustments on FHLB advance		(209	)		(73	)
Other operating income		78			119
Total other income (loss)		(225	)		1,003
OTHER EXPENSES:
Salaries and employee benefits		2,321			2,796
Professional fees		1,093			1,893
Occupancy expense		1,123			1,125
Equipment expense		270			323
Other real estate owned expense		95			51
FDIC assessments		431			640
Merger expenses		418			—
Other operating expenses		1,547			659
Total other expenses		7,298			7,487
Income (loss) before income taxes		(1,423	)		1,132
Income tax expense (benefit)		(71	)		373
NET INCOME (LOSS)	$	(1,352	)	$	759
Net income (loss) per common share, basic	$	(0.26	)	$	0.15
Net income (loss) per common share, diluted	$	(0.26	)	$	0.15

See Notes to Consolidated Financial Statements (Unaudited)

5

Alliance Bankshares Corporation

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Six Months Ended June 30, 2012 and 2011

(Dollars in thousands)

	For the Three Months Ended June 30,
	2012			2011
NET INCOME (LOSS)	$	(919	)	$	394
Other comprehensive income
Unrealized holding gains on securities net of taxes of $163 in 2012 and $1,120 in 2011		318			2,177
Reclassification adjustment, net of taxes of $0 in 2012 and ($283) in 2011		—			(552	)
Total other comprehensive income		318			1,625
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(601	)	$	2,019

See Notes to Consolidated Financial Statements (Unaudited)

	For the Six Months Ended June 30,
	2012			2011
NET INCOME (LOSS)	$	(1,352	)	$	759
Other comprehensive income
Unrealized holding gains on securities net of taxes of $182 in 2012 and $995 in 2011		353			1,933
Reclassification adjustment, net of taxes of ($1) in 2012 and ($310) in 2011		(2	)		(604	)
Total other comprehensive income		351			1,329
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(1,001	)	$	2,088

See Notes to Consolidated Financial Statements (Unaudited)

6

Alliance Bankshares Corporation

Consolidated Statements of Changes in Shareholders’ Equity

For the Six Months Ended June 30, 2012 and 2011

(Dollars in thousands)

	Common Stock		Capital Surplus			Retained Deficit			Acccumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
BALANCE, DECEMBER 31, 2010	$	20,427	$	25,857		$	(12,311	)	$	(288	)	$	33,685
Net income		—		—			759			—			759
Other comprehensive income, net of tax		—		—			—			1,329			1,329
Exercise of stock options		9		(3	)		—			—			6
BALANCE, June 30, 2011	$	20,436	$	25,854		$	(11,552	)	$	1,041		$	35,779
BALANCE, DECEMBER 31, 2011	$	20,440	$	25,915		$	(18,269	)	$	36		$	28,122
Net (loss)		—		—			(1,352	)		—			(1,352	)
Other comprehensive income, net of tax		—		—			—			351			351
Stock-based compensation expense		—		18			—			—			18
BALANCE, June 30, 2012	$	20,440	$	25,933		$	(19,621	)	$	387		$	27,139

See Notes to Consolidated Financial Statements (Unaudited)

7

Alliance Bankshares Corporation

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2012 and 2011

(Dollars in thousands)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,352	)	$	759
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		1,424			622
Loss on disposal of fixed assets		—			15
Provision for loan losses		450			1,075
Losses and valuation adjustments on other real estate owned		67			10
Stock-based compensation expense		18			—
Net (gain) on sale of securities available-for-sale		(3	)		(914	)
Fair value adjustments		380			106
Changes in assets and liabilities affecting operations:
Accrued interest and other assets		(279	)		1,502
Other liabilities		385			(508	)
Net cash provided by operating activities		1,090			2,667
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold		(6,313	)		(2,489	)
Purchase of securities available-for-sale		(64,582	)		(26,943	)
Proceeds from sale of securities available-for-sale		71,017			50,430
Paydowns on securities available-for-sale		13,057			6,175
Net change in trading security		125			1,908
Net change in restricted stock		622			790
Net change in loan portfolio		11,654			9,641
Proceeds from sale of other real estate owned		613			739
Purchase of premises and equipment		(67	)		(384	)
Net cash provided by investing activities		26,126			39,867
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash provided by (expended on):
Non-interest bearing deposits		7,103			6,199
Savings and NOW deposits		15,168			1,064
Money market deposits		(5,283	)		(1,591	)
Time deposits		(15,232	)		(583	)
Repurchase agreements		(32	)		(9,271	)
Proceeds from exercise of stock options		—			6
Net cash provided by (used in) financing activities		1,724			(4,176	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		28,940			38,358
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		45,837			24,078
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	74,777		$	62,436

See Notes to Consolidated Financial Statements (Unaudited)

8

Notes to Consolidated Financial Statements (Unaudited)

1. General

Alliance Bankshares Corporation (Bankshares or Company) is a bank holding company that conducts substantially all its operations through its subsidiaries. Alliance Bank Corporation (the Bank) is state-chartered and a member of the Federal Reserve System. The Bank places special emphasis on serving the needs of individuals, small and medium size businesses and professional concerns in the greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia submarket.

On June 26, 2003, Alliance Virginia Capital Trust I (Trust), a Delaware statutory trust and a subsidiary of Bankshares was formed for the purpose of issuing Bankshares’ trust preferred debt.

On May 3, 2012, WashingtonFirst Bankshares, Inc. (WFBI), Bankshares and the Bank entered into an Agreement and Plan of Reorganization (Merger Agreement), pursuant to which Bankshares will merge with and into WFBI, with WFBI being the surviving corporation (Merger). Each share of Bankshares’ outstanding common stock will be converted into and become the right to receive, subject to proration in accordance with the terms of the Merger Agreement and at the election of each shareholder of Bankshares, either 0.4435 shares of common stock of WFBI or cash in the amount of $5.30, subject in either case to adjustment in the event that Bankshares’ shareholders’ equity (as defined in the Agreement) at the month-end prior to completion of the Merger has declined by more than 10% from the amount of Bankshares’ shareholders’ equity at December 31, 2011, and provided that no more than 20% of the common shares of Bankshares may elect to receive cash. Completion of the Merger is subject to (i) approval of the Merger by the shareholders of each of Bankshares and WFBI, (ii) applicable regulatory approvals, including those of the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Virginia State Corporation Commission, and (iii) other customary closing conditions.

Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from, among other things, redeeming, purchasing or otherwise acquiring any shares of its capital stock, amending its articles of incorporation or bylaws, soliciting any third party acquisition proposals and entering into any new line of business, without the consent of WFBI.

The accompanying unaudited consolidated financial statements reflect the financial condition and results of operations of Bankshares on a consolidated basis and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications considered necessary to present fairly Bankshares’ financial position as of June 30, 2012 and December 31, 2011, the results of operations for the three and six month periods ended June 30, 2012 and 2011, consolidated statements of comprehensive income for the three and six month periods

9

ended June 30, 2012 and 2011, changes in shareholders’ equity for the six month periods ended June 30, 2012 and 2011 and consolidated statements of cash flows for the six month periods ended June 30, 2012 and 2011. The notes included herein should be read in conjunction with the financial statements and accompanying notes included in Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (the SEC).

Operating results for the three and six month periods ended June 30, 2012 and 2011 are not necessarily indicative of full year financial results.

2. Stock Option Plan

Accounting Standards Codification (ASC) 718-10, “Stock Compensation”, requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and nonvested shares, based on the fair value of those awards at the date of grant. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

As of June 30, 2012, there was $64 thousand of total unrecognized compensation expense related to stock options, which will be recognized over the remaining requisite service period which is estimated to be three years or less.

Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model. There were no grants of stock options for the first six months of 2012.

10

Stock option activity for the six months ended June 30, 2012 is summarized below:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value1 (in thousands)
Outstanding at January 1, 2012		257,846		$	8.88
Granted		—			—
Exercised		—			—
Forfeited		(15,700	)		11.29
Expired		(22,690	)		6.12
Outstanding at June 30, 2012		219,456		$	8.86		4.6	$	112
Exercisable at June 30, 2012		173,301		$	10.64		4.6	$	42

¹  Intrinsic value is the difference between the underlying stock’s price and the strike price. If the difference is negative, the intrinsic value is given as zero.

3. Fair Value Measurements

Bankshares uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (FASB), ASC 820-10, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Bankshares’ various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

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Fair Value Hierarchy

In accordance with this guidance, Bankshares groups its financial assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

• Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

• Level 2 — Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

• Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect Bankshares’ own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following describes the valuation techniques used by Bankshares to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Trading and Available-for-Sale Securities – Trading and available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). Financial assets and liabilities that are traded infrequently have values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own view about the assumptions that market participants would use in pricing the asset or liability (Level 3).

FHLB Advances – Under the fair value accounting standards, certain liabilities can be carried at fair value. The designated instruments are recorded on a fair value basis at the time of issuance. As of June 30, 2012, Bankshares had one wholesale liability as a fair value instrument: a long-term Federal Home Loan Bank (FHLB) advance.

Wholesale instruments are designated as either Level 2 or Level 3 under the ASC 820-10 fair value hierarchy. Level 2 liabilities are based on quoted market prices using independent valuation techniques for similar instruments with like characteristics. This

12

information is deemed to be observable market data. Level 3 liabilities are financial instruments that are difficult to value due to dysfunctional, distressed markets or lack of actual trading volume. Management gathers certain data to value the instrument including swap curves, conversion swaptions and discounted cash flows. These data points are modeled to reflect the estimate of the fair value of the liability.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:

	Fair Value Measurements at June 30, 2012
	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Assets / Liabilities at Fair Value
	(Dollars in thousands)
Assets:
Trading securities - PCMO	$	300	$	—	$	300		—	$	300
Available-for-sale securities:
U. S. treasuries		5,000		5,000		—				5,000
U. S. corporations and agencies		18,785		—		18,785		—		18,785
U. S. government CMOs		49,925		—		49,925		—		49,925
U. S. government MBS		19,842		—		19,842		—		19,842
PCMOs		947		—		947		—		947
Municipal securities		8,854		—		8,854		—		8,854
Total assets	$	103,653	$	5,000	$	98,653		—	$	103,653
Liabilities:
FHLB advance	$	29,559	$	—	$	—	$	29,559	$	29,559
Total liabilities	$	29,559	$	—	$	—	$	29,559	$	29,559

13

	Fair Value Measurements at December 31, 2011
	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Assets/ Liabilities at Fair Value
	(Dollars in thousands)
Assets:
Trading securities - PCMO	$	596	$	—	$	596	$	—	$	596
Available-for-sale securities:
U. S. treasuries		71,115		71,115				—		71,115
U. S. corporations and agencies		9,751		—		9,751		—		9,751
U. S. government CMOs		31,038		—		31,038		—		31,038
U. S. government MBS		7,698		—		7,698		—		7,698
PCMOs		950		—		950		—		950
Municipal securities		2,911		—		2,911		—		2,911
Total assets	$	124,059	$	71,115	$	52,944		—	$	124,059
Liabilities:
FHLB advance	$	29,350	$	—	$	—	$	29,350	$	29,350
Total liabilities	$	29,350	$	—	$	—	$	29,350	$	29,350

The following table presents the activity in Level 3 fair value measurements for the three months ended June 30, 2012:

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

(Dollars in thousands)

	FHLB Advance
Beginning balance, April 1, 2012	$	28,887
Realized losses on liabilities		672
Ending balance, June 30, 2012	$	29,559

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The following tables present the activity in Level 3 fair value measurements for the six months ended June 30, 2012 and the year ended December 31, 2011:

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

(Dollars in thousands)

	Other Real Estate Owned			FHLB Advances
Beginning balance, January 1, 2012	$	1,473		$	29,350
Transfers out of Level 3		(1,473	)		—
Realized losses on liabilities		—			209
Ending balance, June 30, 2012	$	—		$	29,559

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

( Dollars in thousands)

	Other Real Estate Owned		FHLB Advances		AFS Securities			Trading Securities
Beginning balance, January 1, 2011	$	—	$	26,208	$	43,611		$	2,075
Transfers into (out of) Level 3		1,473		—		(26,940	)		(596	)
Sales, maturities or calls		—		—		(16,286	)		(1,489	)
Realized gains on assets		—		—		170			10
Realized losses on liabilities		—		3,142		—			—
Unrealized (losses) on assets		—		—		(555	)		—
Ending balance, December 31, 2011	$	1,473	$	29,350	$	—		$	—

For the assets and liabilities selected for fair value accounting where available, management obtained pricing on each instrument from independent third parties who relied upon pricing models using widely available and industry standard yield curves. At December 31, 2011, the securities previously carried at level three were moved to level two due to the fact that the pricing was identical to the normal market price. Management will continue to monitor these instruments. Changes in fair values associated with fluctuations in market values reported above are reported as fair value adjustments on the Consolidated Statements of Operations.

15

The following table displays quantitative information about Level 3 fair value measurements as of June 30, 2012 (Dollars in thousands):

	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
FHLB advance	$	29,559	Pricing model	Yield curves	1.95% - 2.19% (2.11%)

Certain financial and nonfinancial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by Bankshares to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the underlying collateral, if any. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered to be Level 3. Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

Other Real Estate Owned (OREO). OREO is measured at fair value using an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if an appraisal of the real estate property is over two years old, then the fair value is considered to be Level 3. Any fair value adjustments are recorded in the period recognized as OREO expense in the Consolidated Statements of Operations.

16

The following tables summarize Bankshares’ assets that were measured at fair value on a nonrecurring basis as of the dates indicated.

	Carrying Value at June 30, 2012
Description	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans, net of valuation allowance	$	4,517	$	—	$	4,517	$	—
OREO	$	4,031	$	—	$	4,031	$	—

	Carrying Value at December 31, 2011
Description	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans, net of valuation allowance	$	6,760	$	—	$	6,760	$	—
OREO	$	3,748	$	—	$	2,275	$	1,473

The following describes the valuation techniques used by Bankshares to measure certain financial assets and liabilities not previously described in this note that are not recorded at fair value on a recurring basis in the financial statements:

Cash, Due from Banks, and Federal Funds Sold

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Loans Receivable

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

17

Restricted Stock

Restricted investments in correspondent banks are carried at cost based on the underlying redemption provisions of the instruments and therefore are not included in the fair value disclosures.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, statement savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on Bankshares’ current incremental borrowing rates for similar types of borrowing arrangements.

Trust Preferred Capital Notes

The fair value of Bankshares’ Trust Preferred Capital Notes, which is discussed in Note 10, is estimated using discounted cash flow analyses based on Bankshares’ current incremental borrowing rates for similar types of borrowing arrangements.

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

18

The following tables reflect the fair value of financial instruments as of June 30, 2012 and December 31, 2011:

Fair Value of Financial Instruments

	Fair Value Measurements at June 30, 2012, Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Balance
	(Dollars in thousands)
Financial assets:
Cash and due from banks	$	74,777	$	74,777	$	—	$	—	$	74,777
Federal funds sold		22,880		22,880		—		—		22,880
Trading security		300		—		300		—		300
Available-for-sale securities		103,353		5,000		98,353		—		103,353
Loans, net		288,416		—		284,324		—		284,324
Accrued interest receivable		1,665		—		1,665		—		1,665
Financial liabilities:
Non-interest bearing deposits	$	119,553	$	—	$	119,553	$	—	$	119,553
Interest-bearing deposits		262,646		—		263,565		—		263,565
Short-term borrowings		40,388		—		40,388		—		40,388
FHLB advances		15,000		—		15,000		—		15,000
FHLB advances, at fair value		29,559		—		—		29,559		29,559
Trust Preferred Capital Notes		10,310		—		10,310		—		10,310
Accrued interest payable		1,352		—		1,352		—		1,352

	Fair Value Measurements at December 31, 2011 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Balance
	(Dollars in thousands)
Financial assets:
Cash and due from banks	$	45,837	$	45,837	$	—	$	—	$	45,837
Federal funds sold		16,567		16,567		—		—		16,567
Trading security		596		—		596		—		596
Available-for-sale securities		123,463		—		123,463		—		123,463
Loans, net		301,483		—		297,163		—		297,163
Accrued interest receivable		1,815		—		1,815		—		1,815
Financial liabilities:
Non-interest bearing deposits	$	112,450	$	—	$	112,450	$	—	$	112,450
Interest-bearing deposits		267,993		—		268,691		—		268,691
Short-term borrowings		40,420		—		40,420		—		40,420
FHLB advances		15,000		—		15,000		—		15,000
FHLB advances, at fair value		29,350		—		—		29,350		29,350
Trust Preferred Capital Notes		10,310		—		10,310		—		10,310
Accrued interest payable		1,155		—		1,155		—		1,155

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4. Trading Security

The following table reflects the single trading security accounted for on a fair value basis and the effective yield of the instrument as of the dates indicated:

	June 30,					December 31,
	2012					2011
	Fair					Fair
	Value		Yield			Value		Yield
	(Dollars in thousands)
Trading security:
PCMOs	$	300		5.43	%	$	596		5.44	%
Total trading security	$	300		5.43	%	$	596		5.44	%

As of June 30, 2012, trading assets consisted of one PCMO instrument. This PCMO was rated AAA by at least one ratings agency on the purchase date. Currently the security has a rating below investment grade.

At June 30, 2012 and December 31, 2011, the trading security was not pledged.

5. Investment Securities

The amortized cost, unrealized gains and losses, and the fair value of investment securities at June 30, 2012 are summarized as follows:

	June 30, 2012
	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Available-for-sale securities:
U.S. treasuries		5,000		—		—			5,000
U.S. government corporations and agencies		18,629		156		—			18,785
U.S. government agency CMOs		49,919		176		(170	)		49,925
U.S. government agency MBS		19,540		302		—			19,842
PCMOs		943		4		—			947
Municipal securities		8,732		214		(92	)		8,854
Total available-for-sale securities	$	102,763	$	852	$	(262	)	$	103,353

20

The amortized cost, unrealized gains and losses, and the fair value of investment securities at December 31, 2011 are summarized as follows:

	December 31, 2011
	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Available-for-sale securities:
U.S. treasuries	$	71,119	$	—	$	(4	)	$	71,115
U.S. government corporations and agencies		9,737		35		(21	)		9,751
U.S. government agency CMOs		30,893		195		(50	)		31,038
U.S. government agency MBS		7,672		26		—			7,698
PCMOs		1,005		—		(55	)		950
Municipal securities		2,982		70		(141	)		2,911
Total available-for-sale securities	$	123,408	$	326	$	(271	)	$	123,463

There were no held-to-maturity investments at June 30, 2012 or December 31, 2011.

The following tables present the aggregate amount of unrealized loss in investment securities as of June 30, 2012 and December 31, 2011. The aggregate amount is determined by summation of all the related securities that have a continuous loss at period end, and the length of time that the loss has been unrealized is shown by terms of “less than 12 months” and “12 months or more.” The fair value is the approximate market value as of the period end.

	June 30, 2012
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars in thousands)
U.S. treasuries	$	—	$	—		$	—	$	—			—	$	—
U.S. government corporations and agencies		—		—			—		—			—		—
U.S. government agency CMOs		27,709		(170	)		—		—			27,709		(170	)
PCMOs		—		—			—		—			—		—
Municipal securities		1,266		(3	)		586		(89	)		1,852		(92	)
Total temporarily impaired investment securities	$	28,975	$	(173	)	$	586	$	(89	)	$	29,561	$	(262	)

	December 31, 2011
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(Dollars in thousands)
U.S. treasuries	$	71,115	$	(4	)	$	—	$	—		$	71,115	$	(4	)
U.S. government corporations and agencies		3,327		(21	)		—		—			3,327		(21	)
U.S. government agency CMOs		7,401		(50	)		—		—			7,401		(50	)
PCMOs		—		—			950		(55	)		950		(55	)
Municipal securities		526		(4	)		525		(137	)		1,051		(141	)
Total temporarily impaired investment securities	$	82,369	$	(79	)	$	1,475	$	(192	)	$	83,844	$	(271	)

21

Bankshares’ investment security portfolio is primarily comprised of U.S. government and fixed rate bonds, whose prices move inversely with interest rates. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Unrealized losses within Bankshares’ portfolio typically occur as market interest rates rise. Such unrealized losses are considered temporary in nature. Under ASC 320-10-35, Debt and Equity Securities Recognition and Presentation of Other-Than-Temporary Impairments, an impairment is considered “other than temporary” if any of the following conditions are met: Bankshares intends to sell the security, it is more likely than not that Bankshares will be required to sell the security before recovery of its amortized cost basis, or Bankshares does not expect to recover the security’s entire amortized cost basis (even if Bankshares does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” Bankshares would be expected to write down the security’s value to its new fair value, and the amount of the write-down would be included in earnings as a realized loss. As of June 30, 2012 and December 31, 2011, management does not consider any of the unrealized losses to be other-than-temporarily impaired and no impairment charges have been recorded.

There are a total of 15 investment securities with a total fair value of $29.6 million that have an aggregate unrealized loss of $262 thousand and are considered temporarily impaired as of June 30, 2012. Management believes the unrealized losses noted in the table above are a result of current market conditions and interest rates, and do not reflect on the ability of the issuers to repay the obligations. Approximately $27.7 million or 93.7% of the investment securities with an unrealized loss are backed by U.S. government agencies and other forms of underlying collateral.

Bankshares’ investment in FHLB stock totaled $2.7 million at June 30, 2012. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Bankshares does not consider this investment to be other than temporarily impaired as of June 30, 2012 and no impairment has been recognized. FHLB stock is included in restricted stock on the Consolidated Balance Sheets.

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6. Loans

The following table summarizes the composition of the loan portfolio by dollar amount and percentage as of the dates indicated:

	June 30,						December 31,
	2012						2011
	Amount			Percentage			Amount			Percentage
	(Dollars in thousands)
Real estate:
Residential real estate	$	98,219			33.5	%	$	101,248			33.0	%
Commercial real estate		126,643			43.1	%		137,610			44.8	%
Construction / land		38,436			13.1	%		39,176			12.8	%
Total real estate		263,298			89.7	%		278,034			90.6	%
Commercial and industrial		28,700			9.8	%		26,820			8.7	%
Consumer		1,473			0.5	%		2,022			0.7	%
Gross loans		293,471			100	%		306,876			100.0	%
Less: allowance for loan losses		(5,055	)					(5,393	)
Net loans	$	288,416					$	301,483

As of June 30, 2012 and December 31, 2011, there were $2 thousand and $25 thousand, respectively, in checking account overdrafts that were reclassified on the Consolidated Balance Sheets as loans.

The following tables represent the credit quality of loans by class for June 30, 2012 and December 31, 2011:

	As of June 30, 2012
	(Dollars in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total Loans
Risk Rating Number1	1 to 5		6		7		8		9		10
Commercial and industrial	$	25,590	$	850	$	250	$	2,010	$	—	$	—	$	28,700
Commercial real estate
Owner occupied		56,467		1,142		1,994		3,467		—		—		63,070
Non-owner occupied		55,232		4,788		1,745		1,808		—		—		63,573
Construction/land
Residential construction		13,673		800		—		—		559		—		15,032
Other construction & land		14,090		527		167		8,284		336		—		23,404
Residential real estate
Equity lines		27,853		136		99		150		—		—		28,238
Single family		56,437		2,744		2,727		2,645		—		—		64,553
Multifamily		5,428		—		—		—		—		—		5,428
Consumer - non real estate		1,269		22		182		—		—		—		1,473
Totals	$	256,039	$	11,009	$	7,164	$	18,364	$	895	$	—	$	293,471

23

	As of December 31, 2011
	(Dollars in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total Loans
Risk Rating Number1	1 to 5		6		7		8		9		10
Commercial and industrial	$	23,901	$	927	$	224	$	1,768	$	—	$	—	$	26,820
Commercial real estate
Owner occupied		63,192		625		1,742		2,610		—		—		68,169
Non-owner occupied		60,069		1,231		8,141		—		—		—		69,441
Construction/land
Residential construction		9,356		175		599		3,753		876		—		14,759
Other construction & land		16,018		—		1,662		5,837		900		—		24,417
Residential real estate
Equity lines		27,311		430		718		95		552		—		29,106
Single family		56,134		4,876		—		5,347		—		—		66,357
Multifamily		5,785		—		—		—		—		—		5,785
Consumer - non real estate		1,836		—		186		—		—		—		2,022
Totals	$	263,602	$	8,264	$	13,272	$	19,410	$	2,328	$	—	$	306,876

¹  Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets.

The following tables set forth aging and non-accrual loans by class as of the dates indicated:

	Aging and Non-accrual Loans by Class
	As of June 30, 2012
	(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		90-days Past Due and Still Accruing		Non- accrual Loans
Commercial & Industrial	$	1,349	$	403	$	268	$	2,020	$	26,680	$	—	$	1,196
Commercial real estate
Owner occupied		206		2,597		—		2,803		60,267		—		2,492
Non-owner occupied		4,426		—		—		4,426		59,147		—		—
Construction/land
Residential construction		—		—		559		559		14,473		—		559
Other construction & land		1,053		—		4,876		5,929		17,475		—		5,874
Residential real estate
Equity Lines		599		14		150		763		27,475		—		150
Single Family		1,783		264		—		2,047		62,506		—		264
Multifamily		—		—		—		—		5,428		—		—
Consumer-non real estate		9		—		—		9		1,464		—		—
Total loans	$	9,425	$	3,278	$	5,853	$	18,556	$	274,915	$	—	$	10,535

24

	Aging and Non-accrual Loans By Class
	As of December 31, 2011
	(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		90-days Past Due and Still Accruing		Non- accrual Loans
Commercial and industrial	$	1,228	$	367	$	—	$	1,595	$	25,225	$	—	$	977
Commercial real estate
Owner occupied		121		—		2,610		2,731		65,438		—		2,610
Non-owner occupied		—		992		—		992		68,449		—		—
Construction/land
Residential construction		—		—		540		540		14,219		—		540
Other construction & land		—		1,225		5,988		7,213		17,204		—		7,139
Residential real estate
Equity Lines		304		33		184		521		28,585		—		236
Single Family		74		29		1,733		1,836		64,521		—		1,762
Multifamily		—		—		—		—		5,785		—		—
Consumer -non real estate		186		—		—		186		1,836		—		—
Total loans	$	1,913	$	2,646	$	11,055	$	15,614	$	291,262	$	—	$	13,264

7. Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for the periods presented:

	Six Months Ended June 30, 2012			Year Ended December  31, 2011			Six Months Ended June 30, 2011
	(Dollars in thousands)
Allowance for Loan Losses
Balance, beginning of period	$	5,393		$	5,281		$	5,281
Provision for loan losses		450			1,549			1,075
Loans charged off		(821	)		(1,702	)		(986	)
Recoveries of loans charged off		33			265			240
Net (charge offs)		(788	)		(1,437	)		(746	)
Balance, end of period	$	5,055		$	5,393		$	5,610

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The following tables represent the allocation of allowance for loan losses by segment as of the dates indicated:

	June 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Construction Land		Residential Real Estate			Consumer			Total
Beginning Balance:	$	210		$	1,508		$	1,808	$	1,826		$	41		$	5,393
Charge-offs		—			—			—		(821	)		—			(821	)
Recoveries		—			—			—		33			—			33
Provision		(56	)		(53	)		515		57			(13	)		450
Ending Balance:	$	154		$	1,455		$	2,323	$	1,095		$	28		$	5,055
Individually evaluated for impairment	$	48		$	17		$	1,486	$	98		$	—		$	1,649
Collectively evaluated for impairment	$	106		$	1,438		$	837	$	997		$	28		$	3,406
Loans:
Ending Balance:	$	28,700		$	126,643		$	38,436	$	98,219		$	1,473		$	293,471
Individually evaluated for impairment	$	1,196		$	2,492		$	6,433	$	414		$	—		$	10,535
Collectively evaluated for impairment	$	27,504		$	124,151		$	32,003	$	97,805		$	1,473		$	282,936

26

Allowance for Loan Losses

As of December 31, 2011

(Dollars in thousands)

	Commercial and Industrial			Commercial Real Estate			Construction Land			Residential Real Estate			Consumer			Total
	(Dollars in thousands)
Beginning Balance:	$	463		$	1,420		$	700		$	2,613		$	85		$	5,281
Charge-offs		(10	)		(173	)		(404	)		(1,044	)		(71	)		(1,702	)
Recoveries		116			9			—			134			6			265
Provision		(359	)		252			1,512			123			21			1,549
Ending Balance:	$	210		$	1,508		$	1,808		$	1,826		$	41		$	5,393
Individually evaluated for impairment	$	—		$	135		$	1,376		$	760		$	—		$	2,271
Collectively evaluated for impairment	$	210		$	1,373		$	432		$	1,066		$	41		$	3,122
Loans:
Ending Balance:	$	26,820		$	137,610		$	39,176		$	101,248		$	2,022		$	306,876
Individually evaluated for impairment	$	977		$	2,610		$	7,678		$	1,999		$	—		$	13,264
Collectively evaluated for impairment	$	25,843		$	135,000		$	31,498		$	99,249		$	2,022		$	293,612

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Impaired loans and non-accrual loans are summarized as follows as of the dates indicated:

	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Impaired loans without a valuation allowance	$	4,369	$	4,233
Impaired loans with a valuation allowance		6,166		9,031
Total impaired loans	$	10,535	$	13,264
Valuation allowance related to impaired loans	$	1,649	$	2,271
Total loans past due 90 days and still accruing	$	—	$	—
Average investment in impaired loans	$	11,049	$	13,538
Interest income recognized on impaired loans	$	5	$	234
Interest income recognized on a cash basis on impaired loans	$	5	$	234

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The following tables represent specific allocation for impaired loans by class as of the dates indicated:

	Specific Allocation for Impaired Loans By Class
	As of June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance:
Commercial & Industrial	$	928	$	1,014	$	—	$	1,023	$	—
Commercial Real Estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		—		—		—		—		—
Other construction & land		3,292		3,386		—		3,391
Residential Real Estate		—		—		—		—		—
Single family		150		150		—		150		—
With an allowance recorded:
Commercial & Industrial		268		268		48		268		3
Commercial Real Estate
Owner occupied		2,492		2,638		17		2,654		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential construction		559		565		285		555		—
Other construction & land		2,582		2,735		1,201		2,743		—
Residential Real Estate
Single family		264		264		98		265		2
Total:	$	10,535	$	11,020	$	1,649	$	11,049	$	5

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	Specific Allocation for Impaired Loans By Class
	As of December 31, 2011
	Recorded Investment		Principal Balance		Related Allowance		Recorded Investment		Income Recognized
	(Dollars in thousands)
With no related allowance:
Commercial & Industrial	$	977	$	1,033	$	—	$	1,037	$	15
Commercial Real Estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		—		—		—		—		—
Other construction & land		2,293		2,293		—		2,199		87
Residential Real Estate
Single Family		963		963		—		968		37
Consumer		—		—		—
Other
With an allowance Recorded:
Commercial & Industrial		—		—		—
Commercial Real Estate
Owner occupied		2,610		2,669		135		2,311		20
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		540		546		259		546		—
Commercial		4,845		5,049		1,118		5,436		53
Residential Real Estate
Single Family		1,036		1,039		759		1,041		22
Total:	$	13,264	$	13,592	$	2,271	$	13,538	$	234

There were no non-accrual loans excluded from impaired loan disclosures as of June 30, 2012 and December 31, 2011. No additional funds are committed to be advanced in connection with impaired loans.

At June 30, 2012, there were $900 thousand in troubled debt restructured loans. At December 31, 2011, there were $956 thousand in troubled debt restructured loans.

There were no loans modified as TDRs and no TDR defaults during the three and six months ended June 30, 2012.

For purposes of this disclosure, a TDR payment default occurs when, within 12 months of the original TDR modification, either the TDR is placed in non-accrual status or a charge-off has occurred.

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8. Other Real Estate Owned (OREO)

The table below reflects changes in OREO for the periods indicated:

	Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011
	(Dollars in thousands)
Balance, beginning of period	$	3,748		$	4,627
Properties acquired at foreclosure		963			434
Sales of foreclosed properties		(651	)		(959	)
Valuation adjustments		(29	)		(354	)
Balance, end of period	$	4,031		$	3,748

The table below reflects expenses applicable to OREO for the periods indicated:

	Six Months Ended June 30, 2012		Twelve Months Ended December 31, 2011		Six Months Ended June 30, 2011
	(Dollars in thousands)
Loss on sales of OREO	$	38	$	12	$	12
Valuation adjustments		29		354		—
Operating expenses, net of rental income		28		88		39
Total OREO expense	$	95	$	454	$	51

9. Federal Home Loan Bank Advances

Bankshares has two advances from the FHLB: one fixed rate advance and one floating rate advance.

At June 30, 2012 and December 31, 2011, the FHLB advance accounted for on a fair value basis had a value of $29.6 and $29.4 million, respectively, and matures in 2021. The weighted average interest rate on the long-term FHLB advance accounted for on a fair value basis was 3.985% at June 30, 2012 and December 31, 2011. The par value of the FHLB advance accounted for on a fair value basis was $25.0 million at June 30, 2012 and December 31, 2011.

At June 30, 2012 and December 31, 2011, there was one FHLB advance accounted for on a cost basis. Bankshares renewed this floating rate advance in the first quarter of 2012 for $15.0 million. The advance matures in 2013 and the interest rate at June 30, 2012 was 0.32% and at December 31, 2011 was 0.379%. The weighted average interest rate for both FHLB advances outstanding is 2.61%.

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10. Trust Preferred Capital Notes of Subsidiary Trust

On June 30, 2003, Bankshares’ wholly-owned Delaware statutory business trust privately issued $10.0 million face amount of the Trust’s floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued $310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds of the sale to purchase $10.3 million principal amount of Bankshares’ floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption “Trust Preferred Capital Notes.” Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest expense in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through June 30, 2012, Bankshares elected to defer the interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of June 30, 2012 the total amount of deferred and compounded interest owed under the indenture is $1.2 million. The base interest rate as of June 30, 2012 was 3.62% and as of December 31, 2011 was 3.70%. All or a portion of the Trust Preferred Capital Notes may be included in the regulatory computation of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up to 25% of shareholders’ equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At June 30, 2012 and December 31, 2011, $8.9 million and $9.4 million were considered Tier 1 capital.

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11. Net Income (Loss) Per Share

The following tables show the weighted average number of shares used in computing net income (loss) per share and the effect on weighted average number of shares of potential dilutive common stock. Potential dilutive common stock had no effect on income (loss) available to common shareholders for the periods presented.

Three Months Ended June 30,

	2012						2011
	Shares			Per Share Amount			Shares		Per Share Amount
Basic net income per share		5,109,969			(0.18	)		5,108,821	$	0.08
Effect of dilutive securities, stock options		—						25,332
Diluted net income per share		5,109,969			(0.18	)		5,134,153	$	0.08
Net income utilized in the earnings per share calculations above (in thousands)		(919	)				$	394

Six Months Ended June 30,

	2012						2011
	Shares			Per Share Amount			Shares		Per Share Amount
Basic net income per share		5,109,969			(0.26	)		5,108,436	$	0.15
Effect of dilutive securities, stock options		—						16,715
Diluted net income per share		5,109,969			(0.26	)		5,125,151	$	0.15
Net income utilized in the earnings per share calculations above (in thousands)		(1,352	)				$	759

No average shares have been excluded from the calculation for the six months ended June 30, 2012. Average shares of 287,699 have been excluded from the calculation for the six months ended June 30, 2011, because their effects were anti-dilutive.

12. Supplemental Cash Flow Information

Supplemental disclosures of cash flow information for the six months ended June 30, 2012 and 2011:

	June 30, 2012		June 30, 2011
	(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Interest paid during the six months	$	2,237	$	2,849
Income taxes paid during the six months	$	—	$	—
Supplemental Disclosures of Non-cash Activities:
Fair value adjustment for securities	$	532	$	2,014
Transfer of loans to foreclosed assets	$	963	$	434

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13. Mergers and Acquisitions

On May 3, 2012, WFBI, Bankshares and the Bank entered into the Merger Agreement with respect to the Merger and a related bank merger agreement by and between the Bank and WashingtonFirst Bank (WF Bank), WFBI’s wholly owned subsidiary bank (Bank Merger). The consummation of the Merger and the Bank Merger are conditioned upon, among other things, approvals of applicable regulatory agencies and the shareholders of each of Bankshares and WFBI.

The consideration to be received by the shareholders of Bankshares in the Merger is a combination of stock and cash. Pursuant to the Merger Agreement, each share of Bankshares’ outstanding common stock will be converted into and become the right to receive, subject to proration in accordance with the terms of the Merger Agreement and at the election of each shareholder of Bankshares, either 0.4435 shares of common stock of WFBI or cash in the amount of $5.30, subject in either case to adjustment in the event that Bankshares’ shareholders’ equity (as defined in the Agreement) at the month-end prior to completion of the Merger has decline by more than 10% from amount of Bankshares’ shareholders’ equity at December 31, 2011, and provided that no more than 20% of the common shares of Bankshares may elect to receive cash.

The Merger is expected to close in the fourth quarter of 2012, pending approval of the shareholders of each of Bankshares and WFBI and the receipt of all required regulatory approvals, as well as other customary conditions as described in the Current Report on Form 8-K previously filed on May 8, 2012.

14. Subsequent Events

Bankshares evaluated subsequent events that occurred after the balance sheet date, but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provided evidence about conditions that did not exist at the date of the balance sheet but arose after that date. As of the report date there were no subsequent events that would cause adjustments to or disclosures in the financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operations of Bankshares and the Bank on a consolidated basis. This discussion and analysis should be read in conjunction with Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011, and the unaudited consolidated financial statements and accompanying notes included elsewhere in this report.

Internet Access to Corporate Documents

Information about Bankshares can be found on the Bank’s website at www.alliancebankva.com. Under “Documents / SEC Filings” in the Investor Relations section of the website, Bankshares posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those reports as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC). All such filings are available free of charge.

The information available on the Bank’s website is not part of the Quarterly Report on Form 10-Q or any other report filed by Bankshares with the SEC.

Forward-Looking Statements

Some of the matters discussed below and elsewhere in this report include forward-looking statements. Forward-looking statements often use words such as “believe,” “expect,” “plan,” “may,” “will,” “should,” “project,” “contemplate,” “anticipate,” “forecast,” “intend” or other words of similar meaning. Forward-looking statements in this report may include, but are not limited to, statements regarding the proposed merger (the Merger) of Bankshares and WashingtonFirst Bankshares, Inc., profitability, liquidity, Bankshares’ loan portfolio, adequacy of the allowance for loan losses and provisions for loan losses, trends regarding net charge-offs, trends regarding levels of non-performing assets, interest rates and yields, interest rate sensitivity, market risk, regulatory developments, capital requirements, business strategy, the effects of Bankshares’ efforts to reposition its business and other goals or objectives.

You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. The forward-looking statements Bankshares makes in this report are subject to significant risks, assumptions and uncertainties, including among other things, the following important factors that could affect the actual outcome of future events:

• Changes in the strength of the national economy in general and the local economies in Bankshares market areas that adversely affect Bankshares’ customers and their ability to transact profitable business with us, including the ability of Bankshares’ borrowers to repay their loans according to their terms or a change in the value of the related collateral;

• Retention of existing employees;

• Maintaining and developing well established and valuable client relationships and referral source relationships;

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• Changing trends in customer profiles and behavior;

• Direct and substantive competition from other financial services companies targeting certain key business lines;

• Other competitive factors within the financial services industry;

• Changes in the availability of funds resulting in increased costs or reduced liquidity;

• Changes in accounting policies, rules and practices;

• Changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, and soundness of other financial institutions Bankshares does business with;

• The timing of and value realized upon the sale of Other Real Estate Owned (OREO) property;

• Changes in the assumptions underlying the establishment of reserves for possible loan losses and other estimates;

• Fiscal and governmental policies of the United States federal government;

• Reactions in financial markets related to potential or actual downgrades in the sovereign credit rating of the United States and the budget deficit or national debt of the United States government;

• The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, related regulatory rulemaking processes and other legislative and regulatory initiatives on the regulation and supervision of financial institutions, specifically depository institutions;

• The impact of changes to capital requirements that apply to financial institutions and depository institutions, including changes related to the proposed Basel III capital standards;

• Changes in the way the FDIC insurance premiums are assessed;

• Changes in interest rates and market prices, which could reduce Bankshares’ net interest margins, asset valuations and expense expectations;

• Timing and implementation of certain balance sheet strategies;

• Impairment concerns and risks related to Bankshares’ investment portfolio, and the impact of fair value accounting, including income statement volatility;

• Assumptions used within our Asset Liability Management (ALM) process and Net Interest Income (NII) and Economic Value of Equity (EVE) models;

• Changes in tax laws and regulations;

• Bankshares’ ability to recognize future tax benefits;

• Impacts of implementing various accounting standards;

• Deposit attrition, operating costs, customer losses and business disruption in connection with the Merger, including adverse effects on relationships with employees, may be greater than expected;

• The ability to complete the Merger as expected and within the expected timeframe;

• The possibility that required regulatory and shareholder approvals of the Merger may not be obtained, or one or more of the other conditions to the completion of the Merger may not be satisfied;

• The expected growth opportunities or cost savings from the Merger may not be fully realized or may take longer to realize than expected; and

• Other factors described from time to time in our SEC filings.

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In addition, Bankshares’ business and financial performance could be impacted as the financial industry restructures in the current environment, both by changes in the creditworthiness and performance of Bankshares’ counterparties and by changes in the regulatory and competitive landscape. Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A of Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011.

Because of these and other uncertainties, Bankshares’ actual results and performance may be materially different from results indicated by these forward-looking statements. In addition, Bankshares’ past results of operations are not necessarily indicative of future performance.

Bankshares cautions you that the above list of important factors is not exclusive. These forward-looking statements are made as of the date of this report, and Bankshares may not undertake steps to update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made.

Critical Accounting Policies

Bankshares’ financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within Bankshares’ statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Bankshares uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that Bankshares uses in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of Bankshares’ transactions would be the same, the timing of events that would impact its financial statements could change.

Allowance for Loan Losses. The allowance for loan losses is an estimate of the losses that may be sustained in Bankshares’ loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450-10-05, Contingencies which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310-10-35, Receivables which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan losses has two basic components: the general allowance and the specific allowance.

The general allowance is developed following the accounting principles contained in ASC 450-10-05, Contingencies and represents the largest component of the total allowance. It is determined by aggregating unclassified loans and unimpaired loans by loan type based on common purpose, collateral, repayment source or other credit characteristics and then applying factors which in the judgment of management represent the expected losses inherent in the portfolio. In determining these factors, Bankshares considers the following: (1) delinquencies and overall risk ratings, (2) loss history, (3) trends in volume and terms of loans, (4) effects of changes in lending policy, (5) the experience and depth of the borrowers’ management, (6)

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national and local economic trends, (7) concentrations of credit by individual credit size and by class of loans, (8) quality of loan review system and (9) the effect of external factors (e.g., competition and regulatory requirements).

ASC 310-10-35, Receivables is the basis upon which Bankshares determines specific reserves on individual loans which comprise the specific allowance. Specific loans to be evaluated for impairment are identified based on the borrower’s loan size and the loan’s risk rating, collateral position and payment history. If it is determined that it is likely that the Bank will not receive full payment in a timely manner, the loan is determined to be impaired. Each such identified loan is then evaluated to determine the amount of reserve that is appropriate based on ASC 310-10-35. This standard also requires that losses be accrued based on the differences between the value of collateral, present value of expected future cash flows or values that are observable in the secondary market and the loan balance.

Share-Based Compensation. ASC 718-10, Stock Compensation, requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and nonvested shares, based on the fair value of those awards at the date of grant. Compensation cost has been measured using the Black-Scholes model to estimate fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

Deferred Tax Asset. Bankshares routinely evaluates the likelihood of the recognition of deferred tax assets. The analysis is used to determine if a valuation allowance for deferred tax assets is necessary. Bankshares reviews and analyzes various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted.

At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Its analysis reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was considered more likely than not that Bankshares will not be able to realize all its deferred tax assets. As of June 30, 2012, the net deferred tax asset was $1.4 million, compared to $1.5 million as of December 31, 2011.

Overview

On May 3, 2012, WashingtonFirst Bankshares, Inc. (WFBI), Bankshares and the Bank entered into an Agreement and Plan of Reorganization (Merger Agreement), pursuant to which Bankshares will merge with and into WFBI, with WFBI being the surviving corporation. Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally

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refrain from specific actions without the consent of WFBI. Completion of the Merger is subject to approval by the shareholders of each of Bankshares and WFBI, applicable regulatory approval and customary closing conditions.

On May 31, 2012, in contemplation of the pending merger and after consultation with Washington First Bank, Bankshares exercised its early termination clause in the lease agreement with Carr Properties on the Corporate Headquarters location in Chantilly, Virginia. This event triggered a payment of $675 thousand which is recorded on the financial statement as other asset according to the guidance outlined in ASC 805 and 420.

Notwithstanding the Merger Agreement, Bankshares’ primary long-term goals continue to be maximizing earnings and deploying capital in profit driven initiatives that will enhance shareholder value in a sustainable fashion. In pursuit of these goals, Bankshares’ current emphasis is on optimizing profitability in the near term and strengthening its financial performance, while also transitioning its operations to focus more closely on traditional banking activities and to reposition Bankshares for the future. Bankshares’ transitional strategies include, among others, continuing the following initiatives:

• Diversifying the loan portfolio by increasing Bankshares’ focus on commercial loans and loans secured by owner occupied commercial real estate, while continuing to be an active lender in attractive aspects of the residential and commercial real estate markets.

• Reducing the investment securities portfolio and eliminating the trading assets portfolio.

• Continuing to attentively manage the level of non-performing assets by addressing problem loans on a timely basis.

• Increasing low cost deposits by local commercial and retail customers, while working to reduce Bankshares’ brokered deposit portfolio.

• Reducing Bankshares’ operating and funding costs.

Performance Highlights

• The net loss for the quarter ended June 30, 2012 was $919 thousand compared to net income of $394 thousand for the same period in 2011, a decrease of $1.3 million. The net loss was $1.4 million for the six months ended June 30, 2012 compared to net income of $759 thousand for the six months ended June 30, 2011, a decrease of $2.1 million. Loss per common share, basic and diluted, amounted to $0.26 for the six months ended June 30, 2012, compared to earnings per share of $0.15 for the six months ended June 30, 2011. Earnings were negatively affected by merger related expenses of $418 thousand, the fair value adjustment on the FHLB advance of $209 thousand and a reduction in interest income of $2.7 million from $11.7 million for the six months ended June 30, 2011, to $9.0 million for the six months ended June 30, 2012, offset by a reduction in the provision for loan losses of approximately $769 thousand resulting primarily from the collection in full of a previously reserved loan.

• Total assets were $507.8 million at June 30, 2012, an increase of $1.3 million from total assets of $506.5 million at December 31, 2011. The increase in total assets is directly related to a $28.9 million increase in cash and due from banks, with such increase being offset by a $13.1 million decrease in the loan portfolio related to the payoff of a number of loan relationships as well as a $20.1 million reduction in Bankshares’ investment portfolio. The increase in cash relates to the cyclical nature of the business of Bankshares’ title and escrow clients.

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• Total loans were $293.5 million at June 30, 2012, a decrease of $13.4 million, or 4.4% from the December 31, 2011 balance of $306.9 million. The decrease in total loans results from the payoffs of a number of loan relationships, as well as scheduled principal repayments. While new loan activity has increased in the first six months of 2012, the volume of originations has not kept pace with repayments. Each loan segment as a percentage of total loans at June 30, 2012 is nearly unchanged from the percentages at December 31, 2011.

• Demand deposits were $119.6 million at June 30, 2012, or 31.3% of total deposits. This compares to the December 31, 2011 level of $112.5 million or 29.6% of total deposits.

• The composition of non-performing assets as of June 30, 2012 was $10.5 million of non-accrual loans, $4.0 million of OREO, and $900 thousand of troubled debt restructured loans for a total of $15.5 million, compared to the composition of non-performing assets as of December 31, 2011, which was $13.3 million of non-accrual loans, $3.7 million of OREO and $956 thousand of troubled debt restructured loans for a total of $18.0 million. The non-performing assets balance decreased by $2.5 million at June 30, 2012 compared to December 31, 2011. The composition of the reduction was as follows: the charge off of six loans, secured by residential real estate, totaling $838 thousand; the foreclosure and purchase into OREO of a residential property valued at $962 thousand; the full repayment of a commercial loan secured by land with a prior balance of $899 thousand; the movement back to accrual status of two loans secured by land totaling $325 thousand; and the receipt of ongoing payments from a borrower with three outstanding loans secured by land and construction equipment totaling $4.4 million that are carried in non-accrual status; such payments reduced Bankshares’ carrying balance by $85 thousand during 2012.

• The investment securities portfolio totaled $103.4 million at June 30, 2012. This compares to $123.5 million of investments as of December 31, 2011, a decrease of $20.1 million. This decrease is attributable to management’s strategy to reduce the investment portfolio and the maturing of certain investments in the first quarter of 2012. In addition, the investment securities portfolio contains mortgage oriented products (CMO, PCMO, and MBS) and SBA securities. When prepayments on these instruments occur at a faster rate than anticipated, principal is paid down earlier than expected. During the second quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities.

• The net interest margin for the quarter ended June 30, 2012 was 3.13% compared to 3.86% for the same 2011 period, a decrease of 73 basis points. For the six months ended June 30, 2012, the net interest margin of 3.08% was 74 basis points lower than the net interest margin of 3.82% for the six months ended June 30, 2011. The lower net margin is attributed to the targeted efforts to strategically restructure Bankshares’ balance sheet in anticipation of the merger with Eagle Bancorp, Inc. (Eagle) during 2011, which led to shifts in the investment portfolio mix and the reduced yield in the portfolio. During the second quarter of 2012, Bankshares also experienced early prepayments on a number of CMO’s and PCMO’s securities. When prepayments on these instruments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield, the Bank experienced greater than expected prepayments on a variety of investment securities.

• Deposits were $382.2 million at June 30, 2012, an increase of $1.8 million from the December 31, 2011 balance of $380.4 million. Savings and NOW accounts increased by

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$15.2 million from $51.5 million at December 31, 2011 to $66.6 million at June 30, 2012 and non-interest bearing deposits increased by $7.1 million, from $112.5 million at December 31, 2011 to $119.6 million at June 30, 2012. These increases were offset by decreases in money market deposits of $5.3 million, from $23.4 million at December 31, 2011 to $18.1 million at June 30, 2012, and time deposits of $15.2 million, from $193.1 million at December 31, 2011 to $177.9 million at June 30, 2012.

• Non-interest expense for the three months ended June 30, 2012 amounted to $3.7 million compared to $3.8 million for the same period in 2011. The non-interest expenses include merger related expenses of $410 thousand, consultant expenses related to contract employees of $226 thousand and OREO expenses of $94 thousand.

Financial Performance Measures. Bankshares’ net loss for the three month period ended June 30, 2012 was $919 thousand, a decrease of $1.3 million over the second quarter of 2011 net income of $394 thousand. The net loss of $919 thousand includes net interest income of $3.3 million compared to $4.3 million for the same period last year, a decrease of $1.0 million. The decrease is due primarily to a decrease in interest income in the amount of $1.3 million attributed to the lower average yield on the investment portfolio and the lower balance on the loan portfolio, which was partially offset by a decrease of $245 thousand in the cost of funds. For the three months ended June 30, 2012, total interest expense was $1.2 million compared to $1.4 million for the three months ended June 30, 2011. These results led to $0.18 basic and diluted loss per share for the quarter ended June 30, 2012, compared to $0.08 basic and diluted earnings per share for the quarter ended June 30, 2011. Weighted average basic shares outstanding were 5,109,969 for the three months ended June 30, 2012 and 5,108,821 for the three months ended June 30, 2011. Weighted average diluted shares outstanding were 5,109,969 for the three months ended June 30, 2012 and 5,134,153 for the three months ended June 30, 2011.

For the six month period ended June 30, 2012, Bankshares had net loss of $1.4 million compared to net income of $759 thousand for the same period in the prior year, a decline of $2.1 million. The net loss of $1.4 million includes net interest income of $6.6 million compared to $8.7 million for the same period last year, a decrease of $2.1 million. The decrease is due primarily to a decrease in interest income in the amount of $2.7 million, from $11.7 million for the six months ended June 30, 2011, to $9.0 million for the same period in 2012, and the lower average yield on the investment portfolio and the lower average balances on the loan portfolio. The decrease was partially offset by a decrease of $530 thousand in the cost of funds. For the six months ended June 30, 2012, total interest expense was $2.4 million compared to $3.0 million for the six months ended June 30, 2011. These results led to a $0.26 basic and diluted loss per share for the six months ended June 30, 2012. The basic and diluted earnings per share for the six months ended June 30, 2011 was $0.15. Weighted average basic shares outstanding were 5,109,969 for the six months ended June 30, 2012 and 5,108,436 for the six months ended June 30, 2011. Weighted average diluted shares outstanding were 5,109,969 and 5,125,151 for the six months ended June 30, 2012 and June 30, 2011, respectively.

The net interest margin decreased to 3.13% for the three months ended June 30, 2012 compared to 3.86% for the three months ended June 30, 2011, a decrease of 73 basis points. The net interest margin was 3.08% for the six months ended June 30, 2012 compared to 3.82% for the six months ended June 30, 2011, a decrease of 74 basis points. For the first six months, the net interest margin continues to be negatively affected by the decrease in the yield on interest

41

earning assets. Targeted efforts to strategically restructure Bankshares’ balance sheet in anticipation of the merger with Eagle during 2011, led to shifts in Bankshares’ investment portfolio mix and the overall reduced balance and yield on the portfolio. Total interest income reversal relating to non-accrual loans for the six months ended June 30, 2012 was $355 thousand compared to $311 thousand for the six months ended June 30, 2011.

Results of Operations

Net Interest Income. Net interest income (on a fully tax equivalent basis) for the three months ended June 30, 2012 was $3.3 million compared to $4.3 million for the same period in 2011. Interest income on earning assets was $1.3 million lower for the three months ended June 30, 2012, compared to the second quarter of 2011, while interest expense decreased $245 thousand during the same time period.

Net interest income (on a fully tax equivalent basis) for the six months ended June 30, 2011 was $6.6 million compared to $8.7 million for the same period in 2011. Interest income on earning assets was $2.7 million lower for the six months ended June 30, 2012, compared to the first six months of 2011. Of the $2.7 million decrease in interest income, $154 thousand is attributable to the $25.4 million lower average balance in loans. The reduction in the average balance in the investment securities portfolio was $16.5 million and contributed $257 thousand to the reduction in interest income. This was offset by the decrease in interest expense of $530 thousand. The average balance of interest bearing deposits decreased by $20.0 million and contributed $82 thousand to the reduction in interest expense.

The following table illustrates average balances of total interest-earning and non-interest earning assets as well as total interest-bearing and non-interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.

42

Average Balances, Interest Income and Expense and Average Yield and Rates⁽¹⁾

	Three Months Ended June 30,
	2012								2011
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate 1			Balance			Expense		Rate 1
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans (2)	$	293,553		$	4,089		5.59	%	$	320,845		$	4,555		5.69	%
Trading securities		430			9		8.40	%		745			12		6.46	%
Investment securities		108,359			334		1.24	%		119,314			1,192		4.01	%
Federal funds sold		14,853			24		0.65	%		8,866			12		0.54	%
Total interest earning assets		417,195			4,456		4.28	%		449,770			5,771		5.15	%
Non-interest earning assets:
Cash and due from banks		40,913								22,882
Premises and equipment		1,276								1,581
Other real estate owned (OREO)		4,303								4,453
Other assets		7,542								16,514
Less: allowance for loan losses		(5,167	)							(5,386	)
Total non-interest earning assets		48,867								40,044
Total Assets	$	466,062							$	489,814
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	46,360		$	29		0.25	%	$	42,601		$	28		0.26	%
Money market deposit accounts		16,664			32		0.77	%		24,173			45		0.75	%
Savings accounts		4,457			1		0.09	%		2,850			2		0.28	%
Time deposits		182,712			694		1.52	%		201,855			971		1.93	%
Total interest-bearing deposits		250,193			756		1.21	%		271,479			1,046		1.55	%
FHLB advances(3)		43,895			268		2.45	%		41,059			256		2.50	%
Other borrowings		47,997			178		1.49	%		48,860			145		1.19	%
Total interest-bearing liabilities		342,085			1,202		1.41	%		361,398			1,447		1.61	%
Non-interest-bearing liabilities:
Demand deposits		93,548								91,033
Other liabilities		2,518								2,802
Total liabilities		438,151								455,233
Shareholders’ Equity		27,911								34,581
Total Liabilities and Shareholders’ Equity	$	466,062							$	489,814
Interest Spread (4)							2.87	%							3.54	%
Net Interest Margin (5)				$	3,254		3.13	%				$	4,324		3.86	%

⁽¹⁾  The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate.

⁽²⁾ The Bank had average non-accrual loans of $11.0 million in the second quarter of 2012 and 2011. The 2012 and 2011 interest income on non-accrual loans excluded from the loans above was $165 thousand and $117 thousand, respectively.

⁽³⁾  The Bank had two FHLB advances during the periods presented: a $15.0 million floating rate advance accounted for on a cost basis and a $25.0 million par value fixed rate advance accounted for on a fair value basis. The average fair value of the fixed rate FHLB advance for the second quarter of 2012 and 2011 was $28.9 million and $26.1 million, respectively. As of June 30, 2012, the fair value of the fixed rate FHLB advance was $29.6 million.

⁽⁴⁾ Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.

⁽⁵⁾  Net interest margin is net interest income expressed as a percentage of average earning assets.

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Average loan balances were $293.6 million for the three months ended June 30, 2012 compared to $320.8 million for the same period in 2011. The decrease in average loans is primarily due to several large payoffs. Bankshares longer-term strategy is to grow small business commercial loans and owner occupied commercial real estate, and focus on Bankshares’ geographical area. The related interest income from loans was $4.1 million in the three months ended June 30, 2012 compared to $4.6 million in the same period in 2011. The average yield on loans of 5.59% during the three months ended June 30, 2012 was 10 basis points lower than the yield of 5.69% in the second quarter of 2011. Interest rates are established for classes of loans that include variable rates based on Wall Street Journal Prime or other identifiable bases while others carry fixed rates with terms out to 15 years. Most new variable rate originations include minimum start rates and/or floors.

For the three months ended June 30, 2012, Bankshares held one security in its trading portfolio with an average balance of $430 thousand, compared to $745 thousand for the three months ended June 30, 2011. The trading security interest income for the three months ended June 30, 2012 was $9 thousand compared to $12 thousand for the three months ended June 30, 2011. The reduction in average trading securities reflects management’s business strategy to eliminate the trading securities portfolio as Bankshares repositioned the balance sheet and led to the reduction in the associated interest income. At June 30, 2012, the carrying value of the security was $300 thousand.

Investment securities averaged $108.4 million for the quarter ended June 30, 2012 compared to $119.3 million for the same quarter in 2011. Investment securities income (on a fully tax equivalent basis) was $334 thousand for the three months ended June 30, 2011 compared to $1.2 million for the three months ended June 30, 2011. The tax equivalent average yield on investment securities for the three months ended June 30, 2012, was 1.24% compared to 4.01% for the three months ended June 30, 2011. The reduction in the average balance of the investment securities portfolio reflects management’s targeted efforts to strategically restructure our balance sheet in anticipation of the merger during 2011 that led to shifts in our investment portfolio mix, the reduction in the portfolio and the reduction in the overall yield. During the second quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities which impacted the yield on the portfolio. When repayments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield.

Short-term investments in federal funds sold contributed $24 thousand to interest income in the three month period ended June 30, 2012, compared to $12 thousand for the same period in 2011. The average balance for the three months ended June 30, 2012 was $14.9 million, a $6.0 million increase from the prior year average balance of $8.9 million.

The average balance of cash and due from banks was $40.9 million and $22.9 million for the three months ended June 30, 2012 and 2011, respectively.

Total average interest earning assets yielded 4.28% for the three months ended June 30, 2012 compared to the yield of 5.15% for the same period in 2011. Total interest income (on a fully tax equivalent basis) was $4.5 million for the three months ended June 30, 2012 compared

44

to $5.8 million for the three months ended June 30, 2011. As discussed above, interest income decreased in the second quarter of 2012 compared to the second quarter of 2011 due to the smaller average loans and securities balances, which are a product of Bankshares’ strategy to reposition its balance sheet, and lower yields generated by Bankshares’ interest-earning assets in the low interest rate environment.

Total average interest-bearing liabilities were $342.1 million in the second quarter of 2012, or $19.3 million lower than the second quarter of 2011 level of $361.4 million. A key driver of the decline was the decrease in average time deposits. The average balance of time deposits for the second quarter of 2012 was $182.7 million compared to the second quarter of 2011 average balance of $201.9 million, a decrease of $19.2 million. Interest expense for all interest-bearing liabilities amounted to $1.2 million for the three months ended June 30, 2012 compared to $1.4 million for the three months ended June 30, 2011, or a decrease of $245 thousand. The average cost of interest-bearing liabilities for the second quarter of 2012 was 1.41% or 20 basis points lower than the second quarter of 2011 level of 1.61%. The lower interest rate environment allowed for competitive repricing of interest bearing demand accounts, money market accounts, savings accounts and title client based time deposits. The benefits of the repricing are seen in the lower time deposit cost of 1.52% during the second quarter of 2012 compared to 1.93% during the same period of 2011.

As of June 30, 2012, the brokered certificate of deposit portfolio carried an average coupon rate of 1.22% compared to an average coupon rate of 1.93% at June 30, 2011. When maturing wholesale deposits mature and are replaced, Bankshares is able to secure new brokered deposits at lower rates.

Non-interest bearing demand deposits averaged $93.5 million for the second quarter of 2012, $2.5 million more than the second quarter of 2011 level of $91.0 million. This increase is due to the cyclical fluctuation in the title and escrow customer business.

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Average Balances, Interest Income and Expense and Average Yield and Rates⁽¹⁾

	Six Months Ended June 30,
	2012								2011
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate 1			Balance			Expense		Rate 1
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans (2)	$	297,570		$	8,272		5.57	%	$	322,986		$	9,100		5.68	%
Trading securities		499			18		7.23	%		1,283			45		7.07	%
Investment securities		113,473			660		1.17	%		129,970			2,542		3.94	%
Federal funds sold		15,065			39		0.52	%		7,723			22		0.57	%
Total interest earning assets		426,607			8,989		4.23	%		461,962			11,709		5.11	%
Non-interest earning assets:
Cash and due from banks		29,784								21,099
Premises and equipment		1,325								1,592
Other real estate owned (OREO)		4,084								4,477
Other assets		10,417								17,540
Less: allowance for loan losses		(5,117	)							(5,432	)
Total non-interest earning assets		40,493								39,276
Total Assets	$	467,100							$	501,238
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	43,722		$	57		0.26	%	$	42,242		$	58		0.28	%
Money market deposit accounts		16,206			61		0.75	%		24,849			94		0.76	%
Savings accounts		4,210			2		0.10	%		3,332			4		0.24	%
Time deposits		186,216			1,441		1.55	%		199,960			1,968		1.98	%
Total interest-bearing deposits		250,354			1,561		1.25	%		270,383			2,124		1.58	%
FHLB advances(3)		45,219			536		2.38	%		41,132			515		2.52	%
Other borrowings		48,312			337		1.40	%		63,572			325		1.03	%
Total interest-bearing liabilities		343,885			2,434		1.42	%		375,087			2,964		1.59	%
Non-interest bearing liabilities:
Demand deposits		90,085								89,505
Other liabilities		2,420								2,544
Total liabilities		436,390								467,136
Shareholders’ Equity		30,710								34,102
Total Liabilities and Shareholders’ Equity	$	467,100							$	501,238
Interest Spread (4)							2.81	%							3.52	%
Net Interest Margin (5)				$	6,555		3.08	%				$	8,745		3.82	%

⁽¹⁾  The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate.

⁽²⁾ The Bank had average non-accrual loans of $11.0 million and $8.2 million for the first six months of 2012 and 2011, respectively. The 2012 and 2011 interest income on non-accrual loans excluded from the loans above was $355 thousand and $311 thousand, respectively.

⁽³⁾ The Bank had two FHLB advances during the periods presented: a $15.0 million floating rate advance accounted for on a cost basis and a $25.0 million par value fixed rate advance accounted for a fair value basis. The average fair value of the fixed rate FHLB advance for the first six months of 2012 and 2011 was $ 29.1 million and $26.1 million, respectively. As of June 30, 2012, the fair value of the fixed rate FHLB advance was $29.6 million.

⁽⁴⁾ Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.

⁽⁵⁾ Net interest margin is net interest income expressed as a percentage of average earning assets.

46

For the six months ended June 30, 2012, average loan balances were $297.6 million compared to $323.0 million for the same period in 2011, a decrease of $25.4 million. Interest income from loans was $8.3 million in the first six months of 2012 compared to $9.1 million in the same period of 2011, with the average yield decreasing to 5.57% from 5.68%. The lower average balance contributed $154 thousand and lower rates contributed $674 thousand to the $828 thousand decrease in interest income on loans.

For the six months ended June 30, 2012, Bankshares held one security in its trading portfolio with an average balance of $499 thousand, compared to $1.3 million for the six months ended June 30, 2011. The trading security interest income for the six months ended June 30, 2012 was $18 thousand compared to $45 thousand for the six months ended June 30, 2012. The reduction in average trading securities reflects management’s business strategy to eliminate the trading securities portfolio as Bankshares repositions the balance sheet and led to the reduction in associated interest income. At June 30, 2012, the carrying value of the security was $300 thousand.

Investment securities averaged $113.5 million for the six months ended June 30, 2012 compared to $130.0 million for the same period in 2011. Investment securities income was $660 thousand for the six months ended June 30, 2012 compared to $2.5 million for the six months ended June 30, 2011. The average tax equivalent yields on investment securities for the six months ended June 30, 2012 and 2011 were 1.17% and 3.94% respectively. The reduction in average investment securities reflects management’s targeted efforts to strategically restructure our balance sheet in anticipation of the merger during 2011 led to shifts in the portfolio mix and reduction the investment portfolio’s balance. During the second quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities which impacted the yield on the portfolio. When repayments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield.

Short-term investments in federal funds sold contributed $39 thousand to interest income in the six month period ended June 30, 2012 compared to $22 thousand in the six month period ended June 30, 2011.

The average balance of cash and due from banks was $29.8 million and $21.1 million for the six months ended June 30, 2012 and 2011 respectively.

Total average earning assets yielded 4.23% for the six months ended June 30, 2012 or 88 basis points lower than the yield of 5.11% for the same period in 2011. Total interest income (on a fully tax equivalent basis) was $9.0 million for the six months ended June 30, 2012 compared to $11.7 million for the six months ended June 30, 2011.

Total average interest-bearing liabilities were $343.9 million in the first six months of 2012 or $31.2 million less than the first six months of 2011 level of $375.1 million. The average balance of time deposits was $13.7 million lower than the same period last year. For the six months ended June 30, 2012, interest expense was $2.4 million compared to $3.0 million for the six months ended June 30, 2011. The average cost of interest-bearing liabilities for the first six months of 2012 was 1.42% or 17 basis points lower than the 2011 level of 1.59%. Many of the larger wholesale deposits have matured and new brokered deposits were issued at lower interest rates.

47

As of June 30, 2012, the brokered certificate of deposit portfolio carried an average coupon rate of 1.22% compared to an average coupon rate of 1.72% at June 30, 2011.

Non-interest bearing demand deposits averaged $90.1 million for the first six months of 2012, or $580 thousand more than the first six months of 2011 level of $89.5 million. These balances are subject to seasonal changes.

The following table describes the impact on Bankshares’ tax equivalent interest income and expense resulting from changes in average balances and average rates for the periods indicated. The change in interest income due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

	Volume and Rate Analysis
	Six Months Ended June 30,
	2012 compared to 2011
	Change Due To:
	(Decrease)			Volume			Rate
	(Dollars in thousands)
Interest Earning Assets:
Loans	$	(828	)	$	(154	)	$	(674	)
Trading securities		(27	)		(19	)		(8	)
Investment securities		(1,882	)		(165	)		(1,717	)
Federal funds sold		17			29			(12	)
Total (decrease) in interest income		(2,720	)		(309	)		(2,411	)
Interest-Bearing Liabilities:
Interest-bearing deposits		(563	)		(82	)		(481	)
Borrowed funds		33			1			32
Total (decrease) in interest expense		(530	)		(81	)		(449	)
(Decrease) in net interest income	$	(2,190	)	$	(228	)	$	(1,962	)

Non-interest Income (Other Income). Non-interest income amounted to a negative $692 thousand during the three months ended June 30, 2012, a decrease of $1.5 million from $819 thousand of non-interest income for the same period of 2011.

Fair value adjustments on the FHLB advance and the trading security recorded for the three months ended June 30, 2012 resulted in a net loss of $772 thousand, compared to a net loss of $130 thousand for the same period in 2011, an increase of $642 thousand. The net loss of $772 thousand for the three months ended June 30, 2012 is primarily driven by a negative fair value adjustment of $672 thousand on the FHLB advance.

Non-interest Expense. During the three and six months ended June 30, 2012, Bankshares continued to make progress toward its strategic goal of optimizing profitability by decreasing its non-interest expenses.

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Non-interest expense for the three months ended June 30, 2012, amounted to $3.7 million compared to $3.8 million for the same period in 2011, a decrease of $57 thousand. The key components of non-interest expenses are salary and employee benefits, merger related expenses and professional fees. Salary and employee benefits expenses for the quarter ended June 30, 2012 were $1.2 million, compared to the second quarter of 2011 level of $1.4 million, a decrease of $256 thousand. Professional fees for the quarter ended June 30, 2012 were $608 thousand, compared to the second quarter of 2011 level of $473 thousand, an increase of $135 thousand. Merger expenses were $410 thousand for the three months ended June 30, 2012 with no such expense in 2011. Occupancy expenses and equipment expenses collectively totaled $668 thousand for the quarter ended June 30, 2012 compared to the 2011 level of $719 thousand, a decrease of $51 thousand.

For the six months ended June 30, 2012, non-interest expense was $7.3 million compared to $7.5 million for the 2011 period, a decrease of $189 thousand. Salaries and employee benefits expenses decreased by $475 million, occupancy and equipment expenses decreased by $55 thousand, and professional fees increased by $282 thousand. This increase in professional fees is due to the use of contract employees to fill open positions in the Information Technology and Accounting departments.

OREO expense was $95 thousand and $51 thousand for the six months ended June 30, 2012 and 2011 respectively. FDIC assessments decreased by $209 thousand, and there was a minimal increase of $88 thousand in other operating expenses. There were merger related expenses of $418 thousand.

Income Taxes. Bankshares recorded an income tax benefit of $71 thousand for the six months ended June 30, 2012. This income tax benefit was an increase of $444 thousand over the same period in 2011.

At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Its analysis reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was considered more likely than not, that Bankshares will not be able to realize all its deferred tax assets. As of June 30, 2012, the net deferred tax asset was $1.4 million, compared to $1.5 million as of December 31, 2011. The change in the net asset is due to changes relating to the FHLB advance and Available for sale securities.

49

Analysis of Financial Condition

Trading Security. At June 30, 2012 and December 31, 2011, the trading portfolio consisted of one PCMO security with a fair value of $300 thousand and $596 thousand respectively. The current effective portfolio yield is 5.43%.

The following table reflects Bankshares’ trading assets and effective yield on the instruments as of the dates indicated:

ALLIANCE BANKSHARES CORPORATION

Consolidated Statistical Information

Trading Asset Summary

	Trading Security
	June 30,					December 31,
	2012					2011
	Fair					Fair
	Value		Yield			Value		Yield
	(Dollars in thousands)
PCMO (1)	$	300		5.43	%	$	596		5.44	%
Totals	$	300		5.43	%	$	596		5.44	%

⁽¹⁾  As of June 30, 2012, trading security portfolio consisted of one PCMO instrument. This PCMO was rated AAA by at least one ratings agency on the purchase date. Currently the security has a rating below investment grade. The instrument is paying as agreed.

Investment Securities - Available for Sale.

Bankshares actively manages its portfolio duration and composition with changing market conditions and changes in balance sheet risk management needs. Additionally, the securities are pledged as collateral for certain borrowing transactions and repurchase agreements. The total amount of the investment securities accounted for under available-for-sale accounting was $103.3 million June 30, 2012 compared to $123.5 million at December 31, 2011. Targeted efforts to strategically restructure the balance sheet in anticipation of the merger with Eagle during 2011 led to shifts in the investment portfolio mix and reduced the investment securities portfolio’s balance at June 30, 2012.

On June 30, 2012, the investment portfolio contained callable and non-callable U.S. treasuries, U.S. government corporations and agencies securities, U.S Treasury securities, U.S. government collateralized mortgage obligations (CMOs), U.S. government mortgage backed securities (MBS), PCMOs, and municipal securities.

On June 30, 2012, U.S. treasuries and U.S. government corporations and agencies were $23.8 million or 23.0% of the portfolio, PCMOs, CMOs and MBS were $70.7 million, or 68.4% of the portfolio, and municipal securities were $8.9 million, or 8.6% of the portfolio.

The yield on the investment securities portfolio as of June 30, 2012 was 2.28%. During the second quarter of 2012, the Bank earned $334 thousand on the investment securities portfolio

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or an effective tax equivalent yield of 1.24%. The investment securities portfolio contains mortgage oriented products (CMO, PCMO, and MBS) and SBA securities. When prepayments on these instruments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield. During the second quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities. The U. S. treasuries matured during the first quarter and were re-invested in higher yielding securities.

	Investment Securities- Available-for-Sale
	June 30, 2012								December 31, 2011
	Fair					% of			Fair					% of
	Value		Yield			Total			Value		Yield			Total
	(Dollars in thousands)
U.S. treasuries	$	5,000		0.04	%		4.8	%	$	71,115		0.01	%		57.6	%
U.S. government corporations and agencies		18,785		2.55	%		18.2	%		9,751		2.63	%		7.9	%
U.S. government agency CMOs		49,925		2.12	%		48.3	%		31,038		2.16	%		25.1	%
U.S. government agency MBS		19,842		2.02	%		19.2	%		7,698		2.01	%		6.2	%
PCMOs		947		2.84	%		0.9	%		950		2.82	%		0.8	%
Municipal securities		8,854		4.47	%		8.6	%		2,911		5.06	%		2.4	%
Total Investment Securities Available-for-Sale	$	103,353		2.28	%		100	%	$	123,463		1.02	%		100.0	%

The following table summarizes the contractual maturity of the investment securities on an amortized cost basis and their weighted average yield as of June 30, 2012:

	Contractual Maturities of Investment Securities
	June 30, 2012
	(Dollars in thousands)
	Within One Year					After One Year but Within Five Years					After Five Years but Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Total (4,5)		Yield
Available-For-Sale Securities
U.S. treasuries		5,000		0.00	%		0		0.00	%		—		0.00	%	$	—		0.00	%	$	5,000		0.00	%
U.S. government corporations and agencies		—		0.00	%		—		0.00	%		—		0.00	%		18,629		2.51	%		18,629		2.51	%
U.S. government agency CMOs (1)		—		0.00	%		—		0.00	%		2,826		1.74	%		47,093		2.45	%		49,919		2.41	%
U.S. government agency MBS (1)		—		0.00	%		—		0.00	%		—		0.00	%		19,540		2.16	%		19,540		2.16	%
PCMOs(1)		—		0.00	%		—		0.00	%		—		0.00	%		943		2.82	%		943		2.82	%
Municipal securities (2)		—		0.00	%		—		0.00	%		1,268		3.60	%		7,464		4.24	%		8,732		4.15	%
Total Available-For-Sale Securities (3)	$	5,000		0.00	%	$	—		0.00	%	$	4,094		2.32	%	$	93,669		2.55	%	$	102,763		2.43	%

(1) Contractual maturities of CMOs, PCMOs and MBS are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any time.

(2) Municipal securities yield is on a fully tax equivalent basis assuming a 34% federal tax rate.

(3) Bankshares did not have any held-to-maturity securities as of June 30, 2012.

(4) Total above is amortized cost and does not include unrealized gain of $590 thousand.

(5) The fair value of the contractual maturities listed in the total above amounts to $103.4 million.

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Restricted Securities.

Bankshares’ securities portfolio contains restricted securities that are required to be held as part of the Company’s banking operations. These include stock of the Federal Reserve Bank, the FHLB and Community Bankers Bank (CBB). The following table summarizes the balances of restricted stock at the dates indicated:

	Restricted Stock
	June 30,		December 31,
	2012		2011
	(Dollars in thousands)
Federal Reserve Bank Stock	$	1,201	$	1,201
FHLB stock		2,743		3,365
CBB		206		206
Total Restricted Stock	$	4,150	$	4,772

Loan Portfolio.

In its lending activities, Bankshares seeks to develop substantial relationships with clients whose business and individual banking needs will grow with the Bank. Bankshares has made significant efforts to be responsive to the lending needs in the markets served, while maintaining sound asset quality and credit practices. Bankshares grants credit to commercial business, commercial real estate, real estate construction, residential real estate and consumer borrowers in the normal course of business. The loan portfolio net of discounts and fees was $293.5 million as of June 30, 2012, or $13.4 million lower than the December 31, 2011 level of $306.9 million.

The following table summarizes the composition of the loan portfolio by dollar amount and each segment as a percentage of the total loan portfolio as of the dates indicated:

	June 30, 2012					December 31, 2011
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Residential real estate	$	98,219		33	%	$	101,248		33	%
Commercial real estate		126,643		43	%		137,610		45	%
Construction/land		38,436		13	%		39,176		13	%
Commercial and industrial		28,700		10	%		26,820		9	%
Consumer - non real estate		1,473		1	%		2,022		1	%
Total Loans	$	293,471		100	%	$	306,876		100	%

Substantially all loans are initially underwritten based on identifiable cash flows and supported by appropriate advance rates on collateral, which is independently valued. Commercial loans are generally secured by accounts receivable, equipment and business assets.

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Commercial real estate is secured by owner-occupied or non-owner occupied commercial properties of all types. Real estate construction loans are supported by projects which generally require an appropriate level of pre-sales or pre-leasing. Generally, all commercial and real estate loans have full recourse to the owners and/or sponsors. Residential real estate is secured by first or second trusts on both owner-occupied and investor-owned residential properties.

As noted in the table above, loans secured by various types of real estate constitute a significant portion of total loans. Commercial real estate loans represent the largest dollar exposure. Substantially all of these loans are secured by properties in the Metropolitan Washington, D.C. area with the heaviest concentration in Northern Virginia and Fairfax County in particular. Risk is managed through diversification by sub-market, property type, and loan size. Risk is further managed by seeking investment property loans with multiple tenants and by emphasizing owner-occupied loans. The average loan size in this portfolio is $582 thousand as of June 30, 2012.

The table also shows a stable mix in the construction/land portion of the portfolio, which represented 13% of the portfolio at June 30, 2012 and December 31, 2011. The current levels of construction/land loans are a product of management’s efforts to de-emphasize this type of lending in recent years. New originations in this segment are being underwritten in the context of current market conditions and are particularly focused in sub-markets which appear to be the strongest in the region. Legacy loans, particularly in the land portion of this portfolio, have been largely converted to amortizing loans with regular principal and interest payments. Bankshares expects to see further reductions in its land exposure offset by potential increases in certain residential construction activities as market conditions improve.

Loans secured by residential real estate have declined by 3.0% since December 31, 2011, with reductions across most relevant loan classes to include both owner-occupied and investment residential categories. All loans in these categories represent loans underwritten by Bankshares, (Bankshares does not purchase loans in this portfolio) to customers with whom it has had direct contact in the local communities it serves. Bankshares believes that its underwriting criteria reflect current market conditions. The portfolio of first mortgage loans had an average size per housing unit of $331 thousand as of June 30, 2012. Bankshares’ subordinate trust loans averaged $99 thousand per property as of June 30, 2012. While Bankshares recognizes that the Metropolitan Washington, D.C. residential real estate market is in a nascent recovery, Bankshares believes that its current underwriting standards, its emphasis on serving the sub-markets it knows, the granularity of its portfolio, and the continued reduction of its subordinate trust portfolio represent the appropriate risk management strategies for this portfolio.

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The following table presents the maturities or repricing periods of selected loans outstanding at June 30, 2012:

	As of June 30, 2012
	One Year or Less		After One Year Through Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial and industrial	$	18,739	$	8,725	$	1,236	$	28,700
Construction/land		24,711		10,657		3,068		38,436
Total	$	43,450	$	19,382	$	4,304	$	67,136
Loans with:
Fixed rates	$	65,219	$	74,959	$	66,638	$	206,816
Variable rates		36,733		45,381		4,541		86,655
Total	$	101,952	$	120,340	$	71,179	$	293,471

Asset Quality

Bankshares segregates loans meeting the criteria for special mention, substandard, doubtful and loss from non-classified, or pass rated loans. Bankshares reviews the characteristics of each rating at least annually, generally during the first quarter of each year. The characteristics of these ratings are as follows:

Pass and watch rated loans (risk ratings 1 to 6) are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loans, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that the borrower will maintain this type of payment history. Routinely, acceptable personal guarantors support these loans.

Special mention loans (risk rating 7) have a specific defined weakness in the borrower’s operations and/or the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history is characterized by late payments. Bankshares’ risk exposure to special mention loans is mitigated by collateral supporting the loan. The collateral is considered to be well-managed, well maintained, accessible and readily marketable.

Substandard loans (risk rating 8) are considered to have specific and well-defined weaknesses that jeopardize the viability of Bankshares’ credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantors to pay the loan may not adequately protect Bankshares. There is a distinct possibility that Bankshares will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet Bankshares’ definition of an impaired loan unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable Bankshares will be unable to collect all amounts due.

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Substandard non-accrual loans have the same characteristics as substandard loans. However these loans have a non-accrual classification generally because the borrower’s principal or interest payments are 90 days or more past due.

Doubtful rated loans (risk rating 9) have all the weakness inherent in a loan that is classified as substandard but with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable based upon current existing facts, conditions, and values. The possibility of loss related to doubtful rated loans is extremely high.

Loss (risk rating 10) rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

The table below represents Bankshares’ loan portfolio by risk rating, classification, and loan portfolio segment as of June 30, 2012.

	Credit Quality Asset By Class As of June 30, 2012
	(Dollars in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total Loans
Risk Rating Number1	1 to 5		6		7		8		9		10
Commercial and industrial	$	25,590	$	850	$	250	$	2,010	$	—	$	—	$	28,700
Commercial real estate
Owner occupied		56,467		1,142		1,994		3,467		—		—		63,070
Non-owner occupied		55,232		4,788		1,745		1,808		—		—		63,573
Construction/land
Residential construction		13,673		800		—		—		559		—		15,032
Other construction & land		14,090		527		167		8,284		336		—		23,404
Residential real estate
Equity lines		27,853		136		99		150		—		—		28,238
Single family		56,437		2,744		2,727		2,645		—		—		64,553
Multifamily		5,428		—		—		—		—		—		5,428
Consumer - non real estate		1,269		22		182		—		—		—		1,473
Totals	$	256,039	$	11,009	$	7,164	$	18,364	$	895	$	—	$	293,471

¹  Internal risk ratings of pass (rating numbers 1 to 5) and watch (rating number 6) are deemed to be unclassified assets. Internal risk ratings of special mention (rating number 7), substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets.

As part of Bankshares’ normal credit risk management practices, it regularly monitors the payment performance of its borrowers. Substantially all loans require some form of payment on a monthly basis, with a high percentage requiring regular amortization of principal. However, certain HELOCs, commercial and industrial lines of credit, and construction loans generally require only monthly interest payments.

When payments are 90 days or more in arrears or when Bankshares determines that it is no longer prudent to recognize current interest income on a loan, Bankshares classifies the loan as non-accrual. The decrease in non-accrual loans from $13.6 million at December 2011 to $10.5 million at June 30, 2012 is attributed to the following factors: Six non-accrual/impaired

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loans totaling $838 thousand secured by residential real estate were charged off during the period, one loan for $962 thousand was secured by a residential property in Fairfax County, Virginia which was foreclosed into Bankshares’ OREO; and a commercial loan totaling $899 thousand secured by land in Fairfax County, Virginia was paid in full. Four other non-accrual loans continue to receive ongoing payments which are applied to reduce Bankshares’ carrying value for these loans.

From time to time, a loan may be past due 90 days or more but is in the process of collection and thus warrants remaining on accrual status. Bankshares had no such loans at June 30, 2012.

The following table sets forth the aging and non-accrual loans by class, as of June 30, 2012:

	Aging and Non-accrual Loans By Class As of June 30, 2012
	(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current 1		90-days Past Due and Still Accruing		Nonaccrual Loans
Commercial and industrial	$	1,349	$	403	$	268		2,020	$	26,680	$	—	$	1,196
Commercial real estate
Owner occupied		206		2,597		—		2,803		60,267		—		2,492
Non-owner occupied		4,426		—		—		4,426		59,147		—		—
Construction/land
Residential construction		—		—		559		559		14,473		—		559
Other construction & land		1,053		—		4,876		5,929		17,475		—		5,874
Residential real estate
Equity lines		599		14		150		763		27,475		—		150
Single family		1,783		264		—		2,047		62,506		—		264
Multifamily		—		—		—		—		5,428		—		—
Consumer -non real estate		9		—		—		9		1,464		—		—
Total loans	$	9,425	$	3,278	$	5,853	$	18,556	$	274,915	$	—	$	10,535

¹  For the purposes of this table only, loans 1-29 days past due are included in the balance of current loans.

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Allowance for Loan Losses

The allowance for loan losses is an estimate of losses that may be sustained in Bankshares’ loan portfolio. The allowance is based on two basic principles of accounting: (1) ASC 450-10-05, Contingencies which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310-10-35, Receivables which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows, or values that are observable in the secondary market and the loan balance.

The allowance for loan losses was $5.1 million at June 30, 2012, or 1.72 % of loans outstanding, compared to $5.4 million or 1.76% of loans outstanding, at December 31, 2011. Bankshares has allocated $1.6 million at June 30, 2012 compared to $2.3 million at December 31, 2011 for specific non-performing loans. For the first six months of 2012, Bankshares had net charge-offs of $788 thousand compared to net charge-offs of $746 thousand in the same period of 2011.

As part of its routine credit administration process, Bankshares engages an outside consulting firm to review its loan portfolio periodically. The information from these reviews is used to monitor individual loans as well as to evaluate the overall adequacy of the allowance for loan losses.

In reviewing the adequacy of the allowance for loan losses at each period, management takes into consideration the historical loan losses experienced by Bankshares, current economic conditions affecting the borrowers’ ability to repay, the volume of loans, trends in delinquent, non-accruing, and potential problem loans, and the quality of collateral securing loans. Loan losses are charged against the allowance when Bankshares believes that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. After charging off all known losses incurred in the loan portfolio, management considers on a quarterly basis whether the allowance for loan losses remains adequate to cover its estimate of probable future losses, and establishes a provision for loan losses as appropriate. Because the allowance for loan losses is an estimate, as the loan portfolio and allowance for loan losses review process continues to evolve, there may be changes to this estimate and elements used in the methodology that may have an effect on the overall level of allowance maintained.

The allowance for loan losses model is reviewed and evaluated each quarter by Bankshares management to insure its adequacy and applicability in relation to Bankshares’ past and future experience with the loan portfolio, from a credit quality perspective. Due to the extended nature of the current economic cycle, it was determined for the quarter ended June 30, 2012, that the Loss History component of the model [one of seven Factors considered, by Loan Class, in determining the appropriate value for ASC 450-10-05, Contingencies which require that losses be accrued when they are probable of occurring and estimable, also referred to as the general allowance] for loans secured by junior liens on owner-occupied residential properties should be extended from twelve (12) trailing quarters to twenty (20) trailing quarters. This change would more accurately reflect: (a) the past and recurring loss experience in these specific loan classes, (b) the length of the current economic cycle and its impact on these borrowers and, (c) the payment performance we can expect from these specific loan classes until an economic

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recovery has been better established. The impact of this change was a $284 thousand increase to the ASC 450-10-05 portion of the allowance for loan losses, the general allowance, as of June 30, 2012. Further, management believes that these changes to the model are consistent with Interagency Supervisory Guidance provided by the Board of Governors of the Federal Reserve System in regards to these specific loan classes.

Further, as a result of the reduction in loan balances from March 31, 2012 to June 30, 2012, coupled with the repayment in full of a non-accrual loan that carried $495 thousand impairment, a loan loss provision was not required for the second quarter ended June 30, 2012 in order to provide adequate funding of the loan loss reserve.

The following table represents an analysis of the allowance for loan losses for the periods presented:

	Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011			Six Months Ended June 30, 2011
	(Dollars in thousands)
Balance, beginning of period	$	5,393		$	5,281		$	5,281
Provision for loan losses		450			1,549			1,075
Chargeoffs:
Commercial and industrial		—			(10	)		(10	)
Construction/land		—			(404	)		(404	)
Residential real estate		(821	)		(1,044	)		(414	)
Commercial real estate		—			(173	)		(158	)
Consumer - non real estate		—			(71	)		—
Total chargeoffs		(821	)		(1,702	)		(986	)
Recoveries:
Commercial and industrial		—			116			116
Construction/land		—			—			—
Residential real estate		33			134			114
Commercial real estate		—			9			8
Consumer - non real estate		—			6			2
Total recoveries		33			265			240
Net (chargeoffs)		(788	)		(1,437	)		(746	)
Balance, end of period	$	5,055		$	5,393		$	5,610
Allowance for loan losses to total loans		1.72	%		1.76	%		1.75	%
Allowance for loan losses to nonaccrual loans		0.48	x		0.41	X		0.53	X
Allowance for loan losses to non-performing assets		32.68	%		29.58	%		35.08	%
Non-performing assets to total assets		3.05	%		3.55	%		2.98	%
Net chargeoffs to average loans		0.28	%		0.45	%		0.46	%

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The following table provides a breakdown of the allocation of the allowance for loan losses by loan type. However, management does not believe that the allowance for loan losses can be fragmented by category with any precision that would be useful to investors. As such, the entire allowance is available for losses in any particular category, notwithstanding this allocation. The breakdown of the allowance for loan losses is based primarily upon those factors discussed above in computing the allowance for loan losses as a whole. Because all of these factors are subject to change, the allocation and actual results are not necessarily indicative of the exact category of potential loan losses.

	Allowance for Loan Losses As of June 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Construction Land		Residential Real Estate			Consumer			Total
Allowance for Loan Losses:
Beginning Balance	$	210		$	1,508		$	1,808	$	1,826		$	41		$	5,393
Charge-offs		—			—			—		(821	)		—		$	(821	)
Recoveries		—			—			—		33			—		$	33
Provision		(56	)		(53	)		515		57			(13	)	$	450
Ending Balance:	$	154		$	1,455		$	2,323	$	1,095		$	28		$	5,055
Individually evaluated for impairment	$	48		$	17		$	1,486	$	98		$	—		$	1,649
Collectively evaluated for impairment	$	106		$	1,438		$	837	$	997		$	28		$	3,406
Loans:
Ending Balance:	$	28,700		$	126,643		$	38,436	$	98,219		$	1,473		$	293,471
Individually evaluated for impairment	$	1,196		$	2,492		$	6,433	$	414		$	—		$	10,535
Collectively evaluated for impairment	$	27,504		$	124,151		$	32,003	$	97,805		$	1,473		$	282,936

Non-performing Assets

Impaired Loans (Loans with a Specific Allowance Allocation). As of June 30, 2012, there were no loans with impairment allocations that were not also in non-accrual status.

Non-accrual Loans. A loan may be placed on non-accrual status when the loan is specifically determined to be impaired or when principal or interest is delinquent 90 days or more. Bankshares closely monitors individual loans, and relationship officers are charged with working with customers to resolve potential credit issues in a timely manner with minimum exposure to Bankshares. Bankshares maintains a policy of adding an appropriate amount to the allowance for loan losses to ensure an adequate reserve based on the portfolio composition,

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specific credit extended by the Bank, general economic conditions and other factors and external circumstances identified during the process of estimating probable losses in the Company’s loan portfolio.

On June 30, 2012, there was $10.5 million in loans on non-accrual status compared to $13.3 million at December 31, 2011. The $10.5 million non-accrual loan balance consists mostly of loans secured by residential and commercial real estate in the Northern Virginia area. The specific allowance for impaired loans as of June 30, 2012 is $1.6 million.

Non-accruals for the six months ended June 30, 2012 and 2011 were $10.5 million, Non-accrual loans continue to represent transactions originated in 2006 and prior.

Total Non-performing Assets. As of June 30, 2012, Bankshares had $15.5 million of non-performing assets on the balance sheet compared to $18.0 million as of December 31, 2011, a decrease of $2.5 million. This decrease is due to the repayment of several non-accrual lending relationships during the second quarter of 2012. The ratio of non-performing assets to total assets decreased to 3.05% as of June 30, 2012 from 3.55% as of December 31, 2011, a 50 basis points decrease.

The following table provides information regarding credit quality at the dates presented:

	June 30, 2012			December 31, 2011
Credit Quality Information	(Dollars in thousands)
Non-performing assets:
Non-accrual loans		10,535			13,264
OREO		4,031			3,748
Loans past due 90 days and still accruing		—			—
Troubled debt restructurings		900			956
Total non-performing assets	$	15,466		$	17,968
Specific reserves associated with impaired loans	$	1,649		$	2,271
Non-performing assets to total assets		3.05	%		3.55	%

Specific Reserves. As of June 30, 2012, Bankshares had $1.6 million in specific reserves for non-performing loans, compared to $2.3 million at December 31, 2011.

Other Real Estate Owned (OREO). As of June 30, 2012, Bankshares had $4.0 million classified as OREO on the balance sheet, compared to $3.7 million as of December 31, 2011. The OREO balance includes $1.1 million which relates to residential acreage in the Winchester, Virginia area, $879 thousand which relates to residential building lots in Woodstock, Virginia, and $720 thousand which relates to a farm property in Charles Town, West Virginia, and $963 thousand which relates to residential property in Northern Virginia. The remainder is made up of five additional properties totaling $353 thousand at June 30, 2012.

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The table below reflects the OREO activity in the periods presented:

	Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011
	(Dollars in thousands)
Balance, beginning of period	$	3,748		$	4,627
Properties acquired at foreclosure		963			434
Sales of foreclosed properties		(651	)		(959	)
Valuation adjustments		(29	)		(354	)
Balance, end of period	$	4,031		$	3,748

Deposits. Bankshares seeks deposits within its market area by offering high-quality customer service, using technology to deliver deposit services effectively and paying competitive interest rates. A significant portion of its client base and deposits are directly related to home sales and refinancing activity, including those from title and escrow agency customers.

At June 30, 2012, the deposit portfolio was $382.2 million, an increase of $1.8 million compared to the December 31, 2011 level of $380.4 million. The average cost of interest-bearing deposits was 1.25% for the six months ended June 30, 2012, or 33 basis points less than the six months ended June 30, 2011 average cost of 1.58%. As key interest rates declined over the past year, Bankshares repriced deposits at lower levels.

At June 30, 2012, Bankshares’ savings and NOW deposits were $66.6 million compared to $51.5 million at December 31, 2011, a $15.2 million increase. Average non-interest bearing demand deposits were $90.1 million for the six months ended June 30, 2012 compared to average non-interest bearing demand deposits of $89.5 million for the six months ended June 30, 2011, an increase of $580 thousand. The disparity between the June 30, 2012 balance of non-interest bearing deposits of $119.6 million and the average balance for the first six months of 2012 of non-interest bearing deposits of $90.1 million is directly related to seasonal and cyclical changes in the business activities of Bankshares’ title and escrow agency client base. Frequently, Bankshares’ title and escrow agency clients experience strong deposit growth around the end of a month or quarter.

Bankshares currently uses wholesale brokered deposits. Bankshares believes these types of funds offer a reliable stable source of funds for the Bank. Frequently the interest rates associated with wholesale brokered deposits are significantly lower than general customer rates in its markets. As market conditions warrant and balance sheet needs dictate, Bankshares may continue to participate in the wholesale brokered certificate of deposit market. As with any deposit product, Bankshares has potential risk for non-renewal by the customer and/or broker.

As of June 30, 2012, Bankshares had $110.4 million of wholesale brokered certificates of deposit which is $12.0 million lower than the December 31, 2011 level of $122.4 million. This decrease is due to management’s decision not to renew a certificate of deposit that matured in the second quarter.

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The following table shows the maturity distribution and coupon rate of wholesale brokered certificate of deposits at June 30, 2012:

Maturity Distribution of Brokered Deposits by Year
Maturity Year	Amount		Average Coupon Rate
(Dollars in thousands)
2012		9,954		1.10	%
2013		68,044		1.03	%
2014		22,423		1.59	%
2015		10,000		1.91	%
	$	110,421		1.22	%

Purchased Funds and Other Borrowings. Purchased funds and other borrowings include repurchase agreements (repos), which Bankshares offers to commercial customers and affluent individuals, federal funds purchased and treasury, tax and loan balances. The bulk of purchased funds are made up of the following four categories: customer repos, outstanding federal funds purchased, the Trust Preferred Capital Notes and FHLB advances. Customer repos amounted to $40.4 million at both June 30, 2012 and December 31, 2011. The Trust Preferred Capital Notes were $10.3 million for all periods presented.

	Purchased Funds Distribution
	Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011
	(Dollars in thousands)
At Period End
FHLB long-term advances, at fair value	$	29,559		$	29,350
FHLB advances		15,000			15,000
Customer repos		40,388			40,420
Purchased funds and other borrowings		—			—
Trust Preferred Capital Notes		10,310			10,310
Total at period end	$	95,257		$	95,080
Average Balances
FHLB long-term advances, at fair value	$	29,121		$	26,922
FHLB long-term advances		16,098			15,000
Customer repos		36,233			36,666
Purchased funds and other borrowings		1,769			11,773
Trust Preferred Capital Notes		10,310			10,310
Total average balance	$	93,531		$	100,671
Average rate paid on all borrowed funds, end of period		1.95	%		2.00	%
Average rate paid on all borrowed funds, during the period		1.87	%		1.65	%
Maximum outstanding during period	$	101,094		$	108,431

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Customer repurchase agreements are standard commercial banking transactions that involve a Bank customer instead of a wholesale bank or broker. Bankshares offers this product as an accommodation to larger retail and commercial customers and affluent individuals that request safety for their funds beyond the FDIC deposit insurance limits. Bankshares believes this product offers it a stable source of financing at a reasonable market rate of interest. Bankshares does not use or have any open repurchase agreements with any broker-dealers.

The FHLB is a key source of funding for the Bank. During the periods presented, Bankshares has used overnight advances (daily rate credit) to support its short-term liquidity needs. On a longer term basis, Bankshares augments its funding portfolio with its two FHLB advances, one of which is accounted for on a fair value basis, and one of which is accounted for on a cost basis.

At June 30, 2012 and December 31, 2011, the FHLB long-term advance accounted for on a fair value basis had a value of $29.6 million and $29.4 million respectively, and matures in 2021. The weighted average interest rate on the long-term FHLB advance accounted for on a fair value basis was 3.99% for all periods presented. The par value of the FHLB advance was $25.0 million at June 30, 2012 and December 31 2011.

At June 30, 2012, there was one FHLB advance accounted for on a cost basis. Bankshares entered into this floating rate advance in the first quarter of 2012 for $15.0 million. The advance matures in 2013 and the interest rate at June 30, 2012 was 0.198%. The weighted average interest rate for both FHLB advances at June 30, 2012 is 2.565%.

Fair Value of Liability Classified as Level 3. Beginning in the third quarter of 2008 and continuing through the present time, portions of the investment and debt markets have experienced a period of significant distress and dysfunction, and market values for certain financial instruments may not be readily available. Although certain portions of the investment and debt markets have improved, the fair value of an instrument is not the same as a liquidation value. In evaluating the fair value of funding instruments, Bankshares determined that the typical valuation techniques did not take into account the distressed investment and debt markets. As such, Bankshares considered other factors such as typical spreads for the instruments, conversion swaptions, swap curves, discounted cash flow models, previously observable non-distressed valuations and bond issuance rates and spreads for investment and non-investment grade instruments. As of June 30, 2012 and December 31, 2011, the fair value of the long-term FHLB advance accounted for on a fair value basis was $29.6 million and $29.4 million respectively.

The following table reflects the fair value of liabilities accounted for under ASC 820-10 as of the dates indicated:

	June 30, 2012							December 31, 2011
	Par Value		Fair Value		Yield			Par Value		Fair Value		Yield
	(Dollars in thousands)
FHLB long-term advance	$	25,000	$	29,559		3.99	%	$	25,000	$	29,350		3.99	%

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Liquidity. Bankshares specifically focuses on liquidity management to meet the demand for funds from its depositors and lending clients as well as expenses that it incurs in the operation of its business. Bankshares has a formal liquidity management policy and a contingency funding policy used to assist management in executing the liquidity strategies necessary for the Bank. Similar to other banking organizations, the Bank monitors the need for funds to support depositor activities and funding of loans. Bankshares’ client base includes a significant number of title and escrow businesses which have more deposit inflows and outflows than a traditional commercial business relationship. The Bank maintains additional liquidity sources to support the needs of this client base. As noted in the risk factors section of Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011 and the forward-looking statement section of this Quarterly Report on Form 10-Q, loss of relationship officers or clients could have a material impact on Bankshares’ liquidity position through a reduction in average deposits.

Bankshares’ Chief Financial Officer monitors its overall liquidity position daily. Bankshares can and will draw upon federal funds lines with correspondent banks, draw upon reverse repurchase agreement lines with correspondent banks and use FHLB advances as needed. Bankshares’ deposit customers frequently have lower deposit balances in the middle of the month, and balances generally rise toward the end of each month. As such, Bankshares uses wholesale funding techniques to support its balance sheet and asset portfolios, although its longer term plan is to increase deposits from its local retail and commercial deposits and maintain available wholesale funding sources as additional liquidity.

As of June 30, 2012, Bankshares had $74.8 million in cash and due from banks to support the business activities and deposit flows of its clients. The Bank maintains credit lines at the FHLB and other correspondent banks. At June 30, 2012, the Bank had a total credit line of $101.5 million with the FHLB with an unused portion of $61.5 million. Borrowings with the FHLB have certain collateral requirements and are subject to disbursement approval by the FHLB. At June 30, 2012, the Bank had $30.0 million in secured borrowing capacity and $4.0 million in unsecured borrowing capacity (both reverse repurchase agreements and federal funds purchased) from correspondent banks. As of June 30, 2012, the Bank did not have any outstanding borrowings from its correspondent banks. All borrowings from correspondent banks are subject to disbursement approval. The Bank is also eligible to borrow from the Federal Reserve Discount Window subject to the collateral requirements and other terms and conditions that may exist. In addition to the borrowing capacity described above, Bankshares and the Bank may sell investment securities, loans and other assets to generate additional liquidity. Bankshares anticipates maintaining sufficient liquidity to protect depositors, provide for business growth and comply with regulatory requirements.

Capital

Both Bankshares and the Bank are considered “well capitalized” under the risk-based capital guidelines adopted by the federal banking regulatory agencies. Capital adequacy is an important measure of financial stability. Maintaining a “well capitalized” regulatory position is paramount for each organization. Both Bankshares and the Bank monitor the capital positions to ensure appropriate capital for the respective risk profile of each organization, as well as sufficient levels to promote depositor and investor confidence in the respective organizations.

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Total shareholders’ equity was $27.1 million as of June 30, 2012 compared to the December 31, 2011 level of $28.1 million. The change in equity is primarily attributable to Bankshares’ net loss for the first six months of 2012 of $1.4 million and unrealized gains on securities of $351 thousand. Book value per common share was $5.31 as of June 30, 2012, compared to $5.50 as of December 31, 2011. The net unrealized gain on available-for-sale securities amounted to $387 thousand, net of tax, as of June 30, 2012, compared to a net unrealized gain on available-for-sale securities of $36 thousand, net of tax, as of December 31, 2011.

The following table reflects the components of shareholders equity on a book value per share basis.

	Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011			Six Months Ended June 30, 2011
	(Dollars in thousands)
Book value per share, beginning of the period	$	5.50		$	6.60		$	6.60
Net income (loss) per common share		(0.26	)		(1.17	)		0.15
Effects of changes in other comprehensive income (loss)1		0.07			0.07			0.25
Book value per share, end of the period	$	5.31		$	5.50		$	7.00

¹  Other comprehensive income represents the unrealized gains or losses associated with available-for-sale securities and related reclassification adjustments.

Payment of dividends is at the discretion of Bankshares’ Board of Directors and is subject to various federal and state regulatory limitations. It is Bankshares’ current policy to retain earnings to support its banking operations and its business risk profile. In addition, the terms of the Merger Agreement restrict Bankshares from declaring, setting aside or paying any dividends or other distributions on any class of its capital stock without the consent of WFBI while the Merger is pending.

On June 30, 2003, Bankshares’ wholly-owned Delaware statutory business trust (the Trust) privately issued $10.0 million face amount of the trust’s floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The Trust issued $310 thousand in common equity to Bankshares. Simultaneously, the Trust used the proceeds of the sale to purchase $10.3 million principal amount of Bankshares’ floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption “Trust Preferred Capital Notes.” Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest expense in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly

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periods. Beginning with the quarter ended September 30, 2009 and through June 30, 2012, Bankshares elected to defer the interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of June 30, 2012 the total amount of deferred and compounded interest owed under the indenture is $1.2 million. The base interest rate as of June 30, 2012 was 3.62% and as of December 31, 2011 was 3.70%.

All or a portion of Trust Preferred Capital Notes may be included in the regulatory computation of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up to 25% of shareholders’ equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At June 30, 2012 and December 31, 2011, $8.9 and $9.4 was considered Tier 1 capital. Management does not expect the restrictions on Tier 1 capital treatment of trust preferred securities that were enacted by the Dodd-Frank Act to impact the Tier 1 capital status of the Trust Preferred Capital Notes, as the Dodd-Frank Act’s restrictions generally do not apply to trust preferred securities issued prior to enactment by institutions with fewer than $15 billion in assets.

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Bankshares is considered “well capitalized” as of June 30, 2012 and December 31, 2011. The following table shows Bankshares’ capital categories, capital ratios and the minimum capital ratios currently required by bank regulators:

	Risk Based Capital Analysis
	June 30, 2012			December 31, 2011
	(Dollars in thousands)
Tier 1 Capital:
Common stock	$	20,440		$	20,440
Capital surplus		25,933			25,915
Retained (deficit)		(19,621	)		(18,269	)
Less: disallowed assets		—			—
Add: Qualifying Trust Preferred Securities		8,917			9,353
Total Tier 1 capital		35,669			37,439
Tier 2 Capital:
Qualifying allowance for loan losses		3,794			3,828
Qualifying Trust Preferred Securities		1,083			647
Total Tier 2 capital		4,877			4,475
Total Risk Based Capital	$	40,546		$	41,914
Risk weighted assets	$	301,660		$	304,676
Quarterly average assets	$	466,062		$	506,050

	June 30. 2012			December 31, 2011			Regulatory Minimum
Capital Ratios:
Tier 1 risk based capital ratio		11.8	%		12.3	%		4.0	%
Total risk based capital ratio		13.4	%		13.8	%		8.0	%
Leverage ratio		7.7	%		7.4	%		4.0	%

The regulatory risk based capital guidelines establish minimum capital levels for the Bank to be deemed “well capitalized.” The guidelines for “well capitalized” call for a leverage ratio of 5.0%, tier 1 risk based capital ratio of 6.0% and total risk based capital ratio of 10.0%. As of June 30, 2012, the Company had capital ratios of 7.7%, 13.4% and 11.8%, respectively, all in excess of the regulatory minimums to be “well capitalized.” The Bank and Bankshares continuously monitor the capital levels and the risk profile of the entities to determine if capital levels are sufficient for the risk profiles of the organization.

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The ratio of net income to average assets and average equity and certain other ratios are as follows for the periods indicated:

	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011
	(Dollars in thousands)
Average total assets	$	466,062		$	467,100		$	497,953
Average shareholders’ equity	$	27,911		$	30,710		$	34,778
Net (loss)	$	(919	)	$	(1,352	)	$	(5,958	)
Return on average assets (annualized)		-0.79	%		-0.58	%		-1.20	%
Return on average shareholders’ equity (annualized)		-13.21	%		-8.83	%		-17.13	%
Average shareholders’ equity to average total assets		5.99	%		6.57	%		6.98	%

Concentrations. Substantially all of Bankshares’ loans, commitments and standby letters of credit have been granted to customers located in the greater Washington, D.C. Metropolitan region, primarily in the Northern Virginia area. Bankshares’ overall business includes a significant focus on real estate activities, including real estate lending, title companies and real estate settlement businesses. As of June 30, 2012, commercial real estate loans were 43.2% and residential real estate loans were 33.5% of the total gross loan portfolio. In addition, a substantial portion of our non-interest bearing deposits is generated by our title and escrow company clients. As of June 30, 2012, the non-interest bearing deposits were 31.3% of total deposits. The impact of the title and escrow company concentration can create more volatility in our funding mix, especially during periods of declines in the real estate market, which can have an impact on organizational profitability.

Off-Balance Sheet Activities

Bankshares and the Bank enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, we have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

As of June 30, 2012, there are no material changes to the off-balance sheet arrangements disclosed in Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011.

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Recent Accounting Pronouncements

In January 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2011-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2011-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures became effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

In July 2011, the FASB issued ASU 2011-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2011. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures were required for periods beginning on or after December 15, 2011. Bankshares has included the required disclosures in its consolidated financial statements and the disclosures did not have a material impact on Bankshares’ consolidated financial statements.

In December 2011, the FASB issued ASU 2011-28, “Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption was not permitted. The adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

In December 2011, the FASB issued ASU 2011-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2011-29 became effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2011. Early adoption was permitted. The adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

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The SEC issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2009. All remaining filers were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. Bankshares complied with this rule beginning with the filing of its Form 10-Q for the quarter ended June 30, 2011.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 was March 28, 2011. The adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU were effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption was permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Bankshares has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements and the disclosures did not have a material impact on Bankshares’ consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU became effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption was not permitted. The adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

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In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards. The amendments became effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application was not permitted. The adoption of the new disclosures is included in Bankshares’ consolidated financial statements and did not have a material impact on Bankshares’ consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendments require that all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments became effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption was permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. Bankshares’ has complied with this ASU and the adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on Bankshares’ consolidated financial statements.

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In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on Bankshares’ consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset Liability Management (ALM) Risk Management. Bankshares engages a consulting firm to model its short-term and long-term interest rate risk profile. The model includes basic business assumptions, interest rates, repricing information and other relevant market data necessary to project Bankshares’ interest rate risk. The Board of Directors has established interest rate risk limits for both short-term and long-term interest rate exposure. On a periodic basis, management reports to the Board of Directors on Bankshares’ base interest rate risk profile and expectations of changes in the profiles based on certain interest rate shocks.

Net Interest Income Sensitivity (Short-term Interest Rate Risk). Bankshares’ ALM process evaluates the effect of upward and downward changes in market interest rates on future net interest income. This analysis involves shocking the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of Bankshares’ shorter-term interest rate risk. This analysis is accomplished by assuming a static balance sheet over a period of time with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under various rate scenarios. These assumptions include prepayments, the sensitivity of non-maturity deposit rates, and other factors deemed significant by Bankshares.

The ALM model results for June 30, 2012 are shown in the table below. Assuming an immediate upward shift in market interest rates of 100 basis points, the results indicate Bankshares would expect net interest income to decrease over the next twelve months by 1.8%. Assuming a shift downward of 100 basis points, Bankshares would expect net interest income to increase over the next twelve months by 2.0%.

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Economic Value of Equity (Long-term Interest Rate Risk). The economic value of equity process models the cashflows of financial instruments to maturity. The model incorporates growth and pricing assumptions to develop a baseline Economic Value of Equity (EVE). The interest rates used in the model are then shocked for an immediate increase or decrease in interest rates. The results of the shocked model are compared to the baseline results to determine the percentage change in EVE under the various scenarios. The resulting percentage change in EVE is an indication of the longer term repricing risk and options embedded in the balance sheet.

The table below shows as of June 30, 2012, ALM model results under various interest rate shocks:

	June 30, 2012
Interest Rate Shocks	NII			EVE
-200 bp		-1.5	%		-2.1	%
-100 bp		2.0	%		-0.6	%
+100 bp		-1.8	%		-2.4	%
+200 bp		-3.3	%		-7.1	%

All results above are within Bankshares’ current interest rate risk policy guidelines.

Interest Rate Gap. In addition to the NII and EVE models, management reviews Bankshares’ “static” gap position. The cumulative gap position within one year was $42.8 million, or 8.4% of total assets, at June 30, 2012. While this measurement technique is common in the financial services industry, it has limitations and is not Bankshares’ sole tool for measuring interest rate sensitivity. Bankshares does not believe this model accurately reflects its true short-term and long-term interest rate exposure. As an example, $98.7 million of the investment and trading securities at June 30, 2012 are classified as greater than five years due to the contractual maturity of the instruments. Investment and trading securities are easily marketed and can be liquidated in a short period of time. As a result, it is reasonable to consider a portion of, or perhaps all of, the $98.7 million of investment and trading securities as the “within three month” category, which further suggests a more balanced short-term interest rate position for Bankshares.

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The following table reflects our June 30, 2012 “static” interest rate gap position:

	June 30, 2012
	Maturing or Repricing
	Within 3 Months			4 - 12 Months			1 - 5 Years			Over 5 Years			Total
	(Dollars in thousands)
Interest earning assets:
Investment securities	$	5,000		$	—		$	—		$	98,353		$	103,353
Trading securities		—			—						300			300
Loans*		53,955			43,560			114,706			70,715			282,936
Interest-bearing deposits		72,849			—			—			—			72,849
Federal funds sold		22,880			—			—			—			22,880
Total interest earning assets		154,684			43,560			114,706			169,368			482,318
Interest-bearing liabilities:
Interest-bearing demand deposits		63,316			—			—			—			63,316
Money market deposit accounts		18,087			—			—			—			18,087
Savings accounts		3,327			—			—			—			3,327
Time deposits		21,132			52,652			104,131			—			177,916
Total interest-bearing deposits		105,862			52,652			104,131			—			262,646
FHLB long term advances, at fair value		—			—			—			29,559			29,559
FHLB long term advances		15,000			—			—			—			15,000
Customer repurchase agreements		40,388			—			—			—			40,388
Trust Preferred Capital Notes		10,310			—			—			—			10,310
Total interest-bearing liabilities		171,560			52,652			104,131			29,559			357,903
Period Gap	$	(16,876	)	$	(9,092	)	$	10,575		$	139,809		$	124,415
Cumulative Gap	$	(16,876	)	$	(25,968	)	$	(15,393	)	$	124,416		$	124,415
Cumulative Gap / Total Assets		-3.3	%		-5.1	%		-3.0	%		24.5	%		24.5	%

* Excludes nonaccrual assets of $10.7 million.

Interest Rate Risk Management Summary. As part of its interest rate risk management, Bankshares typically uses the trading and investment portfolio and its wholesale funding instruments to balance its interest rate exposure. There is no guarantee that the risk management techniques and balance sheet management strategies Bankshares employs will be effective in periods of rapid rate movements or extremely volatile periods. Bankshares believes its strategies are prudent and within its policy guidelines in the base case of its modeling efforts as of June 30, 2012.

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Item 4. Controls and Procedures

Bankshares has disclosure controls and procedures to ensure that the information required to be disclosed in the reports that Bankshares files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated and communicated to management, including Bankshares’ Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Bankshares’ management evaluated, with the participation of Bankshares’ Chief Executive Officer and Chief Financial Officer, the effectiveness of Bankshares’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, Bankshares’ Chief Executive Officer and Chief Financial Officer concluded that Bankshares’ disclosure controls and procedures are effective as of June 30, 2012.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that Bankshares’ disclosure controls and procedures will detect or uncover every situation involving the failure of persons within Bankshares to disclose material information required to be set forth in Bankshares’ periodic reports.

No changes in Bankshares’ internal control over financial reporting occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, Bankshares’ internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, Bankshares may be involved in litigation relating to claims arising in the normal course of its business. In the opinion of management, there are no pending or threatened legal matters which would have a material adverse effect on Bankshares’ financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. “Risk Factors” of Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. Risks and uncertainties identified in Bankshares’ Forward-Looking Statements contained in this Quarterly Report on Form 10-Q or those that are presently unforeseen could result in significant adverse effects on Bankshares’ financial condition, results of operations and cash flows. See “Forward-Looking Statements” contained in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

2.1	Agreement and Plan of Reorganization between Alliance Bankshares Corporation and Alliance Bank Corporation, dated as of May 22, 2002 (incorporated by reference to Exhibit 2.0 to Form 8-K12g-3 filed August 21, 2002).
2.4	Stock Purchase Agreement between Alliance Bank Corporation, as the seller, and Thomas P. Danaher and Oswald H. Skewes, as the purchasers, dated as of December 29, 2010 (incorporated by reference to Exhibit 2.4 to Form 10-K filed May 28, 2010).
2.5	Agreement and Plan of Reorganization, dated as of May 3, 2012, by and among WashingtonFirst Bankshares, Inc., Alliance Bankshares Corporation, and Alliance Bank Corporation (incorporated by reference to Exhibit 2.5 to Form 8-K filed May 8, 2012).
3.1	Articles of Incorporation of Alliance Bankshares Corporation (as amended July 6, 2006) (incorporated by reference to Exhibit 3.1 to Form 10-Q filed August 14, 2006).
3.2	Bylaws of Alliance Bankshares Corporation (amended and restated as of December 19, 2007) (incorporated by reference to Exhibit 3.2 to Form 8-K filed December 27, 2007).
31.1	Certification of CEO pursuant to Rule 13a-14(a).
31.2	Certification of CFO pursuant to Rule 13a-14(a).
32	Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350.
101	The following materials from Alliance Bankshares Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.

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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 thereunto duly authorized.

ALLIANCE BANKSHARES CORPORATION

(Registrant)

July 27, 2012	/s/ William E. Doyle, Jr.
Date	William E. Doyle, Jr.
	President & Chief Executive Officer
	(Principal Executive Officer)
July 27, 2012	/s/ Jean S. Houpert
Date	Jean S. Houpert
	Executive Vice President &
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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