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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005


o		TRANSITION REPORT UNDER 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		(I.R.S. Employer
incorporation or organization)		Identification No.)

14280 Park Meadow Drive, Suite 350, Chantilly, Virginia 20151
(Address of principal executive offices) (Zip Code)

(703) 814-7200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $4 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

Aggregate market value of Alliance Bankshares Corporation common stock held by non-affiliates as of June 30, 2005 was $65,076,173 based on the closing sale price of $15.25 per common share.

The number of shares of common stock outstanding as of March 27, 2006 was 4,811,050.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the registrant’s 2006 Annual Meeting of Shareholders to be held on June 28, 2006 (the “2006 Proxy Statement”) are incorporated by reference into Part III of this report.

PART I.

Item 1. Business

General

Alliance Bankshares Corporation (“Bankshares”) is a single-bank holding company headquartered in Chantilly, Virginia. We were incorporated in Virginia in May 2002 and acquired all of the shares of Alliance Bank Corporation in a statutory share exchange on August 16, 2002. Our primary asset is Alliance Bank Corporation.

Alliance Bank is a state-chartered commercial bank. Alliance Bank was incorporated in Virginia in July 1996 and opened on November 16, 1998. Alliance Home Funding, LLC, a wholly owned subsidiary of Alliance Bank, opened in July 2001 to pursue and execute our strategic initiative of engaging in mortgage banking. Alliance Virginia Capital Trust I, a Delaware statuary trust was formed in June 2003 for the purpose of issuing trust preferred capital securities. Alliance Insurance Agency, Inc., a wholly owned subsidiary of Alliance Bank, was formed in November 2005 through the acquisition of Danaher Insurance Agency on November 15, 2005.

We execute our business strategies via five distinct business lines: Commercial Banking, Retail Banking, Private Client Services, Mortgage Banking and Insurance.

COMMERCIAL BANKING
Lending Activities

Loan Portfolio. As part of our normal business activities, we are engaged in making loans to a broad range of customers, including small businesses and middle market companies, professionals, home builders and commercial real estate developers, consumers and others in our market area. We generally define our market area as Northern Virginia and the surrounding jurisdictions in the Washington D.C. metropolitan area. The loan portfolio increased 45% during the year, rising to $304.2 million at December 31, 2005, compared to $209.2 million at December 31, 2004.

We categorize our loans into 5 general classifications: Commercial, Commercial Real Estate, Real Estate Construction, Residential Real Estate, and Consumer. During 2005, we experienced significant growth in our total portfolio, with the strongest growth coming in our Commercial Real Estate, Real Estate Construction and Residential Real Estate categories.

Commercial Business Lending. Our commercial business lending category consists of general business credit in the form of lines of credit, revolving credit facilities, term loans, equipment loans, Small Business Administration Section 504 loans, stand-by letters of credit and other credit needs experienced by small and medium sized businesses. These loans are written for any sound business purpose including the financing of plant and equipment, meeting general working capital needs, or supporting business expansion. Commercial loans generally are secured by business assets, carry the personal guarantees of the principals and have floating rates tied to the Wall Street Journal (“WSJ”) prime rate. Our customers come from a wide variety of businesses, including government contractors, professional services, building trades and retailing. Commercial loans represented 12.2% of the loan portfolio or $37.1 million at December 31, 2005, an increase from $35.1 million at December 31, 2004, which was 16.8% of the portfolio. This compares to 24.7% or $29.3 million at December 31, 2003.

Commercial Real Estate Lending. As of December 31, 2005, commercial real estate loans were $107.2 million or 35.2% of the loan portfolio, compared to $71.4 million and 34.2% of the portfolio as of December 31, 2004. This compares to $37.4 million or 31.5% of the loan portfolio at December 31, 2003. The growth reflects the strong demand on the part of our customers to participate in the active real estate market in the Metro Washington area. These loans are typically secured by first trusts on office, warehouse, commercial condominiums or industrial space. These loans are roughly evenly divided into two categories: loans to commercial entities that will occupy most or all of the property (described as “owner occupied”) and loans for income producing properties.

In the case of owner-occupied loans, Alliance Bank is usually the primary provider of financial services for the company and/or the principals of these borrowers which allows us to further monitor the quality of the ongoing cashflow available to service the loans we have made. While these loans are real estate secured, we believe that as a portfolio, these loans are less subject to the normal real estate cycles because of the fact that the underlying businesses are the borrowers and they don’t compete for rental space in times of market over-supply. Loans in this category are generally amortizing over 15-25 year periods and carry adjustable rates which reset every 1 to 5 years, indexed against like-maturity Treasury instruments.

Commercial real estate loans made on income producing properties are made on generally the same terms and conditions as owner-occupied loans. Underwriting guidelines generally require borrowers to contribute cash equity that results in an 80% loan-to-value ratio on owner-occupied properties and an 75% loan-to-value ratio on investment properties. Exceptions to these guidelines are infrequent and are justified based on other credit factors.

Real Estate Construction Lending. The real estate construction category of our loan portfolio generally falls into two distinct categories: commercial construction which will convert to commercial real estate loans (the smaller group) and residential construction loans to builders for resale (the larger group and the faster growth part of the portfolio). Overall, our construction loan portfolio grew 126% over the past year, again reflecting a strong demand in the market for real estate financing. In the aggregate, this category totaled $87.0 million or 28.4% of our portfolio as of December 31, 2005, compared to $38.6 million and 18.4% of the portfolio as of December 31, 2004. This compares to $11.3 million or 9.5% of the loan portfolio at December 31, 2003.

Commercial construction loans are underwritten using the same standards as the commercial real estate loans described above, and in all cases Alliance Bank has agreed to make a longer term loan (we are our own “take-out”) upon completion of construction on the same terms and conditions described in the preceding discussion on commercial real estate loans. The interest rate during the construction period is generally floating and tied to the WSJ prime rate.

We specialize in making loans to residential home builders who are delivering 1 to 10 single family units per year. We advance money for the purchase of lots and also provide funds for construction. We operate in a market that is absorbing residential units at a very rapid pace and, when practical, we limit the number of speculative units that a builder can have at any particular time. Our construction loan monitoring process includes a complete appraisal including current market comparisons, periodic site inspections by a third party, regular interaction by the relationship managers and administrative oversight of the funds utilized in construction to ensure that construction is

progressing as planned and that there are always sufficient funds left in the loan to complete the project. We also make a strong effort to ensure that Alliance Home Funding has an opportunity to provide mortgages to the buyers of the homes built by our customers. In addition to evaluating the financial capacity of the borrower, we also require equity in each transaction that puts us in a range of 70-80% loan-to-value on an “as completed” basis. Substantially all the loans in this category carry a floating rate of interest tied to the WSJ prime rate.

While we are concerned about any future decline in the sustainability the overall economic activity in our area or any increase in the level of interest rates, either or both of which could adversely impact demand for housing, we believe that the healthy market for residential housing will continue into 2005 and 2006, albeit at a somewhat slower pace. However, two important points are reflected in our portfolio. First, substantially all of our construction loans are on projects either in progress or which should be deliverable throughout 2006 and into the first quarter of 2007. The second point is that we are generally not involved in financing large acquisition and development projects which require longer periods of time to complete and carry the associated risks.

Residential Real Estate Lending. This portion of the loan portfolio grew 17% in 2005 over 2004, to $70.0 million and 23.0% of the portfolio from $59.8 million and 28.6%. The $70.0 million in this category consists of two different loan types: home equity loans (“HELOCs”, loans secured by secondary financing on residential real estate) which represent the most significant portion of the category and first mortgage loans secured by single family residences not held for sale through Alliance Home Funding.

Alliance Bank has been an active HELOC lender since its inception. This portfolio is attractive to us for a number of reasons: relationship-based, secured, granular, floating rate. We have typically not competed against the “teaser rate” offerings and the “no closing costs” deals often seen in the market. We rely on our strong relationships with realtors, mortgage companies, including Alliance Home Funding, and others involved in the real estate markets to grow this business line. We underwrite each loan by considering the borrower’s capacity to service the debt, the loan-to-value ratio (typically 75-90%), the credit and employment history of the borrower, as well as their overall financial condition. Substantially all of these loans are priced at or above the WSJ prime rate and float on a daily basis. While our loans generally have a revolving period of 15 years followed by a 15 year amortization (30 years total), our experience is that, similar to first mortgages, the actual expected maturity of an individual loan is much shorter. The average principal balance on a HELOC is less than $73,000.

Residential first mortgage loans carried on the Alliance Bank’s books result from two distinct activities. First, we have a group of business customers who are active in the acquisition and remodeling of existing single family residential property. These loans, secured by first deeds of trust, are generally made under annually reviewed lines of credit which outline the terms and conditions of each individual advance. Each advance generally has a maturity of less than 1 year and carries a floating rate of interest tied to the WSJ prime rate. Loan to value ratios are maintained at 80% or less. Our customers buy these properties in the ordinary course of their business either directly from sellers or as part of a foreclosure process. They then invest their own money along with our loan to restore the property to a fully marketable condition. These loans in many respects are similar to regular residential construction loans. We also find the granularity of these loans to be attractive, with average outstandings per property under $300,000.

The second group in this category are loans secured by first trusts on residential property to owners. Our preference is always to originate first trusts through Alliance Home Funding for sale. However, there are times when business circumstances justify making a first mortgage loan in our regular portfolio. These situations include loans to individuals (a) who for one reason or another do not find mortgage products in the market to fit their needs and who maintain substantial non-lending relationships with us that make these loans attractive to us, or (b) loans made under terms and conditions that we believe will be saleable in the near term. Our approach to these loans is reactive, that is, we consider such requests in order to be a full service financial institution but we do not actively market this product. The maximum loan-to-value ratio in these loans is 90%, with most at lower advance rates. These loans usually either have a maturity of 5 years or less and carry interest rates that adjust with the WSJ prime rate, or look like a more 30-year traditional mortgage loan.

Consumer Installment Lending. This category constitutes the smallest part of our loan portfolio. These loans are small personal lines of credit and term loans. Loans are both secured (deposit accounts, brokerage accounts, automobiles, etc.) and unsecured and carry either fixed or floating rates. Our marketing of these products is generally reactive in nature, responding to requests that come to us primarily from the principals and/or employees of our commercial customers. The balance as of December 31, 2005 was $3.0 million compared to $4.0 million as of December 31, 2004.

Credit Risk Management. Our credit management vision is based on the belief that a sound shared credit culture, the application of well-designed policies and standards, and a long term view are the ingredients that will result in superior asset quality and consistent and acceptable profitability. Superior asset quality and consistent, acceptable profitability are keys to maximizing shareholder value as reflected in the price of our common stock. We will not sacrifice asset quality to meet growth objectives, nor permit opportunities to lead to concentrations of risk that are inappropriate or which contain excessive risk. We employ a number of business processes to effectively manage the risk in our loan portfolio. These include the loan underwriting and approval process, our exposure management process, our loan management process and the independent loan review process. While no set of processes or procedures can eliminate the possibility of loss, we believe that each of these items contributes to the quality of our loan portfolio.

Loan Underwriting and Approval Process. Loan requests are developed by our relationship managers who work in direct contact with our customers. Relationship managers are responsible for understanding the request and making an initial evaluation as to whether the request is consistent with our underwriting standards and risk tolerance. They are then responsible for gathering all pertinent information necessary to fully evaluate the request and the risks associated with the customer’s need. Depending on the complexity of the transaction, additional support is provided by a credit analyst who is responsible for providing an independent analysis of the financial strength of the borrower and the underlying credit-worthiness of the transaction.

We utilize both a signature system and a committee system for approving loans. Relationship managers are given credit authority commensurate with their experience and demonstrated knowledge and ability. The maximum individual authority of any relationship manager is $200,000. Loans from $200,000 to $1,000,000 require a second signature of either the President or Chief Credit Officer.

Loans in excess of $1,000,000 are considered by our management loan committee, which consists of the senior relationship managers, the President and the Chief Credit Officer. Loans greater than our self-imposed “house limit” (equal to approximately 80% of our legal limit) and loans that contain policy exceptions require approval of Directors’ Loan Committee. In determining the actual level of required approval, all direct and indirect extensions of credit to the borrower are considered.

Exposure Management Process. A key factor in developing the portfolio relates to the size of individual requests and the concentration of exposure in individual borrowers and their related interests, as well as product or industry concentrations. We try to address all of these issues in our approval process. While we have regulatory guidelines for maximum loans and concentrations, our policy is to use lower limits to prudently manage our business. For example, our largest total one-borrower exposures share two important characteristics: (1) they are measurably below our legal lending limit and (2) they are spread over multiple activities of the particular sponsor. Our goal is to ensure that no one borrower or event can represent a major risk to the Bank.

We utilize a 10-point rating system for our commercial and real estate credit exposures. The vast majority of our loans fall into the middle range of risk ratings and carry what we consider to be ordinary and manageable business risk. A risk rating is assigned during the underwriting process and is confirmed through the approval process. This risk rating influences our decision about the overall acceptability of the loan given our overall portfolio risk and also may influence our decision regarding the sale of a participation in the loan.

We are an active seller of loans (participations out) as part of our exposure management process. We seek participants even for loans that we find acceptable and within our policy guidelines in order to spread the risk and maintain the capacity to handle future requests from the same borrower or sponsor.

At least semi-annually, management also recommends to the Bank board for its approval two documents: (1) Business Strategy by Credit Type and (2) Recommended Concentrations Limits by Credit Type. These documents are intended to provide guidance to all those involved in our lending process regarding our objectives as it relates to the diversification of the loan portfolio. The Business Strategy document provides clear and concise direction as it relates to each major loan category. A number of factors are considered which result in a recommendation to either expand, attract, maintain, shrink or disengage from a particular type of lending. At the present time, our business plans do not call for shrinking or disengaging from any category.

The Recommended Concentrations further define our desire to build an appropriately diversified loan portfolio. We consider the market opportunities, the overall risk in our existing loans, and our expectations for future economic conditions and how they together may impact our portfolio. We then establish guidelines for maximum amounts in each category. This is a relatively new process for us and we continue to refine our thinking and processes in this area.

Loan Management. For most of the consumer loans and smaller business loans that we make, we utilize a moderate management approach. As long as monthly payments are made in a timely manner, we spend only a nominal amount of time to oversee the portfolio. Past due reports are reviewed on a weekly basis and appropriate action is determined based on the level of delinquency.

Commercial and real estate loans require a much higher degree of attention. The primary responsibility for ensuring that loans are handled as agreed rests with the relationship manager, supported by the credit analyst and loan operations groups. We obtain and review regular financial reports from our borrowers to evaluate operating performance and identify early warning signs of increasing risk. Our culture encourages the early reporting of problems so that they can be addressed in a timely and manageable manner. Identification of increased risk results in an increased risk rating, more frequent management review and possible remediation to include more collateral, an increased interest rate to compensate for risk, or identification of alternate sources of repayment. Adversely rated credits are reviewed monthly with the Bank’s Board of Directors.

Independent Loan Review. The Board of Directors approves loan policies. Relationship managers originate loans. Committees approve loans. Administrators oversee loans. A critical aspect of credit risk management is the independent evaluation of all the processes that take a loan from origination to final repayment. We have employed the services of an independent company to assess our entire lending operation. In addition, auditors also examine the loan portfolio. They evaluate our underwriting process to ensure that we are doing an appropriate level of due diligence. We ask them to review the quality of individual loans to ensure that we have fairly described the risks in a particular credit. They are directed to evaluate whether we are administering loans in accordance with our policies and procedures.

Their work includes a review of delinquency reports for status and collection activity. They evaluate the remediation plans in place on all identified problem loans. Each loan that is chosen as part of the sample has the risk rating confirmed. They evaluate the adequacy of specific reserve allocations on impaired credits and the appropriateness of the overall allowance for loan losses.

We report the results of the independent loan review activities to the Bank’s directors, loan committee and to the Bank’s board of directors. We are not aware of any material differences between management, the board of directors and the independent loan review team regarding specific loans, loan policies or credit administration.

Lending Limit. At December 31, 2005, our legal lending limit for loans to one borrower was $8.2 million. As part of our risk management strategy, we maintain internal “house” limits below our legal lending limit. Our current house limit is 80% of our legal lending limit. When we receive customer requests in excess of our house or legal lending limit, we evaluate the credit risk under our normal guidelines. Approved transactions exceeding our lending limit are sold and funded by other banks. This practice allows us to serve our clients’ business needs as they arise.

Banking Products and Services

Our principal business is accepting deposits from the public and making loans and other investments. Deposits are our major source of funding, while loan products and investments serve as our major use of our funds. We are committed to providing high quality deposit products and loan products to our customers, and we have made significant investments in our core banking systems that support virtually all of our banking functions. Our deposit activities, loan products and investments and funding are described below.

Deposit Activities

Deposits are the major source of our funding. We offer a broad array of deposit products that include Demand, NOW, money market and savings accounts as well as certificates of deposit. We typically pay a competitive rate on the interest bearing deposits to garner our share of the market. As a relationship-oriented bank, we seek generally to obtain deposit relationships with our loan clients. As our overall

asset liability management process dictates, we may become more or less competitive in our deposit terms and interest rate structure. Additionally, we may use brokered deposits to augment Alliance Bank’s funding position (dollars and duration) as well as to support the funding needs of Alliance Home Funding.

We also plan to continue our focus on specialized customer services. We have made a special effort to obtain deposits from title and mortgage loan closing companies, which represent a substantial percentage of our non-interest bearing deposits. Through the use of proprietary software, enhanced customer service, and the most recent technology, we are able to deliver an array of services that are very attractive and affordable for title insurance agencies, many of which maintain significant account balances with us. Our growth strategy includes expanding the number of customers in this market segment by continuing to provide the highest quality of customer service and the latest technology devoted to this industry. Meeting the withdrawal needs of these customers requires that we maintain greater than normal short term liquidity and/or lines of credit.

RETAIL BANKING

We offer traditional retail loan and deposit products for our clients via our five bank business center locations. The locations have the characteristics of a traditional retail branch, (e.g. tellers, atm, CSR and a branch manager) and we view the retail operation as a tool to execute our core commercial and private client business strategies. We typically house commercial banking, mortgage banking, private client executives and wealth managers in the business banking centers. Our business strategy calls for strategically placed business centers in the greater Washington, D.C. metropolitan area.

PRIVATE CLIENT SERVICES

This line of business serves high net worth individuals, entrepreneurs, professionals and small business owners. Our team of professionals includes wealth management officers who have a variety of industry licenses such as a Series 7 licenses. These executives work closely to provide customized financial solutions for clients.

MORTGAGE BANKING

We diversified our core banking revenue stream with the addition of our mortgage banking unit, Alliance Home Funding, which opened in July 2001. Through Alliance Home Funding, we originate conforming and non-conforming home mortgages in the greater Washington, D.C. metropolitan area. As part of our overall risk management strategy, all loans are sold on a correspondent basis to major national mortgage banking or financial institutions, and servicing rights are sold with the loans. The corporate objective of Alliance Home Funding is to generate gains on sales of loans for Alliance Bank and to provide quality service to our client base.

In late 2004 through early 2005 a series of management changes occurred within Alliance Home Funding. Senior management of Alliance Home Funding revamped the operational activities of the organization to improve effectiveness and efficiency. The actions taken in 2005 have created a more stable operating platform. Financial success in mortgage banking is dictated by the size of the production staff and related sales production. In 2005, we experienced turnover in our mortgage origination staff. In late, 2005 we successfully recruited a team of mortgage bankers to augment our existing production sales staff.

Loan sale gains were $3.0 million in 2005, compared to $5.4 million in 2004. Alliance Home Funding originated $174.3 million in mortgage loans or $60.7 million less than the 2004 level of $235.0 million. The lower production coupled with base operational costs led to a pretax loss of $1.1 million in 2005 compared to a nominal loss in 2004.

Improving the financial performance of Alliance Home Funding will require a higher level of loan sale gains. The production levels are sensitive to changes in economic conditions and can suffer from decreased economic activity, a slowdown in the housing market or higher interest rates. In addition, we are directly impacted by the loss of key mortgage bankers. We continue to mitigate our risks by offering adjustable rate mortgage products which typically have lower interest rates, pursuing purchase money mortgage transactions, expanding our loan origination staff and focusing our efforts in diverse multicultural markets.

In addition, mortgage banking activities generally involve risks of loss if secondary mortgage market interest rates increase substantially while a loan is in the “pipeline” (the period beginning with the application to make or the commitment to purchase a loan and ending with the sale of the loan). Our policy is to reduce this interest rate risk by selling each mortgage loan when the borrower locks in the interest rate on the loan.

INSURANCE

In November 2005, Alliance Bank acquired Danaher Insurance Agency, which we renamed Alliance Insurance Agency, Inc. This full line insurance agency offers property and casualty insurance to small businesses, home, life and auto insurance along with a broad array of employee benefits. We believe the insurance product line is a natural adjunct to our core business operations. Additionally, this diversified revenue stream reduces the cyclical impact of other Alliance revenue streams.

Employees

As of December 31, 2005 we had 114 full-time and 1 part-time employees. None of our employees are covered by any collective bargaining agreements, and relations with our employees are considered good.

Location and Market Area

Our primary market is the greater Washington, D.C. metropolitan area, which includes the Northern Virginia counties of Fairfax, Prince William, Arlington, Fauquier, and Loudoun; the Northern Virginia cities of Alexandria, Manassas, Manassas Park, Fairfax, and Falls Church; the Maryland counties of Montgomery, Frederick, and Prince Georges; and the District of Columbia. We are located in Fairfax, Virginia, a key area within the Northern Virginia market. Our branches are in Fairfax County, Arlington County, and Prince William County. Our main banking office is located in the Fair Lakes area of Fairfax. We have additional offices in the City of Manassas Park, Reston, Ballston and Tysons Corner. Alliance Home Funding and Alliance Insurance Agency both serve a broad market in the greater Washington, D.C. metropolitan area. Our two mortgage origination offices are located in Fairfax, Manassas and Reston, and our insurance agency is located in Annandale. In addition to the offices for Alliance Bank, Alliance Home Funding and Alliance Insurance Agency, we also lease administrative space in Chantilly, Virginia. The Chantilly location serves as our corporate headquarters.

According to a study by The Center for Regional Analysis, an affiliate of George Mason University that conducts research and analytical studies on economic, fiscal and demographic issues related to the metropolitan Washington D.C. area, the greater Washington area is one of the wealthiest regions in the nation. It has a diverse private sector economy, with strong technology, international, business and tourism sectors, making it an ideal location for firms looking to gain national and global exposure. The median household income for the area was $71.1 thousand in 2004, which was a 10% increase from the median household income of $64.6 thousand in 2000. The unemployment rate for the area was 3.4% at October 31, 2005, compared to a national unemployment rate of 4.6%. In addition, according to a survey compiled by the FDIC reflecting June 30, 2005 information, total deposits in the metropolitan Washington, D.C. area were approximately $131.0 billion, up $11.2 billion from the June 30, 2004 amount. With the region’s population projected by The Center for Regional Analysis to increase from 5.9 million to 6.3 million by 2008, management believes the metropolitan Washington, D.C. area is poised to maintain its vibrant economy.

Competition

The banking business is highly competitive. We compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in our primary market area and elsewhere.

SUPERVISION AND REGULATION

Regulation of the Corporation

Bankshares must file annual, quarterly and other periodic reports with the Securities and Exchange Commission (“SEC”). Bankshares is directly affected by the corporate responsibility and accounting reform legislation signed into law on July 30, 2002, known as the Sarbanes-Oxley Act of 2002 (the “SOX Act”), and the related rules and regulations. The SOX Act includes significant additional disclosure requirements and corporate governance and other related rules. Bankshares has expended considerable time and money in complying with the SOX Act and expects to continue to incur additional expenses in the future.

Bank Holding Company Act

As a bank holding company, Bankshares is subject to regulation under the Bank Holding Company Act of 1956, as amended, and the examination and reporting requirements of the Board of Governors of the Federal Reserve System. As a state-chartered commercial bank, Alliance Bank and its subsidiaries are also subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions and regulation, supervision and examination by the Federal Reserve.

The Bank Holding Company Act (the “BHCA”) generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is closely related to banking or to managing or controlling banks. Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration

limits. Banks also are able to branch across state lines, provided certain conditions are met, including that applicable state laws expressly permit such interstate branching. Virginia permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based. Similarly, approval of the Virginia Bureau of Financial Institutions is required for certain acquisitions of other banks and bank holding companies. The Federal Reserve has jurisdiction to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company.

The Federal Reserve requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries. Bankshares would be compelled by the Federal Reserve to invest additional capital in the event Alliance Bank experiences either significant loan losses or rapid growth of loans or deposits.

Gramm Leach Bliley Act of 1999

The Gramm Leach Bliley Act (the “GLB Act”) allows a bank holding company or other company to declare and certify its status as a financial holding company, which will allow it to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve to determine by regulation what other activities are financial in nature, or incidental or complementary thereto.

In order for a bank holding company to qualify as a financial holding company, all of its depository subsidiaries must be well capitalized and well managed, and must meet their Community Reinvestment Act of 1977 (“CRA”) obligations. The bank holding company also must declare its intention to become a financial holding company to the Federal Reserve and certify that it meets the requirements.

The GLB Act also imposes customer privacy requirements on financial institutions. Financial institutions generally are prohibited from disclosing customer information to non-affiliated third parties, unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions must disclose their specific privacy policies to their customers annually. Upon making such disclosure, there is no specific restriction on financial institutions disclosing customer information to affiliated parties. Financial institutions must comply with state law, however, if it protects customer privacy more fully than federal law.

Although Bankshares could qualify to be a financial company, Bankshares does not currently contemplate seeking to become a financial holding company until it identifies significant specific benefits from doing so. The cumulative effect of the GLB Act and other recent bank legislation will cause us to expand our staff to handle the procedures required by this additional regulation. The increased staff costs will impact our profitability.

Capital Requirements

The Federal Reserve Board and the Federal Deposit Insurance Corporation (the “FDIC”) have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise. Under the risk-based capital requirements of these federal bank regulatory agencies, the Corporation and the Bank are required to maintain a minimum ratio of total capital to risk-

weighted assets of at least 8 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of at least 4 percent. At least half of the total capital must be Tier 1 capital, which includes common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles and other adjustments. The remainder may consist of Tier 2 capital, such as a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments), other qualifying preferred stock and a limited amount of the general loan loss allowance. At December 31, 2005, the total capital to risk-weighted asset ratio of the Corporation was 17.0% and the ratio of the Bank was 14.9%. At December 31, 2005, the Tier 1 capital to risk-weighted asset ratio was 16.1% for the Corporation and 13.9% for the Bank.

In addition, each of the federal regulatory agencies has established leverage capital ratio guidelines for banking organizations. These guidelines provide for a minimum Tier l leverage ratio of 4 percent for banks and bank holding companies. At December 31, 2005, the Tier l leverage ratio was 10.0% for the Corporation and 8.6% for the Bank. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions must maintain capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Prompt Corrective Action

The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” under the risk-based and leverage capital guidelines discussed above. These terms are defined under uniform regulations issued by each of the federal banking agencies regulating these institutions. An insured depository institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities. As of December 31, 2005, Bankshares was considered “well capitalized.”

Payment of Dividends

As a bank holding company, we are a separate legal entity from Alliance Bank, Alliance Home Funding and Alliance Insurance Agency. Virtually all of our income results from dividends paid to us by Alliance Bank. Alliance Bank is subject to laws and regulations that limit the amount of dividends that it can pay. The amount of dividends that may be paid by Alliance Bank depends upon Alliance Bank’s earnings and capital position and is limited by federal and state law, regulations and policies. As a bank that is a member of the Federal Reserve System, Alliance Bank must obtain prior written approval for any dividend if the total of all dividends declared in any calendar year would exceed the total of its net profits for that year combined with its retained net profits for the preceding two years. In addition, Alliance Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of loans which are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, Alliance Bank is not permitted to add the balance of its allowance for loan losses account to its undivided profits then on hand. It may, however, net the sum of its bad debts as so defined against the balance of its allowance for loan losses account and deduct from undivided profits only bad debts so defined in excess of that account. In addition, the Federal Reserve is authorized to determine under

certain circumstances relating to the financial condition of a bank that the payment of dividends would be an unsafe and unsound practice and to prohibit payment thereof. The payment of dividends that deplete a bank’s capital base could be deemed to constitute such an unsafe and unsound banking practice. The Federal Reserve has indicated that banking organizations generally pay dividends only out of current operating earnings.

In addition, under Virginia law, no dividend may be declared or paid out of a Virginia bank’s paid-in capital. Alliance Bank may be prohibited under Virginia law from the payment of dividends if the Virginia Bureau of Financial Institutions determines that a limitation of dividends is in the public interest and is necessary to ensure Alliance Bank’s financial soundness, and may also permit the payment of dividends not otherwise allowed by Virginia law.

Regulation of Alliance Bank

Alliance Bank is a Virginia chartered commercial bank and a member of the Federal Reserve System. Its deposit accounts are insured by the Bank Insurance Fund of the FDIC up to the maximum legal limits of the FDIC and it is subject to regulation, supervision and regular examination by the Virginia Bureau of Financial Institutions and the Federal Reserve. The regulations of these various agencies govern most aspects of Alliance Bank’s business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowings, dividends and location and number of branch offices. The laws and regulations governing Alliance Bank generally have been promulgated to protect depositors and the deposit insurance funds, and not for the purpose of protecting shareholders.

Insurance of Accounts, Assessments and Regulation by the FDIC

The Federal Deposit Insurance Act (the “FDIA”) establishes a risk-based deposit insurance assessment system. Under applicable regulations, deposit premium assessments are determined based upon a matrix formed utilizing capital categories — “well capitalized,” “adequately capitalized” and “undercapitalized” — defined in the same manner as those categories are defined for purposes of “prompt corrective action” under Section 38 of the FDIA. Each of these groups is then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered healthy to those which are considered to be of substantial supervisory concern. The matrix results in nine assessment risk classifications, with rates ranging from 0.04% of insured deposits for well capitalized institutions having the lowest level of supervisory concern, to 0.31% of insured deposits for undercapitalized institutions having the highest level of supervisory concern. In general, while the Bank Insurance Fund of the FDIC maintains a reserve ratio of 1.25% or greater, no deposit insurance premiums are required. When the Bank Insurance Fund’s reserve ratio falls below that level, all insured banks are required to pay premiums. Payment of deposit premiums, either under current law or as the deposit insurance system may be reformed, will have an adverse impact on earnings.

Restrictions on Extensions of Credit and Investment in the Stock of Alliance Bankshares or its Subsidiaries

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, a holding company and any subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. A subsidiary

bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing, on the condition that: (a) the customer obtain or provide some additional credit, property or services from or to such bank other than a loan, discount, deposit or trust service; (b) the customer obtain or provide some additional credit, property or service from or to a holding company or any other subsidiary of a holding company; or (c) the customer not obtain some other credit, property or service from competitors, except for reasonable requirements to assure the soundness of credit extended.

Monetary and Fiscal Policy Effects on Interest Rates

Banking is a business that depends on interest rate differentials. In general, the differences between the interest paid by Alliance Bank on its deposits and its other borrowings and the interest received by it on loans extended to its customers and securities held in its investment portfolio constitute the major portion of Alliance Bank’s earnings. Thus, our earnings and growth are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve, which regulates the supply of money through various means including open market dealings in United States government securities. The nature and timing of changes in such policies and their impact on Alliance Bank cannot be predicted.

Branching and Interstate Banking

The federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997, that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Such interstate bank mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration limitations described in the Riegle-Neal Act.

The Riegle-Neal Act authorizes the federal banking agencies to approve interstate branching de novo by national and state banks in states which specifically allow for such branching. Virginia has enacted laws which permit interstate acquisitions of banks and bank branches and permit out-of-state banks to establish de novo branches.

Regulatory Enforcement Authority

Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Transactions with Affiliates

Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Section 23A(a) limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus, and (b) requires that all such transactions be on terms substantially the same, or at least as favorable, to the bank as those provided to a nonaffiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. Section 23B applies to “covered transactions” as well as sales of assets and payments of money to an affiliate. These transactions must also be conducted on terms substantially the same, or at least as favorable, to the bank as those provided to nonaffiliates.

Community Reinvestment Act

The CRA requires that federal banking regulators evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. To the best knowledge of Alliance Bank, it is meeting its obligations under this act.

Loans to Insiders

The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholder of banks. Under Section 22(h) of the Federal Reserve Act, any loan to a director, an executive officer or to a principal shareholder of a bank, or to entities controlled by any of the foregoing, may not exceed, together with all outstanding loans to such persons or entities controlled by such person, the bank’s loan to one borrower limit. Loans in the aggregate to insiders of the related interest as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total assets equal or exceed $100 million, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and principal shareholders of a bank or bank holding company, and to entities controlled by such persons, unless such loans are approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and with underwriting standards that are substantially the same as those offered in comparable transactions to other persons.

Other Regulations

Alliance Bank is subject to a variety of other regulations. State and federal laws restrict interest rates on loans, potentially affecting our income. The Truth in Lending Act and the Home Mortgage Disclosure Act impose information requirements on Alliance Bank in making loans. The Equal Credit Opportunity Act prohibits discrimination in lending on the basis of race, creed, or other prohibited

factors. The Fair Credit Reporting Act governs the use and release of information to credit reporting agencies. The Truth in Savings Act requires disclosure of yields and costs of deposits and deposit accounts. Other acts govern confidentiality of consumer financial records, automatic deposits and withdrawals, check settlement, endorsement and presentment, and reporting of cash transactions as required by the Internal Revenue Service.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks which occurred on September 11, 2001. The Patriot Act is intended to strengthen the ability of U.S. law enforcement agencies and the intelligence communities to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The cumulative effect of the Patriot Act requirements and requirements of other recent legislation affecting us will cause us to expand our staff to handle the procedures imposed by this legislation. The increased staff costs will impact our profitability.

Future Regulatory Uncertainty

Because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal regulation of financial institutions may change in the future and impact our operations. We fully expect that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

Internet Access to Corporate Documents

Information about Alliance Bankshares can be found on Alliance Bank’s website at www.alliancebankva.com. Under “Documents/SEC Filings” in the Investor Relations section of the website, Alliance 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. All such filings are available free of charge.

Item 1A. Risk Factors

We depend on the services of key personnel, and a loss of any of those personnel could disrupt our operations and result in reduced earnings. We are a customer focused and relationship driven organization. Our growth and success has been in large part driven by the personal customer relationships maintained by our executives. Although we have entered into employment contracts with our executive officers, we cannot offer any assurance that they and other key employees will remain employed by us. The loss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues and earnings.

The success of our future recruiting efforts will impact our ability to grow. The implementation of our business strategy will require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them. In addition, we are deploying resources to attract additional relationship officers and mortgage loan originators, but cannot guarantee that this investment of money and management time will be successful. The success of our recruiting efforts may impact our ability to grow and future profitability.

Because our mortgage banking revenue is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market or high interest rates may reduce our profits. The size and growth of Alliance Home Funding also creates risks for Bankshares. Our net income includes large amounts of gains on the sale of mortgage loans. Maintaining a high level of loan sale gains depends primarily on continuing to originate mortgage loans at similar volume levels. The production levels are sensitive to changes in economic conditions and can suffer from decreased economic activity, a slowdown in the housing market or higher interest rates. In addition, mortgage banking activities generally involve risks of loss if secondary mortgage market interest rates increase substantially while a loan is in the “pipeline” (the period beginning with the application to make or the commitment to purchase a loan and ending with the sale of the loan). Generally, any sustained period of decreased economic activity or higher interest rates likely would adversely affect our mortgage originations and, consequently, reduce our income from mortgage banking activities. As a result, these conditions may adversely affect our net income.

Our focus on commercial and real estate loans may increase the risk of credit losses, which would negatively affect our financial results. We offer a variety of loans including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in the greater Washington, D.C. metropolitan area. A downturn in this real estate market, such as a deterioration in the value of this collateral, or in the local or national economy, could adversely affect our customers’ ability to pay these loans, which in turn could adversely affect us. Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.

We may be adversely affected by economic conditions in our market area. Because our lending and other banking activities are concentrated in the greater Washington, D.C. metropolitan area, we will be affected by economic conditions in that market area. Changes in the local economy, particularly in government spending or the technology and communications businesses may influence the growth rate of our loans and deposits, the quality of our loan portfolio and loan and deposit pricing. A significant decline in economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and the demand for banking products and services generally could negatively affect our ability to collect loans and could otherwise have a negative effect on our financial condition and performance.

We have been effective in a specific market niche, which creates an industry concentration. We have made a special effort to obtain deposits from title and mortgage loan closing companies. These are monies held for short periods of time by title and mortgage loan closing companies pending the disbursement of funds in mortgage loan or mortgage loan refinancing transactions. The balances on deposit with us from these depositors tend to fluctuate greatly during any given month, depending on transaction scheduling and overall market conditions. These balances represent a substantial portion of our non-interest bearing deposits, which creates a real estate industry concentration. These deposits are subject to seasonal and cyclical market fluctuations and are particularly sensitive to slow real estate markets. In order to meet the withdrawal needs of these customers, we monitor our liquidity, investment securities and lines of credit on a constant basis. Because of this industry concentration in our deposits, we are exposed to liquidity and concentration risks attendant to changes in real estate markets, which could adversely impact our overall performance.

If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected. We maintain an allowance for loan losses that we believe is adequate to absorb any potential losses in our loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio and performance of our customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control and these future losses may exceed our current estimates. Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or that our allowance will be adequate in the future. Excessive loan losses could have a material adverse impact on our financial performance.

Federal and state regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our financial condition and results of operations.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry. The Northern Virginia and the greater Washington, D.C. metropolitan area in which we operate is considered highly attractive from an economic and demographic viewpoint, and is therefore a highly competitive banking and mortgage banking market. Our future growth and success will depend on our ability to compete effectively in this highly competitive financial services environment. We compete for loans, deposits, and investment dollars with numerous large, regional and national banks and other community banking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, and private lenders. Many competitors offer products and services which we do not and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured state-chartered banks, national banks and federal savings institutions. As a result, these nonbank competitors have certain advantages over us in accessing funding and in providing various services. The differences in resources and regulations may make it harder for us to compete profitably, reduce the rates that we can earn on loans and investments, increase the rates we must offer on deposits and other funds, and adversely affect our overall financial condition and earnings.

Our profitability depends on interest rates and changes in monetary policy may adversely impact us. Our profitability depends in substantial part on our net interest margin, which is the difference between the rates we receive on loans and investments and the rates we pay for deposits and other sources of funds. Our net interest margin depends on many factors that are partly or completely outside of our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. An increase in interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money. This may lead to an increase in our nonperforming assets or a decrease in loan originations, either of which could have a negative effect on our results of operations. In addition, periods of rising interest rates could have an adverse effect on home sales, mortgage refinancings and deposit costs. We try to minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk. Fluctuations in market rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

Item 1B. Unresolved Staff Comments

Bankshares has no unresolved comments from the SEC staff.

Item 2. Properties

We typically lease our branch and office locations. Our business model seeks to minimize the level of investment in buildings and facilities, thus we have not purchased any branch, production office or business office locations. In securing space, we are generally responsible for build out costs, furniture and fixtures, computers, telephones and bank specific equipment such as vaults, alarms and ATMs.

We believe a natural evolution of a community-focused bank is to expand the delivery channels via the branch network. We plan to take advantage of strategic opportunities presented to us via mergers and consolidation occurring in our marketplace. We may lease branches that are being closed by other banks. Additionally, we will pursue key market locations for new branch facilities.

The following table highlights our facilities:


Address	Type of Facility	Base Lease Expiration⁽¹⁾
14280 Park Meadow Drive Chantilly, Virginia	Current Corporate Headquarters⁽²⁾	October 2007

14200 Park Meadow Drive Chantilly, Virginia	Future Corporate Headquarters	July 2016

12735 Shops Lane Fairfax, Virginia	Main banking office, Full service branch, ATM	November 2008

11730 Plaza America Drive Reston, Virginia	Full service branch, ATM	August 2012


Address	Type of Facility		Base Lease Expiration⁽¹⁾
4501 North Fairfax Drive Arlington, Virginia		Full service branch, ATM	June 2013

8221 Old Courthouse Road Vienna, Virginia		Full service branch, ATM	October 2008

9150 Manassas Drive Manassas Park, Virginia		Full service branch, ATM	August 2004

9990 Lee Highway Fairfax, Virginia		Mortgage banking headquarters Mortgage banking office	March 2010

9200 Church Street Manassas, Virginia		Former mortgage banking office Subleased for remaining term	August 2005

1840 Michael Faraday Drive Reston, Virginia		Mortgage banking office	December 2008

4200 Evergreen Lane Annandale, Virginia		Insurance agency headquarters Insurance agency office	November 2008


⁽¹⁾		Office leases have one or more renewal options that may be exercised at our discretion subject to terms and conditions outlined in each specific lease. Note 13 of the Notes to Consolidated Financial Statements details the future minimum rental commitments.

⁽²⁾		Relocating in May 2006, sublease has been executed but is subject to landlord’s approval.

We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs. We use the internet, consistent with applicable regulatory guidelines, to augment our growth plans. We also use the internet to offer online account access, bill payment and commercial cash management. In addition, certain loan and deposit products may be offered from time to time on our website, as well as at our numerous physical locations.

Item 3. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising in the normal course of our business. In the opinion of management, final disposition of any pending or threatened legal matters will not have a material adverse effect on our financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2005.

PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed for quotation on the NASDAQ Capital Market (formerly called the NASDAQ SmallCap Market) on the NASDAQ Stock Market System under the symbol ABVA. As of March 27, 2006, we had 4,816,550 shares of common stock issued and outstanding, held by approximately 416 shareholders of record.

The high and low sales prices per share for our common stock for each quarter for the two years ended December 31, 2005, as reported by the NASDAQ Stock Market, are shown in the table below. During these periods, we did not issue any cash dividends.


	2005				2004
Quarter	High		Low		High		Low
First	$	17.38	$	15.03	$	19.80	$	17.51
Second		16.10		14.20		18.48		14.70
Third		16.93		15.00		15.48		14.53
Fourth		17.00		16.00		15.55		14.70

2004 – Common Stock Offering

On February 23, 2004, we issued 1,481,470 shares of common stock in a registered public offering at a price of $17.00 per share. Net proceeds after commissions but prior to other offering expenses were in excess of $23.9 million. A portion of the new capital was down streamed from Alliance Bankshares to the banking subsidiary, Alliance Bank. This additional capital is being used by the Bank to support anticipated increases in our loans and deposits as our business grows.

Dividend Policy

We have elected to retain all earnings to support current and future growth. We do not anticipate changing this policy for the foreseeable future. From time to time, we will consider a stock split in the form of a stock dividend in lieu of paying cash dividends. Our most recent stock split in the form of a stock dividend was issued to shareholders on September 29, 2003.

Our ability to distribute cash dividends will depend primarily on the ability of Alliance Bank to pay dividends to us. As a state bank and member of the Federal Reserve System, Alliance Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Furthermore, neither we nor Alliance Bank may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business.

Item 6. Selected Financial Data


	Selected Financial Information
	Year Ended December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands, except per share data)
Income Statement Data:
Interest income	$	28,929		$	19,151		$	14,617		$	10,187		$	6,477
Interest expense		10,501			6,852			5,407			3,471			2,811

Net interest income		18,428			12,299			9,210			6,716			3,666
Provision for loan losses		1,142			886			396			478			189
Non-interest income		3,514			6,181			8,774			4,356			1,000
Non-interest expense		15,048			13,963			12,102			7,333			3,563
Income taxes		1,694			864			1,497			839			151

Net income	$	4,058		$	2,767		$	3,989		$	2,422		$	763


Per Share Data and Shares Outstanding Data:⁽¹⁾

Basic net income	$	0.85		$	0.61		$	1.24		$	0.76		$	0.38
Fully diluted net income		0.80			0.57			1.14			0.74			0.37
Cash dividends declared		—			—			—			—			—
Book value at period end		10.10			9.73			5.97			5.54			4.33
Shares outstanding, period end		4,811,050			4,793,349			3,241,491			3,172,653			2,023,549
Average shares outstanding, basic		4,798,907			4,546,117			3,208,169			3,172,653			2,023,549
Average shares outstanding, diluted		5,101,552			4,873,081			3,504,369			3,284,333			2,064,630

Balance Sheet Data:

Total assets	$	611,485		$	479,720		$	357,048		$	280,625		$	144,820
Total loans, net of unearned discount		304,228			209,204			118,762			82,786			52,927
Total investment securities		228,791			209,141			175,099			131,085			61,546
Total deposits		461,178			355,691			276,739			215,966			107,602
Stockholders’ equity		48,611			46,622			19,355			17,568			13,721

Performance Ratios:

Return on average assets		0.71	%		0.63	%		1.16	%		1.23	%		0.76	%
Return on average equity		8.59	%		6.87	%		21.00	%		16.00	%		9.26	%
Net interest margin ⁽²⁾		3.51	%		3.10	%		3.07	%		3.88	%		3.89	%

Asset Quality Ratios:⁽³⁾

Allowance to period-end loans		1.12	%		1.10	%		1.22	%		1.29	%		1.15	%
Allowance to non-performing loans		1.87	X		1.77	X		3.58	X		N/A			N/A
Non-performing assets to total assets		0.30	%		0.27	%		0.13	%		N/A			N/A
Net charge-offs to average loans		0.01	%		0.02	%		0.01	%		0.03	%		0.02	%

Capital Ratios:

Tier I risk-based capital		16.1	%		21.5	%		15.0	%		12.3	%		17.1	%
Total risk-based capital		17.0	%		22.3	%		18.4	%		13.1	%		17.8	%
Leverage capital ratio		10.0	%		11.6	%		7.0	%		6.4	%		10.5	%
Total equity to total assets		7.9	%		9.7	%		5.4	%		6.3	%		9.5	%

⁽¹⁾		All share amounts and dollar amounts per share have been adjusted to reflect the three-for-two stock splits in the form of a stock dividend paid on October 24, 2001 and on September 29, 2003.

⁽²⁾		Net interest income divided by total average earning assets.

⁽³⁾		Non-performing assets consist of nonaccrual loans, restructured loans and foreclosed properties.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion is intended to assist in understanding and evaluating the financial condition and results of operations of Alliance Bankshares, Alliance Bank, Alliance Home Funding and Alliance Insurance Agency, on a consolidated basis. This discussion and analysis should be read in conjunction with Alliance Bankshares’ consolidated financial statements and related notes included in Item 8 of this report on Form 10-K.

FORWARD-LOOKING STATEMENTS

Some of the matters discussed below and elsewhere in this report include forward-looking statements. These forward-looking statements include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. The forward-looking statements we use 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:

	•		Loss of key production personnel;

	•		Fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuation and income and expense projections;

	•		Assumptions used within our ALM process and NII / EVE models;

	•		Adverse changes in the overall national economy as well as adverse economic conditions in our specific market areas within Northern Virginia and the greater Washington, D.C. Metropolitan region;

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

	•		Our use of technology or the use of technology by key competitors;

	•		Competitive factors within the financial services industry; and

	•		Changes in regulatory requirements and/or restrictive banking legislation.

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

We caution 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 we 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.

2005 Performance Highlights

	•		Assets were $611.5 million at December 31, 2005, an increase of $131.8 million (27.5%) from December 31, 2004.

	•		Total loans, net of unearned discount were $304.2 million at December 31, 2005, an increase of $95.0 million (45.4%) from December 31, 2004.

	•		Our investment portfolio was $228.8 million at December 31, 2005, an increase of $19.7 million (9.4%) from December 31, 2004.

	•		Deposits were $461.2 million at December 31, 2005, an increase of $105.5 million (29.7%) from December 31, 2004.

	•		Net income was $4.1 million at December 31, 2005, an increase of $1.3 million (46.7%) from December 31, 2004.

	•		Alliance Insurance Agency was formed in November 2005.

Executive Overview

Balance Sheet

December 31, 2005 compared to December 31, 2004. Total assets were $611.5 million as of December 31, 2005, an increase of $131.8 million over the December 31, 2004 level of $479.7 million. As of year end 2005, total loans were $304.2 million, loans held for sale were $5.9 million and investments were $228.8 million. These earning assets amounted to $576.4 million or 94.3% of total assets at year end 2005. The balance of the earning assets was overnight federal funds sold of $37.5 million.

The allowance for loan losses was $3.4 million or 1.12% of loans outstanding as of December 31, 2005. This compares to $2.3 million or 1.10% of loans outstanding as of December 31, 2004. (The ratios exclude loans held for sale.) There was one non-performing consumer loan of $204 thousand as of December 31, 2005, compared to no non-performing assets as of December 31, 2004. Impaired loans or those loans requiring a specific allocation within the allowance for loan losses amounted to $1.8 million as of December 31, 2005 compared to $1.3 million as of December 31, 2004. The specific allocation of the allowance for loan losses was $115 thousand as of December 31, 2005 and $161 thousand as of December 31, 2004.

Total deposits amounted to $461.2 million as of December 31, 2005, an increase of $105.5 million over the December 31, 2004 level of $355.7 million. This growth is attributable to the business building efforts of relationship officers, branch locations opened in mid to late 2003 and the use of brokered deposits to augment our natural deposit growth. Total demand deposits were $185.9 million as of December 31, 2005 compared to $128.3 million as of year end 2004. Demand deposits represent 40.3% of total deposits as of December 31, 2005.

We use customer repurchase agreements (“customer repos”) and wholesale funding from the Federal Home Loan Bank of Atlanta (“FHLB”) to support the asset growth of the organization. As of December 31, 2005, there were $37.7 million of customer repos outstanding or $7.8 million more than were outstanding at the end of 2004. The growth relates to additional customers garnered in 2005 as well as expansion of existing customer relationships. As of December 31, 2005, the organization had

$30.0 million in FHLB term advances outstanding, compared to $20.0 million as of December 31, 2004. The longer term FHLB advances are used as part of our overall Balance Sheet management strategy, which focuses on lengthening liabilities when feasible.

In June 2003, we issued $10 million in Trust Preferred Securities through a statutory business trust. As of December 31, 2005 and December 31, 2004, the full $10 million was considered Tier I regulatory capital.

Total stockholders’ equity was $48.6 million as of December 31, 2005 and $46.6 million as of December 31, 2004. Book value per share increased from $9.73 in 2004 to $10.10 as of December 31, 2005.

December 31, 2004 compared to December 31, 2003. Total assets were $479.7 million as of December 31, 2004, an increase of $122.7 million over the December 31, 2003 level of $357.0 million. The loan portfolio, net of discounts and fees, was $209.2 million at December 31, 2004, $90.4 million greater than the December 31, 2003 level of $118.8 million. Investment securities available for sale amounted to $209.1 million at December 31, 2004, a $34.0 million increase over the December 31, 2003 level of $175.1 million. At December 31, 2004, the deposit portfolio was $355.7 million, a $79.0 million increase over the December 31, 2003 level of $276.7 million. Total stockholders’ equity amounted to $46.6 million at December 31, 2004, an increase of $27.2 million over the $19.4 million level at December 31, 2003. Book value per share increased from $5.97 in 2003 to $9.73 as of December 31, 2004.

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 our 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. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” 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.

Our allowance for loan losses has three basic components: the specific allowance for impaired credits, the general allowance based on relevant risk factors, and an amount based on historical losses. Each of these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for loans identified for

impairment testing. Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. When impairment is identified, a specific reserve is established based on Bankshares’ calculation of the loss embedded in the individual loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, Bankshares does not separately identify individual consumer and residential loans for impairment testing unless loans become 60 days or more past due.

The general allowance is determined by aggregating un-criticized loans (non-classified loans and loans identified for impairment testing for which no impairment was identified) by loan type based on common purpose, collateral, repayment source or other credit characteristics. We then apply allowance factors which in the judgment of management represent the expected losses over the life of the loans. In determining those factors, we consider the following: (i) delinquencies and overall risk ratings, (ii) loss history, (iii) trends in volume and terms of loans, (iv) effects of changes in lending policy, (v) the experience and depth of the borrowers’ management, (vi) national and local economic trends, (vii) concentrations of credit by individual credit size and by class of loans, (viii) quality of loan review system and (ix) the effect of external factors (e.g., competition and regulatory requirements). This is the largest component of the overall allowance.

The portion based on historical losses is the smallest component of the total allowance for loan loss. Actual realized losses have been nominal since the inception of the bank and were insignificant in 2005.

Goodwill

Bankshares adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS142”), effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Based on the results of these tests, Bankshares concluded that there was no impairment and no write-downs were recorded. Additionally, under SFAS 142, acquired intangible assets are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. The costs of other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years.

Results of Operations

2005 compared to 2004. For the year ended December 31, 2005, net income amounted to $4.1 million, compared to $2.8 million for 2004. Earnings per common share, basic were $.85 in 2005 and $.61 in 2004. Earnings per common share, diluted were $.80 in 2005 and $.57 in 2004. Return on average equity was 8.59% in 2005 compared to 6.87% in 2004. Return on average assets was .71% in 2005 compared to .63% in 2004. The net interest margin was 3.51% in 2005 which compares to 3.10% in 2004.

Our core banking unit generated $6.8 million in pre-tax income in 2005 compared to the 2004 pre-tax income of $3.7 million. The 2005 results included a significant increase in the core banking unit’s interest income, up $9.9 million over the 2004 results.

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


	Year Ended December 31,
				2005								2004								2003

	Average			Income /		Yield /			Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars in thousands)
Assets:

Interest earning assets:

Investment securities	$	227,579		$	9,991		4.39	%	$	199,836		$	8,905		4.46	%	$	158,152		$	7,542		4.77	%
Loans ⁽²⁾		268,633			18,149		6.76	%		175,743			10,289		5.85	%		130,210			7,438		5.71	%

Federal funds sold		40,627			1,213		2.99	%		38,511			486		1.26	%		32,313			267		0.83	%

Total interest earning assets		536,839			29,353		5.47	%		414,090			19,680		4.75	%		320,675			15,247		4.75	%

Non-interest earning assets:
Cash and due from banks		27,107								20,006								15,792
Premises and equipment		2,176								2,060								1,591
Other assets		8,019								7,179								8,255
Less: allowance for loan losses		(2,824	)							(1,705	)							(1,246	)

Total non-interest earning assets		34,478								27,540								24,392

Total Assets	$	571,317							$	441,630							$	345,067


Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
Interest-bearing demand deposits	$	39,755		$	488		1.23	%	$	23,880		$	246		1.03	%	$	17,340		$	199		1.15	%
Money market deposit accounts		29,916			554		1.85	%		22,702			308		1.36	%		18,609			306		1.64	%
Savings accounts		3,926			53		1.35	%		3,056			34		1.11	%		2,237			30		1.34	%
Time deposits		184,591			5,913		3.20	%		162,108			4,401		2.71	%		112,919			3,184		2.82	%

Total interest-bearing deposits		258,188			7,008		2.71	%		211,746			4,989		2.36	%		151,105			3,719		2.46	%
FHLB Advances		21,068			682		3.24	%		19,617			486		2.48	%		15,844			318		2.01	%
Other borrowings		81,789			2,812		3.44	%		51,669			1,377		2.67	%		62,351			1,370		2.20	%

Total interest-bearing liabilities		361,045			10,502		2.91	%		283,032			6,852		2.42	%		229,300			5,407		2.36	%

Non-interest bearing liabilities:
Demand deposits		158,944								115,617								92,222
Other liabilities		4,104								2,702								4,553

Total liabilities		524,093								401,351								326,075
Stockholders’ Equity		47,224								40,279								18,992

Total Liabilities and Stockholders’ Equity:	$	571,317							$	441,630							$	345,067


Interest Spread ⁽³⁾							2.56	%							2.33	%							2.40	%


Net Interest Margin⁽⁴⁾				$	18,851		3.51	%				$	12,828		3.10	%				$	9,840		3.07	%


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

⁽²⁾		The bank had nonaccruing loans of $204, $0 and $20 thousand in 2005, 2004 and 2003 respectively.

⁽³⁾		Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.

⁽⁴⁾		Net interest margin is net interest income, expressed as a percentage of average earning assets.

Our net interest margin was 3.51% for the year ended December 31, 2005, compared to 3.10% for 2004. The average yield on loans increased from 5.85% in 2004 to 6.76% in 2005. Our fixed rate term loans generally use a three or five year treasury security as the base index for the customer rate. The net interest income earned, on a fully taxable equivalent basis, grew from $12.8 million in 2004 to $18.9 million in 2005, an increase of 47.0%.

Average loan balances were $268.6 million for the year ended December 31, 2005, compared to $175.7 million for 2004. The related interest income from loans was $18.1 million in 2005, an increase of $7.9 million over the 2004 levels. These increases reflect the strong growth we have experienced in our loan portfolio. The average yield on loans increased to 6.76% in 2005, up 91 basis points compared to the same period in 2004.

Investment securities income of $10.0 million (on a fully taxable equivalent basis) brought our net interest income level to $18.9 million (on a fully taxable equivalent basis) for the year ended December 31, 2005. This represents an increase of $6.0 million in net interest income (on a fully taxable equivalent basis) over the 2004 level of $12.8 million. The tax equivalent yields on investment securities for the year ended December 31, 2005 and 2004 were 4.39% and 4.46%, respectively. The decline in the investment portfolio is a result of strategic initiatives undertaken to reduce the weighted average life and duration of the investment portfolio.

Excess liquidity results in federal funds sold for us. For the year ended December 31, 2005, federal funds sold contributed $1.2 million of interest income, compared to $486 thousand for the same period in 2004.

Average interest-bearing funding sources (deposits and purchased funds) grew to $361.0 million in 2005, which was $78.0 million greater than the 2004 level of $283.0 million. Interest expense for all interest-bearing liabilities amounted to $10.5 million during for the year ended December 31, 2005, a $3.6 million increase over the 2004 level of $6.9 million. Cost of interest bearing liabilities for the year ended December 31, 2005 was 2.91%, or 49 basis points higher than the 2004 level of 2.42%.

The following table describes the impact on our 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
	Years Ended December 31,							Years Ended December 31,
	2005 compared to 2004							2004 compared to 2003
	Change Due To:							Change Due To:
	Increase /							Increase /
	(Decrease)		Volume		Rate			(Decrease)		Volume		Rate
	(Dollars in thousands)							(Dollars in thousands)
Interest Earning Assets:
Investments	$	1,086	$	1,224	$	(138	)	$	1,363	$	1,809	$	(446	)
Loans		7,860		6,073		1,787			2,851		2,664		187
Federal funds sold		727		28		699			219		59		160


Total Increase (Decrease) in Interest Income		9,673		7,325		2,348			4,433		4,532		(99	)

Interest Bearing Liabilities:
Interest bearing deposits		2,019		969		1,050			1,270		1,419		(149	)
Purchased funds		1,631		998		633			175		57		118


Total Increase (Decrease) in Interest Expense		3,650		1,967		1,683			1,445		1,476		(31	)


Increase (Decrease) in Net Interest Income	$	6,023	$	5,358	$	665		$	2,988	$	3,056	$	(68	)

Allowance for Loan Losses & Asset Quality

Our loan portfolio has experienced very few past due loans since inception. At December 31, 2005, Alliance Bank had a single loan that was on nonaccrual status totaling $204 thousand compared to no nonaccrual loans at December 31, 2004. The allowance for loan losses was $3.4 million at December 31, 2005, or 1.12% of loans outstanding, compared to $2.3 million or 1.10% of loans outstanding, at December 31, 2004. (These ratios exclude loans held for sale.) In 2005, we had net charge-offs of $20 thousand compared to $30 thousand in 2004 and $99 thousand since inception in 1998.

As of December 31, 2005, we had loans to five borrowers that were recorded as “special mention” and “substandard” on our internal loan watch list. These impaired loans amount to $1.8 million. We have allocated a $115 thousand of our allowance for loan losses towards these specific loans. This compares to an impaired loan balance of $1.3 million as of December 31, 2004. The allowance for loan losses as of December 31, 2004 included a specific allocation for the impaired loans of $161 thousand.

The allowance for loan losses was 1.10% of net loans, or $2.3 million, at December 31, 2004, and 1.22% of net loans, or $1.4 million at December 31, 2003. Net charge-offs were $30 thousand in 2004, compared to $18 thousand in 2003.

As part of our routine credit administration process, we engage an outside consulting firm to review our 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.

A loan may be placed on nonaccrual status when the loan is specifically determined to be impaired or when principal or interest is delinquent 90 days or more. We closely monitor individual loans, and relationship officers are charged with working with customers to resolve potential credit issues in a timely manner with minimum exposure to us. We maintain a policy of adding an appropriate amount to the allowance for loan losses to ensure an adequate reserve based on the portfolio composition, specific credit extended by Alliance Bank and general economic conditions.

In reviewing the adequacy of the allowance for loan losses at each period, management takes into consideration the historical loan losses experienced by the organization, current economic conditions affecting the borrowers’ ability to repay, the volume of loans, trends in delinquent, nonaccruing, and potential problem loans, and the quality of collateral securing loans. After charging off all known losses which have been incurred in the loan portfolio, management considers the allowance for loan losses adequate to cover its estimate of probable losses.

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


	Allowance for Loan Losses
	Year Ended December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands)
Balance, beginning of period	$	2,300		$	1,444		$	1,066		$	610		$	430

Provision for loan losses		1,142			886			396			478			189

Chargeoffs:
Commerical		—			—			44			16			—
Consumer		25			40			—			11			9

Total chargeoffs		25			40			44			27			9
Recoveries:
Commerical		—			—			23			—			—
Consumer		5			10			3			5			—

Total recoveries		5			10			26			5			—

Net chargeoffs		20			30			18			22			9


Balance, end of period	$	3,422		$	2,300		$	1,444		$	1,066		$	610


Allowance for loan losses to total loans		1.12	%		1.10	%		1.22	%		1.29	%		1.15	%
Allowance for loan losses to non-accrual loans		16.8	X	NM				72.2	X		N/A			N/A
Non-performing assets to allowance for loan losses		53.48	%		56.40	%		27.90	%		N/A			N/A
Net chargeoffs to average loans		0.01	%		0.02	%		0.01	%		0.03	%		0.02	%

The following table summarizes the composition of the loan portfolio by dollar amount:


	Loan Portfolio
	December 31,
	2005			2004		2003		2002		2001
	Amount			Amount		Amount		Amount		Amount
	(Dollars in thousands)
Commercial	$	37,131		$	35,077	$	29,300	$	16,491	$	12,073
Commercial real estate		107,200			71,432		37,444		24,710		15,140
Real estate construction		87,046			38,578		11,264		11,111		4,402
Residential real estate		69,957			59,819		37,281		27,438		18,862
Consumer		2,957			4,020		3,190		3,036		2,500
Other		274			278		283		—		—
Less: unearned discount & fees		(337	)		—		—		—		(50	)


Total loans	$	304,228		$	209,204	$	118,762	$	82,786	$	52,927

The following table presents the maturities or repricing periods of selected loans outstanding at December 31, 2005:


	Loan Maturity Distribution
	December 31, 2005
	One Year		After One Year		After
	or Less		Through Five Years		Five Years		Total
	(Dollars in thousands)
Commercial	$	23,767	$	11,446	$	1,958	$	37,171
Real estate construction		84,642		2,404		—		87,046


Total	$	108,409	$	13,850	$	1,958	$	124,217


Loans with:
Fixed Rates	$	9,048	$	43,303	$	24,142	$	76,493
Variable Rates		168,221		56,034		3,480		227,735

Total	$	177,269	$	99,337	$	27,622	$	304,228

Loans Held for Sale. In 2001, we established our mortgage banking subsidiary, Alliance Home Funding, LLC. As part of our business strategy to offer complementary services to clients while minimizing risk, generally all loans originated by Alliance Home Funding are presold to correspondent lenders. As of December 31, 2005, $5.9 million of Loans Held for Sale were part of our asset base, as compared to $24.7 million at December 31, 2004. Our business objective includes having the loans sold, shipped and funded within a 90 day period.

Investment Securities

We generally classify investment securities as available for sale under the classifications outlined in FASB Statement No. 115. In all periods presented, we had a single investment of $100,000 classified as held to maturity. We use the portfolio to manage excess liquidity, customer deposit volatility and asset/liability mix.

Investment securities available for sale were $228.7 million as of December 31, 2005, an increase of $19.7 million over the December 31, 2004 level of $209.0 million. The growth in the investment security portfolio is directly related to the growth in deposits experienced in 2005. The effects of unrealized losses on the portfolio were ($5.8) million at December 31, 2005 and ($2.4) million at December 31, 2004. The unrealized losses amounted to 2.5% of the investment portfolio value as of December 31, 2005 and 1.1% of the investment portfolio value as of December 31, 2004.

Our investment portfolio at December 31, 2005 and 2004 contained callable US agency securities, US agency collateralized mortgage obligations, US agency mortgage backed securities, state and municipal bonds, Federal Reserve Bank stock, Federal Home Loan Bank stock and other securities. Our basic investment philosophy includes investments that provide stable cash flows, municipal securities and callable securities. According to our policy, the investment portfolio may contain corporate debt securities. The investment portfolio did not contain any corporate debt securities at December 31, 2005 or December 31, 2004. We actively manage our portfolio duration and composition with the 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.

Contractual maturities of collateralized mortgage obligations and mortgage backed securities are not reliable indicators of their expected life because mortgage borrowers have the right to prepay mortgages at any time. We generally expect theses securities to prepay prior to contractual maturity. Additionally, callable agency securities may be called by the issuer prior to the contractual maturity.

In 2004 we developed and implemented an investment strategy focused on three key prongs. The first prong focused on managing the base duration of the callable bond portions of the portfolio. The second prong focused on expanding the cash flowing portion of the investment portfolio. The final prong focused on managing the municipal bond or higher yielding portion of the portfolio. All of the strategies were undertaken within the context of the overall balance sheet and the then current investment portfolio and the overall investment market conditions. This remains our current strategy today, and the following paragraphs describe these prongs in detail.

Base Duration Management

As we entered 2004, we embarked on an investment strategy for the Agency sector of minimum reinvestment and to let the balance of this sector mature, be called or sold. The remaining portion of this sector provides a stable base within the investment portfolio. We generally felt interest rates would be flat to rising in the future and, as such, our investment activity was geared to a different product which would have shorter cash flow characteristics. The Agency sector of the portfolio declined from 52.0% in 2003 to 29.4% as of December 31, 2005. The December 31, 2005 Agency portfolio was $67.2 million with a weighted average

yield of 4.59% and a weighted average life of 6.1 years. This compares to the December 31, 2004 level of $56.3 million with a weighed average yield of 4.53% and a weighted average life of 7.4 years.

Cashflowing Instruments

The second prong of the investment strategy was to maximize monthly cash flow. As previously stated the economic conditions in 2004 and beyond have generally favored cashflowing investments. This type of investment allows the organization to have liquidity in most economic times. Our current interest rate bias in 2005 is for rising interest rates. As such we have developed an investment portfolio composed of a variety of cashflowing bonds. We currently own US agency mortgage backed securities, US agency CMOs and Private Label CMOs. The instruments have varying maturity and coupon characteristics. We own 7 year balloons, 10 year MBS, 15 year MBS, 20 year MBS, GNMA hybrid ARMs, Agency CMOs with locked out positions, Agency CMOs that are presently in the cash flow windows. In addition, we own Private Label CMOS with varying issuers and AAA ratings along with varying coupons. The diversified nature of this portion of the investment portfolio is expected to provide cash flow or interest rate repricing in most economic cycles. As of December 31, 2005, these instruments amounted to $143.9 million with a weighted average yield of 4.54% and a weighted average life of 3.6 years.

Portfolio Yield

The third prong of the investment strategy is based on investment yield performance. We generally invest in AAA insured bank qualified municipal bonds. This portion of the investment portfolio is invested on a longer duration basis. We own instruments with maturities ranging from 2010 to 2025. Many of the instruments have call features which would allow the issuer to redeem the bonds prior to final maturity.

The December 31, 2005 municipal portfolio was $13.1 million with a weighted average tax equivalent yield of 5.44% and a weighted average life of 10.1 years. This compares to the December 31, 2004 level of $27.9 million with a weighed average yield of 5.68% and a weighted average life of 12.6 years.

The overall investment portfolio had a base case duration of 3.0 years as of December 31, 2005. If interest rates rise the base case duration extends to 4.3 years or very similar to the duration of a 5 year US Treasury security which has a duration of 4.6 years. The investment portfolio is modeled on an instrument level basis for portfolio management purposes. In addition, the investment portfolio is modeled on a detailed basis within the NII and EVE ALM models. The performance of the investment portfolio in the interest rate shock tests is considered as part of the overall balance sheet management process and appropriate ALM strategies are developed and implemented accordingly.

The following table summarizes the contractual maturity of the investment securities on an amortized cost basis and their weighted average yield as of December 31, 2005:


	Maturities of Investment Securities
	December 31, 2005
	(Dollars in thousands)
						After One					After Five
	Within					Year but Within					Year but Within
	One Year					Five Years					Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Total		Yield
Available For Sale Securities
US Government agency securities	$	—		0.00	%	$	29,034		4.45	%	$	40,694		4.79	%	$	—		0.00	%	$	69,728		4.65	%
US Government agency CMOs & PCMOs ⁽¹⁾		—		0.00	%		—		0.00	%		—		0.00	%		112,662		4.75	%		112,662		4.75	%
US Government agency MBS ⁽²⁾		—		0.00	%		4,588		4.08	%		7,920		4.04	%		21,684		4.24	%		34,192		4.17	%
State & Municipal securities ⁽²⁾		—		0.00	%		—		0.00	%		1,550		7.43	%		11,861		5.82	%		13,411		6.01	%
Other securities		—		0.00	%		—		0.00	%		—		0.00	%		4,464		4.63	%		4,464		4.63	%

Total Available For Sale Securities	$	—		0.00	%	$	33,622		4.40	%	$	50,164		4.75	%	$	150,671		4.76	%	$	234,457		4.71	%


Held To Maturity Securities
Certificate of Deposit	$	100		4.10	%	$	—		0.00	%	$	—		0.00	%	$	—		0.00	%	$	100		4.10	%

Total Held To Maturity Securities	$	100		4.10	%	$	—		0.00	%	$	—		0.00	%	$	—		0.00	%	$	100		4.10	%


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

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

Non-Interest Income

The following table highlights the major components of non-interest income for the periods referenced:


	Year Ended December 31,
	2005			2004		2003		2002		2001
	(Dollars in thousands)
Gain on loan sales	$	2,997		$	5,362	$	6,325	$	2,995	$	515
Net gain on sale of securities		(21	)		346		1,837		820		255
Net gain on trading activities		—			51		250		302		—
Deposit account service charges		171			205		180		114		85
Other		367			217		182		125		145

Total	$	3,514		$	6,181	$	8,774	$	4,356	$	1,000

The primary source of non-interest income is gains on the sale of residential mortgage loans. Gains from sales of mortgage loans were $3.0 million for the year ended December 31, 2005. This represents a decrease of $2.4 million over the $5.4 million level in 2004. The mortgage banking activity and performance has a correlation to interest rates. As interest rates rise home buyers may elect to finance homes with adjustable mortgage products or, if rates rise significantly, defer a home purchase. The volatility in interest rates could result in slower mortgage production or lower levels of mortgage banking income. The loss of key employees may also affect production. During the fourth quarter of 2004, several staffing changes occurred. We also hired additional staff to help keep pace with the changing growth of Alliance Home Funding. During the transition period production was low, leading to the decrease in gain on loan sales.

In the year ended December 31, 2005, we had a net loss of $21 thousand on the sale of investment securities. This represents a decrease of $367 thousand over the 2004 level net gains of $346 thousand. During 2003, we reallocated our investment portfolio to manage the high levels of actual and projected prepayments on collateralized mortgage obligations and mortgage backed securities. In addition to managing the mortgage related investments, a variety of agency and municipal securities were sold. The repositioning of the portfolio generated a larger level of securities gains than we routinely experience in the ordinary course of business. We have separately disclosed net gains from securities held for a short period of time for the pair off of certain mortgage backed securities transactions. For the year ended December 31, 2005 we had no net gains on trading activities, compared to $51 thousand and $250 thousand for the years ended December 31, 2004 and 2003, respectively.

Routine banking fees such as account maintenance, insufficient funds, online banking, stop payment, and wire transfer fees amounted to $171 thousand, $205 thousand and $180 thousand, for each of the years ended December 31, 2005, 2004 and 2003, respectively. Our other non-interest income is predominately from ATM fees. This type of fee income is a modest activity for Alliance Bank.

Our gains on mortgage loan sales amounted to $5.4 million during the year ended December 31, 2004. This represented a $963 thousand decrease over the 2003 level of $6.3 million.

As part of our routine balance sheet management strategy, a variety of investment securities were sold in 2003. The repositioning along with some pair off transactions resulted in gains of $397 thousand during the year ended December 31, 2004, compared to $2.1 million during the year ended December 31, 2003.

Non-Interest Expense

Non-interest expense for the year ended December 31, 2005 amounted to $15.0 million, compared to the 2004 level of $14.0 million. Salary and benefits expense for the year ended December 31, 2005 was $7.9 million, compared to the December 31, 2004 level of $7.8 million. The increase results from commissions and incentives paid on mortgage banking production as well as new personnel in Alliance Bank. Total salary and benefits expense for Alliance Home

Funding amounted to $2.7 million for the year ended December 31, 2005 and $4.3 million for the year ended December 31, 2004. Occupancy and furniture and equipment costs were up $224 thousand in 2005 from the 2004 level of $2.0 million. The change in occupancy expense is directly related to opening branches and offices. Our Manassas mortgage loan office opened in January 2003, our Ballston banking office opened in June 2003, our Tysons Corner banking office opened in December 2003 and our Reston mortgage loan office opened in February of 2004. Other operating expenses amounted to $4.9 million in 2005, compared to $4.1 million in 2004. Other operating expenses increased due to increased marketing efforts, absorption of branch operating costs and professional fees.

Non-interest expense for 2004 amounted to $14.0 million, compared to the 2003 level of $12.1 million. The increase is directly related to our expansion activities. The largest component of non-interest expense is salaries and benefits. Salary and benefits expenses in 2004 were $7.8 million, or $693 thousand higher than the 2003 level of $7.1 million. As a growing organization, we expanded our retail, commercial and private banking staffs to meet growth and profitability targets. Additionally, the salaries, commissions and benefits associated with Alliance Home Funding contributed to the growth in salaries and other non-interest expense. Occupancy and furniture and equipment costs in 2004 were up $427 thousand over the 2003 level of $1.6 million. Other operating expenses amounted to $4.1 million in 2004, compared to $3.4 million in 2003. The costs associated with opening these locations increased our other operating expenses due to marketing and general branch openings programs. In addition, our professional fees rose due to costs incurred in the establishment of the holding company.

The components of other operating expenses for the periods referenced were as follows:


	Year Ended December 31,
	2005		2004		2003		2002		2001
	(Dollars in thousands)
Business development	$	702	$	605	$	549	$	465	$	327
Office expense		1,062		767		735		518		348
Bank operations expense		977		920		746		565		320
Data processing & professional fees		1,422		1,146		775		596		260
Other		735		671		563		364		163

Total	$	4,898	$	4,109	$	3,368	$	2,508	$	1,418

Income Taxes

We recorded an income tax expense of $1.7 million in 2005 compared to an income tax expense of $864 thousand in 2004. Our effective tax rates were 29.5% for the year ended December 31, 2005 and 23.8% for the year ended December 31, 2004. The effective tax rate is lower than the statutory rate of 34% primarily due to the benefits of our municipal bond portfolio.

Deposits

We have made a special effort to obtain deposits from title and mortgage loan closing companies, which generally provide a good source of non-interest bearing deposits. We have developed products and services using available technology that meet the needs of these customers. The balances on deposit with us tend to fluctuate greatly during any given month, depending on transaction scheduling and overall market conditions. These balances represent a substantial portion of our non-interest bearing deposits. These deposits are subject to significant reduction during slow real estate markets. In order to meet the withdrawal needs of these customers, we monitor our liquidity, investment securities and lines of credit on a constant basis. We have sold and will in the future sell investment securities as a source of liquidity.

We seek deposits within our market area by paying competitive interest rates, offering high-quality customer service and using technology to deliver deposit services effectively. At December 31, 2005, the deposit portfolio was $461.2 million, a $105.5 million increase over the December 31, 2004 level of $355.7 million. We have seen growth in several key categories over the periods compared. Key deposit categories, such as NOW, money market and certificates of deposit have all grown in proportion to overall company growth. The effects of several deposit gathering and branching initiatives have allowed our deposit and customer base to continually expand.

From time to time, we gather time deposits from the wholesale marketplace. Brokered certificates of deposit allow us to fund loan and investment growth with minimal sales efforts. At December 31, 2005, we had $79.9 million in such deposits. The balance of the $79.9 million consists of two types of “brokered” deposits. At December 31, 2005, we had $10.0 million of brokered deposits that relate to a state government program and $69.9 million of brokered deposits that are part of a periodic marketing program by a licensed broker on our behalf. We entered into a series of brokered deposits during 2003 as part of a corporate initiative to extend the maturity of liabilities. The certificates issued as part of the brokered deposit program have maturities ranging from one to three years from issuance. This type of funding is an excellent tool to support the growth of our mortgage banking unit, Alliance Home Funding. As market conditions warrant and balance sheet needs dictate, we may continue to participate in the wholesale certificates of deposit market. As with any deposit product, we have potential risk for non-renewal by the customer and/or broker.

At December 31, 2004, deposits were $355.7 million, a $79.0 million increase over the December 31, 2003 level of $276.7 million. At December 31, 2004, we had $58.3 million in brokered deposits, compared to $61.2 million at December 31, 2003. The December 31, 2004 balance of the $58.3 million consists of two types of “brokered” deposits. At December 31, 2004, we had $10.0 million of brokered deposits that relate to a state government program and $48.3 million of brokered deposits that were part of a periodic marketing program by a licensed broker on our behalf. The December 31, 2003 balance of $61.2 million consisted of $10.0 million of brokered deposits that related to a government program and $51.2 million in brokered deposits that were issued as part of a marketing program by a licensed broker on our behalf.

The following table details the average amount of, and the average rate paid on, the following primary deposit categories for the periods indicated:


	Average Deposits and Average Rates Paid
	Years Ended December 31,
			2005							2004							2003

	Average		Income /		Yield /			Average		Income /		Yield /			Average		Income /		Yield /
	Balance		Expense		Rate			Balance		Expense		Rate			Balance		Expense		Rate
	(Dollars in thousands)
Interest bearing liabilities:
Interest-bearing demand deposits	$	39,755	$	488		1.23	%	$	23,880	$	246		1.03	%	$	17,340	$	199		1.15	%
Money market deposit accounts		29,916		554		1.85	%		22,702		308		1.36	%		18,609		306		1.64	%
Savings accounts		3,926		53		1.35	%		3,056		34		1.11	%		2,237		30		1.34	%
Time deposits		184,591		5,913		3.20	%		162,108		4,401		2.71	%		112,919		3,184		2.82	%

Total interest-bearing deposits		258,188	$	7,008		2.71	%		211,746	$	4,989		2.36	%		151,105	$	3,719		2.46	%

Non-interest bearing deposits		158,944							115,617							92,222

Total deposits	$	417,132						$	327,363						$	243,327

The following is a summary of the maturity distribution of certificates of deposit as of December 31, 2005:


	Certificates of Deposit Maturity Distribution
	December 31, 2005
	Three Months		Three Months to		Over
	or Less		Twelve Months		Twelve Months		Total
	(Dollars in thousands)
Certificates of deposit:
Less than $100,000	$	29,701	$	41,035	$	32,443	$	103,179
Greater than or equal to $100,000		7,301		21,289		66,875		95,465


Total	$	37,002	$	62,324	$	99,318	$	198,644

Capital

Both Alliance Bankshares and Alliance Bank are considered “well capitalized” under the risk-based capital guidelines adopted by the various regulatory agencies. Stockholders’ equity amounted to $48.6 million as of December 31, 2005 and $46.6 million as of December 31, 2004. Book value per share increased to $10.10 in 2005 from $9.73 as of December 31, 2004. The significant increase is directly related to a capital stock offering that took place in February 2004. Approximately $25.2 million in gross proceeds were generated from the sale of 1,481,470 shares

of common stock at an offering price of $17.00 per share. Expenses associated with the offering were $1.3 million for broker fees and $200 thousand for legal, accounting, printing, and miscellaneous fees. Bankshares is using the net proceeds from this offering to provide additional capital to the bank to support anticipated increases in our loans and deposits as our business grows.

Alliance Bankshares’ ability to pay cash dividends is restricted by banking regulations. We have not declared or paid cash dividends since inception. It is our general policy to retain earnings to support future organizational growth.

On June 30, 2003, Alliance Bankshares’ wholly-owned Delaware statutory business trust privately issued $10 million face amount of the trust’s floating rate trust preferred capital securities (“Trust Preferred Securities”) in a pooled trust preferred capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase $10.3 million principal amount of Alliance Bankshares’ floating rate junior subordinated debentures due 2033 (“Subordinated Debentures”). Both the Trust Preferred Securities and the Subordinated Debentures are callable at any time after five years from the issue date. The Subordinated Debentures are an unsecured obligation of Alliance Bankshares and are junior in right of payment to all present and future senior indebtedness of Alliance Bankshares. The Trust Preferred Securities are guaranteed by Alliance Bankshares on a subordinated basis. The Trust Preferred Securities are presented in the consolidated statements of condition of Alliance Bankshares under the caption “Trust Preferred Capital Securities of Subsidiary Trust.” Alliance Bankshares records distributions payable on the Trust Preferred Securities as an interest expense in its consolidated statements of operations. The cost of issuance of the Trust Preferred Securities was approximately $300,000. This cost is being amortized over a five year period from the issue date. The interest rate associated with the Trust Preferred Securities is 3 month LIBOR plus 3.15% subject to quarterly interest rate adjustments. The interest rate as of December 31, 2005 was 7.64%.

A portion of Trust Preferred Securities may be included in the regulatory computation of capital adequacy as Tier I capital. Under the current guidelines, Tier I capital may include up to 25% of stockholders’ equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Securities. At December 31, 2005 and 2004, the entire amount was considered Tier I capital, as compared to December 31, 2003 when approximately $5.3 million of the Trust Preferred Securities was included in Tier I capital. The remaining $4.7 million was considered Tier II capital in 2003.

Alliance Bankshares is considered “well capitalized” as of December 31, 2005, 2004 and 2003. The following table shows our capital categories, capital ratios and the minimum capital ratios currently required by bank regulators:


	Risk Based Capital Analysis
	December 31,
	2005			2004			2003
	(Dollars in thousands)
Tier I Capital:
Common stock	$	19,244		$	19,173		$	12,966
Capital surplus		19,955			19,855			1,745
Retained earnings		13,218			9,160			6,393
Less: disallowed assets		(3,096	)		—			—
Add: Qualifying Trust Preferred Securities		10,000			10,000			5,276

Total tier I capital		59,321			58,188			26,380

Tier II Capital:
Allowance for loan losses		3,422			2,300			1,444
Qualifying Trust Preferred Securities		—			—			4,724

Total tier II capital		3,422			2,300			6,168


Total Risk Based Capital	$	62,743		$	60,488		$	32,548


Risk weighted assets	$	369,659		$	271,118		$	176,418


Quarterly average assets	$	595,857		$	500,625		$	375,671

							Regulatory
										Minimum
Capital Ratios:
Tier 1 risk based capital ratio		16.1	%		21.5	%		15.0	%		4.0	%
Total risk based capital ratio		17.0	%		22.3	%		18.4	%		8.0	%
Leverage ratio		10.0	%		11.6	%		7.0	%		4.0	%

Purchased Funds and Other Borrowings

Purchased funds and other borrowings include repurchase agreements (which we offer to commercial customers and affluent individuals), federal funds purchased and treasury, tax and loan balances. Customer repurchase agreements amounted to $37.7 million at December 31, 2005, compared to $29.9 million at December 31, 2004 and $35.0 million at December 31, 2003. Outstanding federal funds purchased were $20.0 million and $15.0 million at December 31, 2005 and December 31, 2004, respectively, compared to no outstanding federal funds purchased at December 31, 2003.

Customer repurchase agreements are standard repurchase agreement transactions that involve an Alliance Bank customer instead of wholesale banks and brokers. We offer this product as an accommodation to larger retail and commercial customers that request safety for their funds beyond the FDIC deposit insurance limits. We believe this product offers us a stable source of financing at a reasonable market rate of interest. We do not have any open repurchase agreements with broker dealers.

Liquidity

Our overall asset/liability strategy takes into account the need to maintain adequate liquidity to fund asset growth and deposit runoff. Our liquidity is impacted by the general growth of Alliance Bank, growth of Alliance Home Funding, the national and local mortgage refinance market and the investment portfolio. We use a variety of tools to manage our liquidity. These include pricing on loans and deposits, purchase or sale of investments, brokered deposits, the sale or participation of loans, and rates and fees on home mortgages. In addition, we have a variety of credit facilities at our disposal. Our funding department monitors our overall position daily. We can and will draw upon federal funds lines with correspondent banks, reverse repurchase agreement lines with correspondent banks and use FHLB advances. Our deposit customers frequently have lower deposit balances in the middle of each month. The deposit balances generally rise toward the end of each month. As such, we use wholesale funding techniques to support our overall balance sheet growth.

Our liquidity is directly impacted by Alliance Home Funding. As interest rates decline, mortgage refinances and home purchases increase. In addition to the impact of interest rate movements, Alliance Home Funding has been adding production personnel which we expect will increase loan originations and funding requirements. Alliance Bank provides a warehouse line of credit to Alliance Home Funding. The funds advanced on this line allow us to originate and hold mortgages until they are sold to third party investors. In 2005, advances under this line of credit averaged $14.7 million, compared to $26.3 million in 2004. Our general liquidity management activities take into account current and expected warehouse line of credit needs.

In 2003, we expanded our use of brokered deposits as part of our core business growth. Certificates of deposit issued under this program also support the funding needs of Alliance Home Funding as well as general interest rate risk management. We generally issue these instruments with a maturity of one year or longer. As with any deposit product, we have potential risk for non-renewal by the customer or broker.

An analysis of the purchased funds distribution is presented below for the periods indicated:

Contractual Obligations

Bankshares has entered into certain contractual obligations including long term debt, operating leases and obligations under service contracts. The following table summarizes Bankshares’ contractual cash obligations as of December 31, 2005. The table does not include deposit liabilities or repurchase agreements entered into in the ordinary course of banking.


	Payments Due By Period
	December 31, 2005
			Less than		1 - 3		3 - 5		More than
	Total		1 Year		Years		Years		5 Years
	(Dollars in thousands)
Trust Preferred Securities	$	10,310	$	—	$	—	$	—	$	10,310
Operating Leases		11,921		1,286		3,150		2,337		5,148
Federal Home Loan Bank Advances		30,000		10,000		—		17,000		3,000
Data Processing Services		1,456		511		945		—		—


Total	$	53,687	$	11,797	$	4,095	$	19,337	$	18,458

Bankshares has signed a lease in late 2005 to relocate the current corporate headquarters. The impact of the new lease is included in “Operating Leases” in the table above.

Off-Balance Sheet Activities

Alliance Bankshares, Alliance Bank, Alliance Home Funding and Alliance Insurance Agency 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. See Note 16 of the Notes to Consolidated Financial Statements for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements. With the exception of these off-balance sheet arrangements, and Alliance Bankshares’ obligations in connection with its Trust Preferred Securities, 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.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements and their effect on us, see “Recent Accounting Pronouncements” in Note 2 of the Notes to Consolidated Financial Statements contained herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity. In mid 2004, we began a project to enhance the sophistication of our current Asset Liability Management (“ALM”) processes. We engaged a consulting firm to assist management in developing “best practices” in the ALM process. A core component of the project is the development of a more in-depth ALM model that measures Net Interest Income (“NII”) and Economic Value of Equity (“EVE”) results on a monthly basis. The results indicate that we are positioned well for rising interest rates. The Board of Directors has approved NII and EVE metrics for policy measurement and as of the most recent model run (December 2005), we are in compliance with all policy metrics. The short term interest rate model (NII) indicates we are asset sensitive. The long term model (EVE) indicates a stable to slightly declining EVE in a rising interest rate environment.

Net Interest Income Sensitivity. Bankshares’ ALM process evaluates the effect of upward and downward changes in market interest rates of 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 process is accomplished by maintaining the 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 might include prepayments, the sensitivity of non-maturity deposit rates, and other factors deemed significant by Bankshares.

The ALM results for December 31, 2005 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 increase over the next twelve months by 6.1%. Assuming a shift downward of 100 basis points, Bankshares would expect net interest income to decrease over the next twelve months by 5.5%. The results in both a rising and declining interest rate environment are within the policy guidelines.

Economic Value of Equity. The economic value process models the cashflows of financial instruments to maturity. The model incorporates growth and pricing assumptions to develop a baseline 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. Bankshares is in compliance with the board approved EVE guidelines in all scenarios.

The following table reflects our December 31, 2005 “static” interest rate gap position:


	December 31, 2005
	Maturing or Repricing
	Within			4 - 12			1 - 5			Over
	3 Months			Months			Years			5 Years			Total
	(Dollars in thousands)
Interest earning assets:
Investment securities	$	100		$	—		$	33,622		$	200,835		$	234,557
Loans held for sale		5,936			0			—			0			5,936
Loans		161,013			14,285			99,538			29,392			304,228
Interest-bearing deposits		200			0			—			0			200
Federal funds sold		37,522			0			—			0			37,522

Total interest earning assets		204,771			14,285			133,160			230,227			582,443


Interest-bearing liabilities:
Interest-bearing demand deposits		47,975			—			—			—			47,975
Money market deposit accounts		24,422			—			—			—			24,422
Savings accounts & IRAs		4,260			—			—			—			4,260
Time deposits		37,003			62,324			51,197			48,120			198,644

Total interest-bearing deposits		113,660			62,324			51,197			48,120			275,301

FHLB Advances		27,000			—			—			3,000			30,000
Repos		37,668			—			—			—			37,668
Other borrowings		20,421			—			—			—			20,421
Trust Preferred Capital Notes		10,310			—			—			—			10,310

Total interest-bearing liabilities		209,059			62,324			51,197			51,120			373,700


Period Gap	$	(4,288	)	$	(48,039	)	$	81,963		$	179,107		$	208,743


Cumulative Gap	$	(4,288	)	$	(52,327	)	$	29,636		$	208,743		$	208,743


Cumulative Gap / Total Assets		-0.7	%		-8.6	%		4.8	%		34.1	%		34.1	%

Interest Rate Risk Management Summary. As part of our interest rate risk management, we typically use the investment portfolio to balance our interest rate exposure. The pricing of deposits is adjusted within the market area to favor money market or certificates of deposit depending on the need for floating or fixed rate liabilities. The pricing of loan products is a function of interest rate risk management strategies and the market conditions in the area. In many cases, interest rate risk pricing desires are not consistent with the general market, which requires us to balance our interest rate risk through other products. An example of this is that in a rising rate environment, the loan customer typically prefers fixed rate loans and banks typically desire floating rate loans. In this example, we would add floating rate or adjustable securities or price certificates of deposit aggressively to balance the interest rate risk.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Alliance Bankshares Corporation
Chantilly, Virginia

We have audited the accompanying consolidated balance sheets of Alliance Bankshares Corporation and subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the three years ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alliance Bankshares Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the three years ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Winchester, Virginia
January 27, 2006

Alliance Bankshares Corporation
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands, except share data)


								Accumulated						Total
								Other						Stock-
	Common		Capital			Retained		Comprehensive			Comprehensive			holders’
	Stock		Surplus			Earnings		Income (Loss)			Income			Equity
BALANCE, DECEMBER 31, 2002	$	8,460	$	5,770		$	2,404	$	934					$	17,568
Comprehensive income:
Net income		—		—			3,989		—		$	3,989			3,989
Other comprehensive income (loss), net of tax: unrealized holding losses on securities available for sale, net of tax of $672		—		—			—		—			(1,305	)		—
Less: reclassification adjustment, net income taxes of $710												(1,377	)

Other comprehensive income (loss), net of tax		—		—			—		(2,683	)	$	(2,682	)		(2,683	)

Total comprehensive income		—		—			—		—		$	1,307			—

Stock dividend in the form of a three-for-two stock split		4,316		(4,316	)		—		—						—
Exercise of stock options		190		291			—		—						481

BALANCE, DECEMBER 31, 2003	$	12,966	$	1,745		$	6,393	$	(1,749	)				$	19,355
Comprehensive income:
Net income		—		—			2,767		—		$	2,767			2,767
Other comprehensive income, net of tax: unrealized holding losses on securities available for sale, net of tax of $229		—		—			—		—			445			—
Less: reclassification adjustment, net income taxes of $135												(262	)

Other comprehensive income, net of tax		—		—			—		183		$	183			183

Total comprehensive income		—		—			—		—		$	2,950			—

Exercise of stock options		281		309			—		—						590
Issuance of 1,481,470 shares of common stock		5,926		17,801			—		—						23,727

BALANCE, DECEMBER 31, 2004	$	19,173	$	19,855		$	9,160	$	(1,566	)				$	46,622
Comprehensive income:
Net income		—		—			4,058		—		$	4,058			4,058
Other comprehensive income (loss), net of tax: unrealized holding losses on securities available for sale, net of tax of $1,146		—		—			—		—			(2,226	)		—
Less: reclassification adjustment, net income taxes of $7												(14	)

Other comprehensive income (loss), net of tax		—		—			—		(2,240	)	$	(2,240	)		(2,240	)

Total comprehensive income		—		—			—		—		$	1,818			—

Exercise of stock options		71		100			—		—						171

BALANCE, DECEMBER 31, 2005	$	19,244	$	19,955		$	13,218	$	(3,806	)				$	48,611

The accompanying notes are an integral part of these consolidated financial statements.

Alliance Bankshares Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005, 2004 and 2003
(Dollars in thousands)


	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,058		$	2,767		$	3,989
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion		1,864			1,320			980
Provision for loan losses		1,142			886			396
Origination of loans held for sale		(174,345	)		(235,043	)		(236,004	)
Proceeds from sale of loans held for sale		196,152			228,692			266,430
Gain on sale of loans		(2,997	)		(5,362	)		(6,325	)
Net loss (gain) on sale of securities available-for-sale and trading		21			(397	)		(2,087	)
Deferred tax expense (benefit)		(686	)		(113	)		(86	)
Changes in assets and liabilities affecting operations:
Accrued interest and other assets		(3,248	)		(344	)		(2,273	)
Other liabilities		1,552			(648	)		284

Net cash provided by (used in) operating activities		23,513			(8,242	)		25,304


CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold		(36,383	)		31,570			(22,582	)
Purchase of investment securities available-for-sale		(121,179	)		(188,529	)		(246,587	)
Proceeds from sale of securities available-for-sale		58,283			115,682			131,020
Proceeds from calls and maturities of securities available-for-sale		2,000			13,024			45,500
Paydowns on investment securities available-for-sale		36,767			25,813			23,629
Net increase in loan portfolio		(95,044	)		(90,472	)		(35,994	)
Purchase of premises and equipment		(595	)		(1,070	)		(1,017	)

Net cash (used in) investing activities		(156,151	)		(93,982	)		(106,031	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash realized from:
Non-interest bearing deposits		57,590			39,413			(19,817	)
Savings and NOW deposits		15,201			12,440			4,829
Money market deposits		(3,401	)		10,545			(63	)
Other time deposits		36,097			16,554			75,824
Repurchase agreements, federal funds purchased and other borrowings		12,737			10,101			769
FHLB Advances		10,000			7,000			2,500
Trust Preferred Capital Notes		—			—			10,310
Proceeds from exercise of stock options		171			590			481
Proceeds from issuance of common stock		—			23,727			—

Net cash provided by financing activities		128,395			120,370			74,833


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(4,243	)		18,146			(5,894	)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		29,467			11,321			17,215


CASH AND CASH EQUIVALENTS, END OF YEAR	$	25,224		$	29,467		$	11,321

The accompanying notes are an integral part of these consolidated financial statements.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

(Dollars in Thousands, except per share data)

1.		NATURE OF BUSINESS

		Alliance Bankshares Corporation (“Bankshares”) 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 Northern Virginia.

		In March 2001, the Bank formed Alliance Home Funding, LLC (“AHF”). AHF is a wholly-owned mortgage banking subsidiary of the Bank and originates residential mortgages for subsequent sale. AHF does not maintain the servicing rights on mortgages sold.

		On June 26, 2003, Alliance Virginia Capital Trust I, a Delaware statutory trust and a subsidiary of Alliance Bankshares Corporation was formed.

		On November 15, 2005, the Bank formed Alliance Insurance Agency (“AIA”) through the acquisition of Danaher Insurance Agency. AIA is a wholly-owned insurance subsidiary of the Bank and sells a wide array of insurance and financial products.

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		Basis of Presentation and Consolidation - The consolidated financial statements include the accounts of Alliance Bankshares Corporation, Alliance Bank Corporation, Alliance Home Funding, LLC, Alliance Insurance Agency, and Alliance Virginia Capital Trust I. In consolidation all significant inter-company accounts and transactions have been eliminated. FASB Interpretation No. 46 R requires that Bankshares no longer consolidate Alliance Virginia Capital Trust I. The subordinated debt of the trust is reflected as a liability of Bankshares.

		Business - The Bank is a state-chartered commercial bank. We provide a broad array of commercial, retail and mortgage banking services and products to clients located in Northern Virginia and the greater Washington, D.C. Metropolitan area.

		Use of estimates - In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and deferred income taxes.

		Cash and cash equivalents - For the purposes of the consolidated Statements of Cash Flows, Bankshares has defined cash and cash equivalents as those amounts included in the balance sheet caption “Cash and due from banks.”

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

Securities - Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. At December 31, 2005 and 2004, Bankshares held no trading securities.

The pair off (simultaneous purchase and sale of investments with the net proceeds delivered to or from the brokerage house) of investments typically occurs when shifts in market conditions change the expected cashflows of the investment portfolio or when our overall balance sheet and liquidity requirements change. We have separately classified the pair off transactions as “net gain on trading activities” on the consolidated statements of income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the intent and ability of Bankshares to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans Held For Sale - Loans originated by AHF are designated as held for sale at the time of their origination. These loans are generally pre-sold with servicing released and AHF does not retain any interest or obligation after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government-sponsored enterprises (conforming loans). In addition, AHF requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at the lower of cost or estimated fair value in the aggregate. Gain on sale of loans are recognized as loans are shipped to the investor.

Rate Lock Commitments - AHF enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.

Loans - The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans throughout the Washington, DC metropolitan area. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions of the lending area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the life of the loan or currently upon the sale or repayment of a loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for loan losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Premises and equipment – Furniture and equipment are stated at cost less accumulated depreciation and amortization and are depreciated over their estimated useful lives ranging from three to ten years. Leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Depreciation and amortization are recorded on the accelerated and straight-line methods.

Costs of maintenance and repairs are charged to expense as incurred. Costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

Income taxes – Bankshares uses the liability (or balance sheet) approach in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Repurchase agreements – The Bank routinely enters into repurchase agreements with customers. As part of the repurchase agreements, the Bank uses marketable investment securities from its investment portfolio as collateral for the customer agreements. The repurchase agreements bear interest at a market rate.

Stock-based compensation – At December 31, 2005, Bankshares has a stock-based employee compensation plan, which is described more fully in Note 21. Bankshares accounts for the plan under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if Bankshares had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.


	December 31,
	2005			2004			2003
Net income, as reported	$	4,058		$	2,767		$	3,989
Deduct: total stock-based employee compensation expense determined based on fair value method of awards, net		(1,041	)		(394	)		(140	)

Pro forma net income	$	3,017		$	2,373		$	3,849


Earnings per share:
Basic, as reported	$	0.85		$	0.61		$	1.24

Basic, pro forma	$	0.63		$	0.52		$	1.20


Diluted, as reported	$	0.80		$	0.57		$	1.14

Diluted, pro forma	$	0.59		$	0.49		$	1.10

On April 27, 2005, the Board of Directors of Bankshares approved the immediate vesting of all unvested “underwater” stock options held by executive officers, directors and employees as of March 31, 2005. A stock option was considered “underwater” if the option exercise price (or strike price) was greater than $14.50 per share, which was the opening market price of Bankshares’ common stock on the date of the Board action. The other terms of the “underwater” stock options remain unchanged. As a result of this board action, 152,467 “underwater” stock options vested as of April 27, 2005.

The Board’s decision to accelerate the vesting of these “underwater” stock options was made primarily to avoid recognizing compensation expense associated with these stock options in future financial statements upon Bankshares’ adoption of SFAS No. 123R, Share Based Payment. The acceleration of vesting of these underwater stock options eliminates approximately $787 thousand of future compensation expense which

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

Bankshares would have been required to record as an income statement charge over the remaining vesting periods under the transitional provisions of SFAS No. 123R, which become effective for Bankshares on January 1, 2006.

Earnings per share – Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by Bankshares relate solely to outstanding stock options, and are determined using the treasury method.

Off-balance-sheet instruments – In the ordinary course of business, Bankshares, through it’s banking subsidiary, has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and rate lock commitments. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Advertising and marketing expense – Advertising and marketing costs are expensed as incurred. Advertising and marketing costs as of December 31, 2005, 2004 and 2003 were $379 and $241 and $217, respectively.

Reclassifications – Certain reclassifications have been made to prior period balances to conform to the current year presentation.

Recent Account Pronouncements – In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans purchased by Bankshares or acquired in business combinations. SOP 03-3 does not apply to loans originated by Bankshares. Bankshares adopted the provisions of SOP 03-3 effective January 1, 2005 and the initial implementation had no material effect on the financial statements.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (Revised 2004) (SFAS No. 123R) “Share-Based Payment,” which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123R requires all share-based payments to employees to be valued using a fair value method on the date of grant and expensed based on that fair value over the applicable vesting period. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows” requiring the benefits of tax deductions in excess of recognized compensation cost be reported as financing instead of operating cash flows. The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”), which expresses the SEC’s views regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. Additionally, SAB No. 107 provides guidance related to share-based payment transactions for public companies. Bankshares was required to apply SFAS No. 123R as of the annual reporting period that began after September 15, 2005. Bankshares estimates approximately $167 thousand in share based compensation in 2006 for stock options.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, (“SFAS No. 154”) “Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement. “ The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Bankshares does not anticipate this revision will have a material effect on its financial statements.

In November 2005, FASB Staff Position (FSP) 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued. The FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The FSP applies to investments in debt and equity securities and cost-method investments. The application guidance within the FSP includes items to consider in determining whether an investment is impaired, in evaluating if an impairment is other than temporary and recognizing impairment losses equal to the difference between the investment’s cost and its fair value when an impairment is determined. The FSP is required for all reporting periods beginning after December 15, 2005. Earlier application is permitted. Bankshares does not anticipate the amendment will have a material effect on its financial statements.

PURCHASE OF INSURANCE AGENCY

Effective November 15, 2005, Alliance Bank Corporation acquired all of the stock of Danaher Insurance Agency, Inc, a Virginia based insurance agency. Upon consummation of the transaction, the agency was renamed, Alliance Insurance Agency, Inc. The Bank paid $2,975,000 in cash (including escrows) for the stock in the agency. We engaged a nationally recognized third party to evaluate the goodwill and intangible assets created from the transaction. Approximately, $1.6 million of the purchase price was deemed to be an intangible asset and amortized over ten years following the accounting prescribed in SFAS 142. The remainder of the value, approximately $1.6 million of goodwill and transaction costs, were recorded on the balance sheet as of December 31, 2005.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

Proceeds from sales and calls of securities available for sale were $58.3 million, $115.7 million and $131.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Gross gains of $106 thousand, $675 thousand and $2.1 million and gross losses of $127 thousand, $278 thousand and $61 thousand were realized on these sales during 2005, 2004 and 2003, respectively. The tax provision applicable to the net realized gain (loss) amounted to ($7) thousand, $135 thousand and $710 thousand, respectively.

At December 31, 2005 and 2004, securities with a carrying value of $119.1 million and $142.1 million, respectively, were pledged to secure repurchase agreements, Federal Home Loan Bank advances, public deposits and for other purposes required or permitted by law.

The following table is a presentation of the aggregate amount of unrealized loss in investment securities as of December 31, 2005 and 2004. The aggregate is determined by summation of all the related securities that have a continuous loss at year 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 year end.


	2005
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
US Government corporations and agencies	$	13,359	$	(170	)	$	52,669	$	(2,330	)	$	66,028	$	(2,500	)
US Government agency CMOs and PCMOs		63,059		(1,126	)		45,016		(1,094	)		108,075		(2,220	)
US Government agency MBS		14,492		(201	)		17,143		(556	)		31,635		(757	)
Municipal securities		1,556		(16	)		10,472		(286	)		12,028		(302	)

Total temporarily impaired investment securities:	$	92,466	$	(1,513	)	$	125,300	$	(4,266	)	$	217,766	$	(5,779	)

There are a total of 123 investment securities that have an unrealized loss as of December 31, 2005: 32 U.S. Government Agencies, 53 U.S. Government Agency CMO’s, 16 U.S. Government Agency MBS and 22 Municipal Securities. The investment securities are obligations of entities that are excellent credit risks. The impairment noted in the table above is the result of market conditions and does not reflect on the ability of the issuers to repay the obligations. Bankshares has the intent and ability to hold these securities until maturity or for a period of time sufficient to allow for any anticipated recovery.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Bankshares to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

TRUST PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST

On June 30, 2003, Bankshares’ wholly-owned Delaware statutory business trust privately issued $10 million face amount of the trust’s floating rate trust preferred capital securities (“Trust Preferred Securities”) 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 that sale to purchase $10.3 million principal amount of Bankshares’ floating rate junior subordinated debentures due 2033 (“Subordinated Debentures”). Both the Trust Preferred Securities and the Subordinated Debentures are callable at any time after five years from the issue date. 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 Securities are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Securities are presented in the consolidated statements of condition of Bankshares under the caption “Trust Preferred Capital Securities Notes.” Bankshares records distributions payable on the Trust Preferred Securities as an interest expense in its consolidated statements of operations. The cost of issuance of the Trust Preferred Securities was approximately $300,000. This cost is being amortized over a five year period from the issue date. The interest rate associated with the Trust Preferred Securities is 3 month LIBOR plus 3.15% subject to quarterly interest rate adjustments. The interest rate as of December 31, 2005 was 7.64%.

10.

INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows:


	2005			2004			2003
Current	$	2,380		$	977		$	1,583
Deferred tax provision (benefit)		(686	)		(113	)		(86	)

Income tax expense	$	1,694		$	864		$	1,497

The reasons for the differences between the statutory federal income tax rate and the effective tax rate are summarized as follows:


	2005			2004			2003
Computed at the expected statutory rate	$	1,949		$	1,235		$	1,865
Tax exempt income, net		(252	)		(378	)		(450	)
State income tax expense		—			—			40
Other		(3	)		7			42

Income Tax Expense	$	1,694		$	864		$	1,497

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

12.		RELATED PARTY TRANSACTIONS AND LETTERS OF CREDIT

		Bankshares grants loans and letters of credit to its executive officers, directors and their affiliated entities. These loans are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or present other unfavorable features. The aggregate amount of such loans outstanding at December 31, 2005 and 2004 was approximately $397 thousand and $674 thousand, respectively. During 2005, new loans and line of credit advances to such related parties amounted to $381 thousand in the aggregate and payments amounted to $658 thousand in the aggregate.

		Bankshares also maintains deposit accounts with some of its executive officers, directors and their affiliated entities. The aggregate amount of these deposit accounts at December 31, 2005 and 2004 amounted to $4.9 million and $4.3 million, respectively.

13.		COMMITMENTS AND CONTINGENCIES

		As members of the Federal Reserve System, Bankshares is required to maintain certain average reserve balances. For the final weekly reporting period in the years ended December 31, 2005 and 2004, the aggregate amounts of daily average required balances were $11.0 million and $15.3 million, respectively.

		In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guarantees, commitments to extend credit, etc., which are not reflected in the accompanying financial statements. Bankshares does not anticipate losses as a result of these transactions. See Note 15 with respect to financial instruments with off-balance-sheet risk. Bankshares is obligated under several operating leases, with initial terms of three to ten years, for its office locations and branch sites.

		Total rental expense for the occupancy leases for the year ended December 31, 2005, 2004 and 2003 was $1.0 million, $963 thousand, and $725 thousand, respectively. Bankshares also leases office equipment and vehicles pursuant to operating leases with various expiration dates. Total rental expense for office equipment and vehicles for the years ended December 31, 2005, 2004 and 2003 was $137 thousand, $147 thousand and $136 thousand, respectively.

		Bankshares leases office space for four of its branch locations, two of its mortgage lending locations, insurance agency location and corporate headquarters location. These non-cancelable agreements, which expire through July 2016, in some instances require payment of certain operating charges. At December 31, 2005, minimum annual rental commitments under these leases (in thousands) are as follows:


2006	$	1,286
2007		1,631
2008		1,519
2009		1,297
2010		1,040
Thereafter		5,148

Total	$	11,921

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

14.		SUPPLEMENTAL CASH FLOW INFORMATION

		Supplemental Disclosures of Cash Flow Information:


	2005			2004		2003
Interest paid during the year	$	10,236		$	6,916	$	5,076


Income taxes paid during the year	$	1,305		$	1,149	$	2,255


Supplemental Disclosures of Noncash Activities:

Fair value adjustment for securities	$	(3,393	)	$	277	$	(4,063	)

15.		DEPOSITS

		The aggregate amount of time deposits in denominations of $100 or more at December 31, 2005 and 2004 was $95,465 and $81,859, respectively.

		At December 31, 2005, the scheduled maturities of time deposits (in thousands) are as follows:


2006	$	99,326
2007		30,368
2008		20,829
2009		27,689
2010		20,432

Total	$	198,644

Brokered deposits totaled $79.9 million and $58.3 million at December 31, 2005 and 2004, respectively.

16.		FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

		Bankshares, through its banking subsidiary, is party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

		Bankshares’ exposure to credit loss is represented by the contractual amount of these commitments. Bankshares follows the same credit policies in making commitments and as it does for on-balance-sheet instruments.

		At December 31, 2005 and 2004, the following financial instruments were outstanding whose contract amounts represent credit risk:


	2005		2004
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	132,068	$	64,640
Standby letters of credit		2,482		3,085

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bankshares evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bankshares, is based on management’s credit evaluation of the customer.

		Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which Bankshares is committed.

		Standby letters of credit are conditional commitments issued by Bankshares to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Bankshares generally holds collateral supporting those commitments if deemed necessary.

		At December 31, 2005, Bankshares had rate lock commitments to originate mortgage loans totaling $3.8 million and loans held for sale of $5.9 million. It is management’s intent to enter into corresponding commitments, on a best-efforts basis, to sell these loans to third-party investors.

		From time to time Bankshares will enter into forward purchase agreements for investment securities. These purchases generally will settle within 90 days of the end of the reporting period. As of December 31, 2005, Bankshares had no forward purchase commitments.

		Bankshares maintains cash accounts and Federal funds sold in other commercial banks. The amount on deposit with correspondent institutions, including Federal funds sold at December 31, 2005, exceeded the insurance limits of the Federal Deposit Insurance Corporation by $37.9 million.

17.		SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

		Substantially all of Bankshares’ loans, commitments and standby letters of credit have been granted to customers located in the Washington, DC metropolitan area. The concentrations of credit by type of loan are set forth in Note 5.

18.		EMPLOYEE BENEFITS

		Bankshares has a 401(k) defined contribution plan covering substantially all full-time employees and provides that an employee becomes eligible to participate immediately on employment provided they are age 21 or older. Under the plan, a participant may contribute up to 15% of his or her covered compensation for the year, subject to certain limitations. Bankshares currently matches 50% of employee contributions up to 6%. Matching contributions totaled $84 thousand, $56 thousand and $43 thousand, for the years ended December 31, 2005, 2004 and 2003, respectively. Bankshares may also make, but is not required to make, a discretionary contribution for each participant. The amount of contribution, if any, is determined on an annual basis by the Board of Directors. No contributions were made by Bankshares during the years ended December 31, 2005 and 2004.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

19.		FAIR VALUE OF FINANCIAL INSTRUMENTS

		The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for 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. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of Bankshares.

		The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

		Cash, Short-Term Investments and Federal Funds Sold

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

Securities

For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The carrying value of restricted stock approximates fair value based on the redemption provisions of the issuers.

Loan Held for Sale

Fair value is based on selling price arranged by arms-length contracts with third parties.

Loan Receivables

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.

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

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

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 analysis based on Bankshares’ current incremental borrowing rates for similar types of borrowing arrangements.

Federal Home Loan Bank Advances

The fair values of Bankshares’ Federal Home Loan Bank advances 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 are 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 similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness 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.

At December 31, 2005 and 2004, the carrying amounts of loan commitments and standby letters of credit were immaterial.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

The estimated fair values of Bankshares’ financial instruments are as follows:


	2005				2004
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and short-term investments	$	25,224	$	25,224	$	29,467	$	29,467
Federal funds sold		37,522		37,522		1,139		1,139
Securities		228,791		228,791		209,141		209,141
Loans, net		300,806		300,036		206,904		205,625
Loans held for sale		5,936		5,936		24,746		24,746
Accrued interest receivable		3,356		3,356		2,687		2,687
Financial liabilities:
Noninterest-bearing deposits	$	185,877	$	185,877	$	128,287	$	128,287
Interest-bearing deposits		275,301		275,861		227,404		228,163
Short-term borrowings		58,089		57,668		45,352		44,890
FHLB advances		30,000		30,000		20,000		20,000
Trust Preferred Capital Notes		10,310		10,310		10,310		10,310
Accrued interest payable		1,017		1,017		751		751

Bankshares assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of Bankshares’ financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to Bankshares. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate Bankshares’ overall interest rate risk.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

20.		REGULATORY MATTERS

		The Bank, as a state bank, is subject to the dividend restrictions set forth by the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”). Under such restrictions, the Bank may not, without the prior approval of the Bureau, declare dividends in excess of the sum of the current year’s earnings plus the retained earnings from the prior two years. As of December 31, 2005, the aggregate amount of unrestricted funds, which could be transferred from the banking subsidiary to the Parent Company, without prior regulatory approval, totaled $12.1 million or 24.8% of consolidated net assets. As of December 31, 2005, 2004 and 2003, no dividends were declared.

		As a member of the Federal Reserve Bank system, the Bank is required to subscribe to shares of $100 par value Federal Reserve Bank stock equal to 6% of the Bank’s capital and surplus. The Bank is only required to pay for one-half of the subscription. The remaining amount is subject to call when deemed necessary by the Board of Governors of the Federal Reserve.

		Bankshares (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bankshares and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt correction action provisions are not applicable to bank holding companies.

		Quantitative measures established by regulation to ensure capital adequacy require Bankshares and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005 and 2004, that Bankshares and the Bank meet all capital adequacy requirements to which it is subject.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

21.		STOCK OPTION PLAN

		Effective June 30, 1999, as amended on May 28, 2003 and June 22, 2005, the Bank established an incentive and non-qualified stock option plan. The plan is administered by the Board of Directors of Bankshares acting upon recommendations made by the Stock Option Committee appointed by the Board. The plan is currently authorized to grant a maximum of 994,500 shares to directors, key employees and consultants. The options are granted at the fair market value of Bankshares common stock at the date of grant. The term of the options shall not exceed ten years from the date of grant. The options vest on a schedule determined by the Stock Option Committee based on financial performance criteria.

		The fair value of each grant is estimated at the grant date using the Black-Scholes Option-Pricing Model with the following weighted average assumptions:


	December 31,
	2005			2004			2003
Dividend yield		0.00	%		0.00	%		0.00	%
Expected life	6.29		years	6.60		years	6.82		years
Expected volatility		23.03	%		25.89	%		25.79	%
Risk-free interest rate		4.28	%		3.76	%		3.04	%

A summary of the status of Bankshares stock option plan is presented below:


	2005					2004					2003
				Weighted					Weighted					Weighted
				Average					Average					Average
	Number of			Exercise		Number of			Exercise		Number of			Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at January 1		657,588		$	5.62		588,950		$	6.23		512,663		$	4.63
Granted		115,900			16.09		180,300			18.00		145,625			11.01
Forfeited		(6,000	)		16.27		(43,300	)		14.59		(563	)		5.39
Exercised		(17,701	)		7.80		(68,362	)		4.55		(68,775	)		4.50

Outstanding at December 31		749,787		$	7.10		657,588		$	5.62		588,950		$	6.23


Exercisable at end of year		560,644					386,681					415,341

Weighted-average fair value per option of options granted during the year	$	5.42				$	4.96				$	4.59

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

The status of the options outstanding at December 31, 2005 is as follows:


	Options Outstanding				Options Exercisable
			Weighted				Weighted
Remaining			Average				Average
Contractual	Number		Exercise		Number		Exercise
Life	Outstanding		Price		Exercisable		Price
4 years		286,413	$	4.45		286,413	$	4.45
6 years		16,875	$	4.89		16,875	$	4.89
7 years		56,175	$	5.59		52,575	$	5.50
8 years		129,125	$	10.93		49,906	$	11.34
9 years		145,300	$	18.24		144,875	$	18.25
10 years		115,900	$	16.09		10,000	$	15.99

All options granted, available under the Plan, and exercisable have been restated for all three years giving retroactive effect to the common stock dividends distributed on October 26, 2001 and September 29, 2003.

22.		EARNINGS PER SHARE

		The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Weighted average number of shares for all years reported has been restated giving effect to the common stock dividends distributed on October 26, 2001 and September 29, 2003. Potential dilutive common stock had no effect on income available to common shareholders.


	2005				2004				2003
			Per Share				Per Share				Per Share
	Shares		Amount		Shares		Amount		Shares		Amount

Basic earnings per share		4,798,907	$	0.85		4,546,117	$	0.61		3,208,169	$	1.24


Effect of dilutive securities, stock options		302,645				326,964				296,200


Diluted earnings per share		5,101,552	$	0.80		4,873,081	$	0.57		3,504,369	$	1.14

Average shares of 125,300, 184,000 and 21,000 have been excluded from the earnings per share calculation for 2005, 2004 and 2003, respectively, because their effects were anti-dilutive.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

We maintain a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As required, management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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

Our management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III.

Except as otherwise indicated, information called for by the following items under Part III is contained in the proxy statement for Alliance Bankshares’ 2006 Annual Meeting of Shareholders (the “2006 Proxy Statement”) to be held on June 28, 2006.

Item 10. Directors and Executive Officers of the Registrant

Information with respect to Alliance Bankshares’ directors and audit committee is contained in the 2006 Proxy Statement under the captions “Election of Directors” and “Meetings and Committees of the Board of Directors,” and is incorporated herein by reference. All other information required by this item is contained in the 2006 Proxy Statement under the captions “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Ethics,” and is incorporated herein by reference.

Item 11. Executive Compensation

Information regarding executive compensation is contained in the 2006 Proxy Statement under the captions “Executive Compensation,” “Report of the Compensation Committee on Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by reference. Information regarding director compensation is contained in the 2006 Proxy Statement under the caption “Director Compensation,” and is incorporated herein by reference. Bankshares’ stock performance graph is contained in the 2006 Proxy Statement under the caption “Performance Graph” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning stock ownership by directors, executive officers and five percent beneficial owners is contained in the 2006 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference. Information regarding equity securities of Alliance Bankshares that are authorized for issuance under equity compensation plans is contained in the 2006 Proxy Statement under the caption “Securities Authorized for Issuance Under Equity Compensation Plans,” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information regarding transactions with management is contained in the 2006 Proxy Statement under the caption “Interest of Management in Certain Transactions,” and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information regarding Principal Accounting Fees and Services is contained in the 2006 Proxy Statement under the caption “Principal Accountant Fees and Services” and “Pre-Approval Policies,” and is incorporated herein by reference.


⁽¹⁾		Contractual maturities are not a reliable indicator of the expected life of investment securities.

		Instruments may be prepaid by the borrower or issuer.

⁽²⁾		AFS investments at market value; HTM investments at cost basis.


	Purchased Funds Distribution
	Year Ended December 31,
	2005			2004			2003
	(Dollars in thousands)
At Period End
FHLB Advances	$	30,000		$	20,000		$	13,000
Customer repos		37,668			29,890			34,991
Other borrowed funds		20,421			15,462			260

Total at period end	$	88,089		$	65,352		$	48,251


Average Balances
FHLB Advances	$	21,068		$	19,617		$	15,844
Customer repos		52,571			33,941			30,418
Other borrowed funds		29,218			17,728			26,819

Total average balance	$	102,857		$	71,286		$	73,081


Average rate paid on all borrowed funds, end of period		3.37	%		2.28	%		2.28	%


Average rate paid on all borrowed funds, during the period		3.40	%		2.61	%		2.16	%


Maximum outstanding at any month end period	$	91,884		$	70,322		$	96,908


	December 31, 2005
Interest Rate Shocks	NII			EVE
-200 bp		(20.7	)%		(3.3	)%
-100 bp		(5.5	)%		(0.5	)%
+100 bp		6.1	%		(1.6	)%
+200 bp		11.3	%		(5.0	)%


	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
Available for sale securities:
U.S. Government corporations and agencies	$	57,663	$	—	$	(1,340	)	$	56,323
U.S. Government agency CMOs & PCMOs		76,370		48		(459	)		75,959
U.S. Government agency MBS		45,534		89		(173	)		45,450
Municipal securities		28,448		21		(559	)		27,910
Restricted stocks:
Community Bankers Bank		55		—		—			55
Federal Reserve Bank		1,056		—		—			1,056
Federal Home Loan Bank		2,288		—		—			2,288

Total	$	211,414	$	158	$	(2,531	)	$	209,041


Held-to-maturity securities:
Certificate of deposit	$	100	$	—	$	—		$	100

Total	$	100	$	—	$	—		$	100


	2004
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
US Government corporations and agencies	$	—	$	—		$	56,323	$	(1,340	)	$	56,323	$	(1,340	)
US Government agency CMOs and PCMOs		58,811		(459	)		—		—			58,811		(459	)
US Government agency MBS		18,689		(97	)		2,646		(76	)		21,335		(173	)
Municipal securities		12,636		(210	)		8,946		(349	)		21,582		(559	)


Total temporarily impaired investment securities:	$	90,136	$	(766	)	$	67,915	$	(1,765	)	$	158,051	$	(2,531	)


		Page #
PART I.

Item 1.	Business		1
Item 1A.	Risk Factors		15
Item 1B.	Unresolved Staff Comments		18
Item 2.	Properties		18
Item 3.	Legal Proceedings		19
Item 4.	Submission of Matters to a Vote of Security Holders		19

PART II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6.	Selected Financial Data		21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		49
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		88
Item 9A.	Controls and Procedures		88
Item 9B.	Other Information		88

PART III.

Item 10.	Directors and Executive Officers of the Registrant		89
Item 11.	Executive Compensation		89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		89
Item 13.	Certain Relationships and Related Transactions		89
Item 14.	Principal Accountant Fees and Services		89

PART IV.

Item 15.	Exhibits, Financial Statement Schedules		90

SIGNATURES			92


	Allocation of the Allowance for Loan Losses
	Year Ended December 31,
	2005		2004		2003		2002		2001
	(Dollars in thousands)
Commercial	$	529	$	437	$	434	$	350	$	150
Commercial real estate		1,317		901		409		275		175
Real estate construction		1,155		383		127		150		75
Residential real estate		349		403		383		191		150
Consumer		26		40		24		100		60
Other		46		136		67		—		—


Total loans	$	3,422	$	2,300	$	1,444	$	1,066	$	610


	Investment Securities⁽¹⁾
	December 31,
	2005		2004		2003
	(Dollars in thousands)
Available For Sale Securities
US Government agency securities	$	67,228	$	56,323	$	91,078
US Government agency CMOs & PCMOs		110,449		75,959		3,267
US Government agency MBS		33,438		45,450		38,000
State & Municipal securities		13,112		27,910		40,921
FHLB & FRB Common Stock		4,409		3,344		1,678
Other investments		55		55		55


Total Available For Sale Securities ⁽²⁾	$	228,691	$	209,041	$	174,999


Held To Maturity Securities
Certificate of Deposit	$	100	$	100	$	100


Total Held To Maturity Securities ⁽²⁾	$	100	$	100	$	100


Total Investment Securities ⁽²⁾	$	228,791	$	209,141	$	175,099


	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due after one year through five years	$	33,622	$	32,683	$	100	$	100
Due after five years through ten years		50,164		48,234		—		—
Due after ten years		146,207		143,310		—		—
Restricted securities		4,464		4,464		—		—

Total	$	234,457	$	228,691	$	100	$	100


	2005			2004
Real estate:
Residential real estate	$	69,957		$	59,819
Commercial real estate		107,200			71,432
Construction		87,046			38,578

Total real estate		264,203			169,829
Agricultural		274			278
Commercial		37,131			35,077
Consumer		2,957			4,020

Gross loans		304,565			209,204

Less: unearned discounts and fees		(337	)		—
Less: allowance for loan losses		(3,422	)		(2,300	)

Net loans	$	300,806		$	206,904


	2005			2004
Leasehold improvements	$	979		$	894
Furniture, fixtures and equipment		3,748			3,238

		4,727			4,132
Less: accumulated depreciation and amortization		(2,775	)		(1,976	)

Premises and equipment, net	$	1,952		$	2,156


	2005		2004
Deferred tax assets:
Bad debt expense	$	1,151	$	773
Deferred rent		13		21
Deferred loan fees (costs), net		112		—
Depreciation and amortization		5		—
Other		4		—
Unrealized loss on securities available-for-sale		1,960		807

		3,245		1,601


Deferred tax liabilities:
Deferred loan fees (costs), net		—		26
Depreciation and amortization		—		106
Other		27		90

		27		222

Net defered tax assets	$	3,218	$	1,379


											Minimum
											To Be Well
											Capitalized Under
						Minimum Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2005:
Total Capital (to Risk Weighted Assets)
Consolidated	$	62,743		17.0	%	$	29,573		8.0	%		N/A		N/A
Alliance Bank Corporation	$	54,836		14.9	%	$	29,534		8.0	%	$	36,918		10.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	59,321		16.1	%	$	14,786		4.0	%		N/A		N/A
Alliance Bank Corporation	$	51,414		13.9	%	$	14,767		4.0	%	$	22,151		6.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	59,321		10.0	%	$	23,834		4.0	%		N/A		N/A
Alliance Bank Corporation	$	51,414		8.6	%	$	23,794		4.0	%	$	29,743		5.0	%

As of December 31, 2004:
Total Capital (to Risk Weighted Assets)
Consolidated	$	60,488		22.3	%	$	21,689		8.0	%		N/A		N/A
Alliance Bank Corporation	$	47,161		17.4	%	$	21,628		8.0	%	$	27,035		10.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	58,188		21.5	%	$	10,845		4.0	%		N/A		N/A
Alliance Bank Corporation	$	44,861		16.6	%	$	10,814		4.0	%	$	16,221		6.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	58,188		11.6	%	$	20,025		4.0	%		N/A		N/A
Alliance Bank Corporation	$	44,861		9.0	%	$	20,003		4.0	%	$	25,004		5.0	%

23.		COMMON STOCK DIVIDEND AND CAPITALIZATION

		On September 29, 2003, Bankshares’ board of directors approved a three-for-two stock split in the form of a common stock dividend. The common stock dividend was in the form of one share of Bankshares common stock, par value $4.00 per share, for every two shares of Bankshares common stock issued and outstanding as of the close of business on September 17, 2003, and was paid on September 29, 2003 to stockholders of record at the close of business on September 17, 2003.

		On February 23, 2004, we issued 1,481,470 shares of common stock in a registered public offering at a price of $17.00 per share before commissions and expenses. Gross proceeds amounted to $25.2 million. Net proceeds after commissions but prior to other offering expenses were approximately $23.9 million. A portion of the new capital was downstreamed from Bankshares to the banking subsidiary, Alliance Bank. Bankshares is using the net proceeds from this offering to provide additional capital to the Bank to support anticipated increases in our loans and deposits as our business grows.


	2005			2004
Assets
Cash	$	7,291		$	12,743
Investment in subsidiaries		50,705			43,295
Other assets		976			966


Total assets	$	58,972		$	57,004


Liabilities
Trust preferred capital notes	$	10,310		$	10,310
Other liabilities		51			72

Total liabilities	$	10,361		$	10,382


Stockholders’ Equity
Common stock	$	19,244		$	19,173
Capital surplus		19,955			19,855
Retained earnings		13,218			9,160
Accumulated other comprehensive (loss), net		(3,806	)		(1,566	)

Total stockholders’ equity	$	48,611		$	46,622


Total liabilities and stockholders’ equity	$	58,972		$	57,004

25.		SEGMENT REPORTING

		Bankshares has two reportable segments: traditional commercial banking and a mortgage banking business. Revenues from commercial banking operations consist primarily of interest earned on loans and investment securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market and loan origination fee income.

		The commercial bank segment provides the mortgage segment with the short term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on a premium over their cost to borrow funds. These transactions are eliminated in the consolidation process.

		The following table presents segment information for the years ended December 31, 2005, 2004 and 2003:


			2005

	Commercial		Mortgage						Consolidated
	Banking		Banking			Eliminations			Totals
Revenues:
Interest income	$	29,054	$	694		$	(819	)	$	28,929
Gain on sale of loans		—		2,997			—			2,997
Other		507		10			—			517

Total operating income		29,561		3,701			(819	)		32,443

Expenses:
Interest expense		10,501		819			(819	)		10,501
Provision for loan loss		1,142		—			—			1,142
Salaries and employee benefits		5,254		2,657			—			7,911
Other		5,844		1,293			—			7,137

Total operating expenses		22,741		4,769			(819	)		26,691

Income before income taxes	$	6,820	$	(1,068	)	$	—		$	5,752

Total assets	$	610,854	$	9,021		$	(8,390	)	$	611,485

Capital expenditures	$	335	$	260		$	—		$	595


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).

2.2		Stock Purchase Agreement dated October 6, 2005, by and between Thomas P. Danaher, Thomas P. Danaher and Company, Inc. and Alliance Bank Corporation (incorporated by reference to Exhibit 10.9 to Form 8-K filed October 12, 2005).

3.1		Articles of Incorporation of Alliance Bankshares Corporation (incorporated by reference to Exhibit 3.1 to Form 8-K12g-3 filed August 21, 2002).

3.2		Bylaws of Alliance Bankshares Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K12g-3 filed August 21, 2002).


10.1*		Alliance Bankshares Corporation Stock Option Plan, as restated effective March 25, 2003, and further amended April 27, 2005 (incorporated by reference to Appendix A to the definitive proxy statement filed May 2, 2005).

10.1.1*		Form of Stock Option Agreement

10.2*		Employment agreement between Alliance Bank and Thomas A. Young, Jr. dated March 1, 2003 (incorporated by reference to Exhibit 10.30 to Form 10-QSB filed May 15, 2003).

10.3*		Employment agreement between Alliance Bank and Paul M. Harbolick, Jr. dated March 1, 2003 (incorporated by reference to Exhibit 10.31 to Form 10-QSB filed May 15, 2003).


10.4*		Employment agreement between Alliance Bank and Craig W. Sacknoff dated March 1, 2003 (incorporated by reference to Exhibit 10.32 to Form 10-QSB filed May 15, 2003).

10.6*		Employment agreement between Alliance Bank and Frank H. Grace, III dated January 13, 2004, as amended on February 27, 2004 (incorporated by reference to Exhibit 10.34 to Form 10-KSB filed April 1, 2004).

10.7*		Base Salaries of Named Executive Officers.

10.8*		Non-Employee Director Compensation.

10.9*		Employment agreement between Thomas P. Danaher and Company, Inc. (now, Alliance Insurance Agency, Inc.) and Thomas P. Danaher dated November 15, 2005 (incorporated by reference to Exhibit 10.10 to Form 8-K filed November 21, 2005).

21		Subsidiaries of the Registrant.

23.1		Consent of Yount, Hyde & Barbour, P.C.

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.


March 31, 2006				/s/ Thomas A. Young, Jr.
Date				Thomas A. Young, Jr.
				President & CEO
				(principal executive officer)

March 31, 2006				/s/ Paul M. Harbolick, Jr.

Date				Paul M. Harbolick, Jr.
				Executive Vice President & CFO,
				Corporate Secretary
				(principal financial and accounting officer)


March 31, 2006		/s/ Harvey E. Johnson, Jr.

Date		Harvey E. Johnson, Jr.
		Chairman of the Board of Directors

March 31, 2006		/s/ William M. Drohan

Date		William M. Drohan
		Director

March 31, 2006		/s/ Lawrence N. Grant

Date		Lawrence N. Grant
		Director

March 31, 2006		/s/ Serina Moy

Date		Serina Moy
		Director

March 31, 2006		/s/ George S. Webb

Date		George S. Webb
		Director

March 31, 2006		/s/ Robert G. Weyers

Date		Robert G. Weyers
		Director

March 31, 2006		/s/ Thomas A. Young, Jr.

Date		Thomas A. Young, Jr.
		Director, President & CEO (principal executive officer)

March 31, 2006		/s/ Paul M. Harbolick, Jr

Date		Paul M. Harbolick, Jr.
		Executive Vice President & CFO (principal financial and accounting officer)