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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


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

For the fiscal year ended December 31, 2006


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

For the transition period from to

Commission file number: 000-49976

ALLIANCE BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)


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

14200 Park Meadow Drive, Suite 200 South, Chantilly, Virginia 20151
(Address of principal executive offices) (Zip Code)

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

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


Common Stock, $4.00 par value per share		The NASDAQ Stock Market LLC

Title of each class		Name of each exchange on which registered

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

None

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 þ Non-accelerated filer o

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

The aggregate market value of Alliance Bankshares Corporation common stock held by non-affiliates as of June 30, 2006 was $78,955,655 based on the closing sale price of $16.40 per common share.

The number of shares of common stock outstanding as of March 12, 2007 was 5,551,477.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the registrant’s 2007 Annual Meeting of Shareholders to be held in June 2007 (the “2007 Proxy Statement”) are incorporated by reference into Part III of this report.

TABLE OF CONTENTS


		Page #
PART I.

Item 1.	Business	1
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	20

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	48
Item 8.	Financial Statements and Supplementary Data	51
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	87
Item 9A.	Controls and Procedures	87
Item 9B.	Other Information	88

PART III.

Item 10.	Directors, Executive Officers and Corporate Governance	88
Item 11.	Executive Compensation	88
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	88
Item 13.	Certain Relationships and Related Transactions, and Director Independence	89
Item 14.	Principal Accountant Fees and Services	89

PART IV.

Item 15.	Exhibits and Financial Statement Schedules	89

SIGNATURES		91

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 (Alliance Bank) in a statutory share exchange on August 16, 2002. Our primary asset is Alliance Bank.

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 (AHF), a wholly owned subsidiary of Alliance Bank, opened in July 2001 to pursue and execute our strategic initiative of engaging in mortgage banking. On December 27, 2006, Bankshares announced it would restructure its mortgage banking operations conducted by AHF and create a division with Alliance Bank instead. As a result, Alliance Bank Mortgage Division (ABMD) was created. Bankshares intends to wind up the existing business of the subsidiary AHF, in early 2007. Alliance Virginia Capital Trust I (Trust), a Delaware statuary trust was formed in June 2003 for the purpose of issuing trust preferred capital securities. Alliance Insurance Agency, Inc. (AIA), a wholly owned subsidiary of Alliance Bank, was formed in 2005. AIA acquired Danaher Insurance Agency on November 15, 2005. In 2006, AIA formed Alliance/Battlefield Insurance Agency, LLC (Battlefield), a wholly owned subsidiary of AIA. On December 14, 2006 Battlefield acquired certain assets and liabilities of Battlefield Insurance Agency, Inc. and Northern Virginia Insurance Agency, Inc.

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 24% during the year, rising to $378.7 million at December 31, 2006 compared to $304.2 million at December 31, 2005.

We categorize our loans into 5 general classifications: Commercial Business, Commercial Real Estate, Real Estate Construction, Residential Real Estate, and Consumer Installment. Over the past year, we have experienced significant growth in our total portfolio, with growth coming in all 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 business 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 business loans represented 13.8% of the loan portfolio or $52.3 million at December 31, 2006, an increase from $37.1 million at December 31, 2005, which was 12.2% of the portfolio. This compares to 16.8% or $35.1 million at December 31, 2004.

Commercial Real Estate Lending. As of December 31, 2006, commercial real estate loans were $126.0 million or 33.3% of the loan portfolio, compared to $107.2 million and 35.2% of the portfolio as of December 31, 2005. This compares to $71.4 million or 34.2% of the loan portfolio at December 31, 2004. The growth reflects the demand on the part of our customers to participate in the 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 generally divided into two categories: loans to commercial entities that will occupy most or all of the property (described as “owner occupied”) (approximately 58% of the commercial real estate portfolio) and loans for income producing properties held by investors.

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 a 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 primary categories: commercial construction which will convert to either commercial real estate loans or will be sold in individual condo units and residential construction loans to builders for resale. Overall, our construction loan portfolio grew 14% over the past year, reflecting the changing demand in the market for real estate financing due to a slowing real estate market. In the aggregate, this category totaled $99.6 million or 26.3% of our portfolio as of December 31, 2006, compared to $87.0 million and 28.6% of the portfolio as of December 31, 2005. This compares to $38.6 million or 18.4% of the loan portfolio at December 31, 2004.

Commercial construction loans are underwritten using the same standards as the commercial real estate loans described above. Alliance Bank has generally agreed to make longer term loans (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. 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 AHF or ABMD 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.

The overall health of the local real estate market has a direct correlation on our real estate construction loan portfolio. The slowdown the real estate market place experienced in 2006 has caused developers to review projects carefully. They may slow down the delivery rates of projects, modify projects, defer projects or cancel them altogether. The larger volume of residential real estate on the market has made for stiffer pricing competition for developers, which in turn, may cause a decrease in the volume of loans in this area. Many of the projects undertaken prior to 2006 with expected delivery dates of 2006 and into 2007 have been impacted. Our organization has taken a close look at this line of business and has determined it is a desirable long term line of business but warrants a moderating exposure in the short term.

Residential Real Estate Lending. This portion of the loan portfolio grew 38% in 2006 over 2005, to $96.5 million and 25.5% of the portfolio from $70.0 million and 23.0%. The $96.5 million in this category consists of two different loan types: home equity loans (“HELOCs”, loans secured by secondary financing on residential real estate) and first mortgage loans secured by single family residences not held for sale through AHF or ABMD.

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 our mortgage banking division, 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 approximately $84 thousand.

Residential first mortgage loans carried on 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 or approximately $302 thousand.

The second group in this category is loans secured by first trusts on residential property to owners. In the past, our preference was to originate first trusts through AHF for sale, now this will be done through our mortgage banking division, ABMD. 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, 2006 was $4.4 million compared to $3.0 million as of December 31, 2005.

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 $250,000. Loans from $250,000 to $1,000,000 require a second signature of either the Director of Commercial Banking, Chief Credit Officer, or President.

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 or less for transactions perceived to have greater risk) 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. In addition, we try to spread higher exposures over multiple activities of the particular borrower. Our goal is to limit the impact one borrower or event can have on 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 a 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.

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 call for reducing our exposure to certain construction categories and land loans.

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. The review is conducted at least annually. 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 director’s 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 company regarding specific loans, loan policies or credit administration.

Lending Limit. At December 31, 2006, our legal lending limit for loans to one borrower was $9.0 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 our mortgage banking division.

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 subsidiary, AHF, which opened in July 2001. As described below, however, on December 27, 2006, Bankshares announced its intentions to exit the mortgage banking operations conducted by AHF. Our mortgage banking services will continue but as a smaller division of Alliance Bank.

Through AHF, we originated conforming and non-conforming home mortgages in the greater Washington, D.C. metropolitan area. As part of our overall risk management strategy, all loans were sold on a correspondent basis to major national mortgage banking or financial institutions, and servicing rights are sold with the loans.

Loan sale gains were $4.1 million in 2006, compared to $3.0 million in 2005. AHF originated $199.6 million in mortgage loans, an increase of $25.3 million over the 2005 level of $174.3 million. Proceeds from mortgage loans were $191.1 million in 2006 compared to $196.2 million in 2005.

On December 27, 2006, Bankshares announced its intention to restructure its mortgage banking operations and wind down the existing AHF operations and create a division with in the Bank. Bankshares took a fourth quarter pre-tax charge of $680 thousand to wind down the AHF operations, with an after-tax charge of $449 thousand. The charges covered staff severance, systems charges, estimated subleasing costs and various other costs associated with the closure of AHF. Our mortgage banking services will continue but as a smaller division of Alliance Bank.

INSURANCE

On November 15, 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. For the year ended December 31, 2006 commission revenues were $1.6 million.

We expanded on our insurance agency line of business in December 2006 through the purchase of certain assets and liabilities of Battlefield Insurance Agency, Inc. and Northern Virginia Insurance Agency, Inc. We operate those business activities as Alliance/Battlefield Insurance Agency, LLC, which is a wholly owned subsidiary of AIA. The size of this division is approximately 75% of our base insurance agency.

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, 2006 we had 113 full-time and 2 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, Falls Church and Fredericksburg; 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, Tysons Corner and Fredericksburg. Our mortgage banking division and insurance agencies both serve a broad market in the greater Washington, D.C. metropolitan area. Prior to closing at the end of 2006, the AHF mortgage origination offices were located in Fairfax, Manassas and Reston; the new division, ABMD, will operate out of our Chantilly headquarters location. Our insurance agencies are located in Annandale and Manassas. In addition to the offices for the Bank, mortgage banking and insurance, 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. In addition, according to a survey compiled by the FDIC reflecting June 30, 2006 information, total deposits in the metropolitan Washington, D.C. area were approximately $144.8 billion, up $13.8 billion from the June 30, 2005 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 long term positive 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 on the basis of paying competitive interest rates, offering high-quality customer service and using technology to deliver deposit services effectively. We seek to distinguish ourselves from our competitors by making a special effort to obtain deposits from title and mortgage loan closing companies.

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, Bankshares 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, 2006, the total capital to risk-weighted asset ratio of Bankshares was 15.0% and the ratio of the Bank was 13.3%. At December 31, 2006, the Tier 1 capital to risk-weighted asset ratio was 14.0% for Bankshares and 12.3% 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, 2006, the Tier l leverage ratio was 9.7% for Bankshares 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, 2006, Bankshares was considered “well capitalized.”

Payment of Dividends

As a bank holding company, we are a separate legal entity from Alliance Bank, AHF and AIA. 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 Deposit Insurance Fund (DIF) 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

Alliance Bank’s deposits are insured up to applicable limits by the DIF of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC recently amended its risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (FDIRA). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Unlike the other categories, Risk Category I, which contains the least risky depository institutions, contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points. FDIRA also provided for the possibility that the FDIC may pay dividends to insured institutions if the DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits.

Restrictions on Extensions of Credit and Investment in the Stock of 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, mortgage loan originators, and insurance agents, 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.

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 slower 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. In 2006 we saw a larger decline in the title company deposits than in the past years. We maintained the key client relationships; however, many title companies were impacted in their respective business due to the slower real estate market.

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.

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.

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.

Structural changes to our mortgage banking business may not be adequate to deal with the real estate mortgage market volatility due to key economic issues such as inventory, pricing, production staff and interest rates, which could dampen our financial performance. In late 2006 we announced a major restructuring of our mortgage banking unit, AHF. We decided to exit the stand alone operating business of our subsidiary AHF and created an approximately ten person division within the Bank to serve as a client focused mortgage banking unit. The structural changes were designed to improve operating performance in the future by utilizing a more focused approach to the mortgage banking business. These changes, however, may not have the desired impacts due to several factors. The recent slowing of the local housing market in the metropolitan Washington, D.C. area has led to large levels of inventories, which could affect real estate pricing and, relatedly, mortgage origination fees. The unusual interest rate market has made mortgage financing more difficult for traditional borrowers, which could lead to a decrease in the volume of mortgage originations. These factors, along with normal personnel retention challenges, create a series of business risks which could adversely affect Bankshares’ financial performance.

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.

Failure to maintain an effective system of internal control over financial reporting may not allow us to be able to accurately report our financial results or prevent fraud. The requirements of Section 404 of the Sarbanes Oxley Act and SEC rules and regulations require an annual management report on our internal controls over financial reporting, including, among other matters, management’s assessment of the effectiveness of our internal control over financial reporting, and an attestation report by our independent registered public accounting firm addressing these assessments. Such reports have been included in this annual report on Form 10-K. Management assessed the effectiveness of our internal control over financial reporting, including safeguarding of assets as of December 31, 2006 and believes that, as of December 31, 2006, we maintained effective internal control over financial reporting, including safeguarding of assets. If we fail to maintain an effective system of internal control over financial reporting we may not be able to report our financial results with the desired degree of accuracy or to prevent fraud.

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 to acquire new branch locations 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⁾

14200 Park Meadow Drive Chantilly, Virginia	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

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 ⁽²⁾

607 William Street Fredericksburg, Virginia	Loan production office	November 2011

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

10611 Balls Ford Road Manassas, Virginia	Insurance agency office	November 2013

9020 Mathis Avenue Manassas, Virginia	Insurance agency office	November 2008

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

9990 Lee Highway Fairfax, Virginia	Former mortgage banking headquarters Former mortgage banking office	March 2010 ⁽³⁾

1840 Michael Faraday Drive Reston, Virginia	Former mortgage banking office	December 2008 ⁽³⁾

14280 Park Meadow Drive Chantilly, Virginia	Former Corporate Headquarters Subleased for remaining term	October 2007 ⁽⁴⁾


⁽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⁾		Initial lease has expired, month to month terms exit.

⁽³⁾		On the market for sublease through the remainder of the base term.

⁽⁴⁾		Subleased thru the remainder of the initial lease term.

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

There are no material pending legal proceedings to which Bankshares or any of its subsidiaries is a party or to which the property of Bankshares or any of its subsidiaries is subject.

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, 2006.

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 12, 2007, we had 5,551,477 shares of common stock issued and outstanding, held by approximately 398 shareholders of record and the closing price of our common stock was $15.28.

The high and low sales prices per share for our common stock for each quarter for the two years ended December 31, 2006, as reported by the NASDAQ Stock Market, are shown in the table below. During these periods, we did not issue any cash dividends.


	2006*				2005*
Quarter	High		Low		High		Low
First	$	16.48	$	13.91	$	15.11	$	13.07
Second		16.92		16.18		14.00		12.35
Third		17.11		15.48		14.72		13.04
Fourth		17.34		15.49		14.78		13.91


*		All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006.

Dividend Policy

We have elected to retain all earnings to support current and future growth. 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 15% stock dividend was distributed to shareholders on June 30, 2006.

Payment of dividends is at the discretion of Bankshares’ Board of Directors and is subject to various federal and state regulatory limitations. For further information regarding payment of dividends, refer to Item 1, “Business,” under the heading “Payment of Dividends” and Note 20 of the Notes to Consolidated Financial Statements.” It is our current policy to retain cash earnings to support future organizational growth. However, on May 25, 2006 the Board of Directors of Bankshares declared a three-for-twenty stock split in the form of a 15% stock dividend. Each shareholder received three additional shares for every twenty shares of stock held on the record date. The stock dividend was paid on June 30, 2006 to shareholders of record at the close of business on June 9, 2006.

Item 6. Selected Financial Data


	Selected Financial Information
	Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands, except per share data)

Income Statement Data:
Interest income	$	39,575		$	28,929		$	19,151		$	14,617		$	10,187
Interest expense		18,522			10,501			6,852			5,407			3,471

Net interest income		21,053			18,428			12,299			9,210			6,716
Provision for loan losses		1,020			1,142			886			396			478
Non-interest income		6,027			3,514			6,181			8,774			4,356
Non-interest expense		19,422			15,048			13,963			12,102			7,333
Income taxes		2,159			1,694			864			1,497			839

Net income	$	4,479		$	4,058		$	2,767		$	3,989		$	2,422


Per Share Data and Shares Outstanding Data: ⁽¹⁾
Basic net income	$	0.81		$	0.74		$	0.53		$	1.08		$	0.66
Fully diluted net income		0.76			0.69			0.49			0.99			0.64
Cash dividends declared		—			—			—			—			—
Book value at period end		9.84			8.79			8.46			5.19			4.82
Shares outstanding, period end		5,551,477			5,532,708			5,512,351			3,727,715			3,648,551
Average shares outstanding, basic		5,536,771			5,518,743			5,228,035			3,689,394			3,648,551
Average shares outstanding, diluted		5,922,475			5,866,785			5,604,043			4,030,024			3,776,983

Balance Sheet Data:
Total assets	$	644,371		$	611,485		$	479,720		$	357,048		$	280,625
Total loans, net of unearned discount		378,676			304,228			209,204			118,762			82,786
Total investment securities		200,819			228,791			209,141			175,099			131,085
Total deposits		471,333			461,178			355,691			276,739			215,966
Stockholders’ equity		54,637			48,611			46,622			19,355			17,568

Performance Ratios:
Return on average assets		0.72	%		0.71	%		0.63	%		1.16	%		1.23	%
Return on average equity		8.75	%		8.59	%		6.87	%		21.00	%		16.00	%
Net interest margin ⁽²⁾		3.64	%		3.51	%		3.10	%		3.07	%		3.88	%

Asset Quality Ratios: ⁽³⁾
Allowance to period-end loans		1.16	%		1.12	%		1.10	%		1.22	%		1.29	%
Allowance to non-performing loans		5.34	X		1.87	X		1.77	X		3.58	X		N/A
Non-performing assets to total assets		0.13	%		0.30	%		0.27	%		0.13	%		N/A
Net charge-offs to average loans		0.02	%		0.01	%		0.02	%		0.01	%		0.03	%

Capital Ratios:
Tier I risk-based capital		14.0	%		16.1	%		21.5	%		15.0	%		12.3	%
Total risk-based capital		15.0	%		17.0	%		22.3	%		18.4	%		13.1	%
Leverage capital ratio		9.7	%		10.0	%		11.6	%		7.0	%		6.4	%
Total equity to total assets		8.5	%		7.9	%		9.7	%		5.4	%		6.3	%


⁽¹⁾		All share amounts and dollar amounts per share have been adjusted to reflect the three-for-two stock split in the form of a stock dividend paid on September 29, 2003 and the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006.

⁽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.

All share amounts and dollar amounts per share in the following discussion have been adjusted to reflect the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006.

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;

	•		Anticipated growth of our insurance company;

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

	•		Risks inherent in making loans such as repayment risks and fluctuating collateral values;

	•		Changes in the national and local home mortgage market;

	•		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;

	•		Changing trends in customer profiles and behavior;

	•		Competitive factors within the financial services industry;

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

	•		Other factors described from time to time in our Securities and Exchange Commission filings.

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.

	2006		Performance Highlights

	•		Assets were $644.4 million at December 31, 2006, an increase of $32.9 million (5.4%) from December 31, 2005.

	•		Total loans, net of unearned discount were $378.7 million at December 31, 2006, an increase of $74.4 million (24.5%) from December 31, 2005.

	•		Our investment portfolio was $200.8 million at December 31, 2006, a decrease of $28.0 million or 12.2% less than December 31, 2005.

	•		Deposits were $471.3 million at December 31, 2006, an increase of $10.1 million (2.2%) from December 31, 2005.

	•		Demand deposits were $158.7 million at December 31, 2006, a decrease of $27.2 million or 14.6% less than December 31, 2005.

	•		Net income was $4.5 million at December 31, 2006, an increase of $421 thousand (9.8%) from December 31, 2005.

	•		On December 27, 2006 we announced our intention to transition AHF from a separate subsidiary to a division of the Bank and took a $680 thousand pre-tax loss to wind up the operations.

	•		AIA commission revenue income was $1.6 million as of December 31, 2006.

	•		On December 14, 2006 AIA acquired certain assets and liabilities of Battlefield Insurance Agency, Inc. and Northern Virginia Insurance Agency, Inc. to form Alliance/Battlefield Insurance Agency, LLC.

Executive Overview

Balance Sheet

December 31, 2006 compared to December 31, 2005. Total assets were $644.4 million as of December 31, 2006, an increase of $32.9 million over the December 31, 2005 level of $611.5 million. As of year end 2006, total loans were $378.7 million, loans held for sale were $18.5 million and investments were $200.8 million. The balance of the earning assets was overnight federal funds sold of $11.7 million. These earning assets amounted to $609.7 million or 94.6% of total assets at year end 2006, as compared to $576.4 million or 94.3% of total assets as of year end 2005.

The allowance for loan losses was $4.4 million or 1.16% of loans outstanding as of December 31, 2006. This compares to $3.4 million or 1.12% of loans outstanding as of December 31, 2005. (The ratios exclude loans held for sale.) There were two non-performing loans totaling $476 thousand as of December 31, 2006, compared to one non-performing loan of $204 thousand as of December 31, 2005. Impaired loans or those loans requiring a specific allocation within the allowance for loan losses amounted to $636 thousand as of December 31, 2006 compared to $1.8 million as of December 31, 2005. The specific allocation of the allowance for loan losses was $126 thousand as of December 31, 2006 and $115 thousand as of December 31, 2005.

Total deposits amounted to $471.3 million as of December 31, 2006, an increase of $10.1 million over the December 31, 2005 level of $461.2 million. This change is attributable to the business building efforts of relationship officers and the use of brokered deposits to augment our natural deposit growth. Total demand deposits were $158.7 million as of December 31, 2006 compared to $185.9 million as of year end 2005. Demand deposits represent 33.7% of total deposits as of December 31, 2006, compared to 40.3% as of December 31, 2005. Because of the slower real estate market, average deposits from title companies were lower than in previous years.

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, 2006, there were $43.3 million of customer repos outstanding or $5.6 million more than were outstanding at the end of 2005. The growth relates to additional customers garnered in 2006 as well as expansion of existing customer relationships. As of December 31, 2006, the organization had $50.0 million in FHLB long term advances outstanding, compared to $30.0 million as of December 31, 2005. 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, 2006 and December 31, 2005, the full $10 million was considered Tier I regulatory capital.

Total stockholders’ equity was $54.6 million as of December 31, 2006 and $48.6 million as of December 31, 2005. Book value per share increased to $9.84 as of December 31, 2006 from $8.79 as of December 31, 2005.

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. The loan portfolio, net of discounts and fees, was $304.2 million at December 31, 2005, $95.0 million greater than the December 31, 2004 level of $209.2 million. Investment securities available for sale amounted to $228.7 million at December 31, 2005, a $19.7 million increase over the December 31, 2004 level of $209.0 million. 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. Total stockholders’ equity amounted to $48.6 million at December 31, 2005, an increase of $2.0 million over the $46.6 million level at December 31, 2004. Book value per share increased from $8.46 in 2004 to $8.79 as of December 31, 2005.

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.

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.

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.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R). SFAS No. 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and nonvested shares based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Bankshares adopted SFAS 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

Results of Operations

2006 compared to 2005. For the year ended December 31, 2006, net income amounted to $4.5 million, compared to $4.1 million for 2005. Earnings per common share, basic were $.81 in 2006 and $.74 in 2005. Earnings per common share, diluted were $.76 in 2006 and $.69 in 2005. Return on average equity was 8.75% in 2006 compared to 8.59% in 2005. Return on average assets was .72% in 2006 compared to .71% in 2005. The net interest margin was 3.64% in 2006 which compares to 3.51% in 2005.

On December 27, 2006, Bankshares announced its intention to restructure the mortgage banking operations conducted by AHF but continue these operations as a division of the Bank. Bankshares took a fourth quarter pre-tax charge of $680 thousand to wind down the operations, with an after-tax charge of $449 thousand. The charges covered staff severance, systems charges, estimated subleasing costs and various other costs associated with the closure of AHF. Our mortgage banking services will continue, but as a division of Alliance Bank.

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 $.74 in 2005 and $.53 in 2004. Earnings per common share, diluted were $.69 in 2005 and $.49 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.

Interest Income and Expense

Net interest income (on a fully taxable equivalent basis) was $21.3 million in 2006 or $2.4 million greater than the 2005 level of $18.9 million. This 12.9% increase is primarily attributable to the substantial increase in net earning assets, and the growth of our loan portfolio.

The following table illustrates average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders’ equity and related income, expense and corresponding weighted average yields and rates.

The average balances used in these tables and other statistical data were calculated using daily average balances.

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


	Year Ended December 31,
	2006								2005								2004
	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	$	207,608		$	9,836		4.74	%	$	227,579		$	9,991		4.39	%	$	199,836		$	8,905		4.46	%

Loans ⁽²⁾		366,074			29,459		8.05	%		268,633			18,149		6.76	%		175,743			10,289		5.85	%

Federal funds sold		10,188			503		4.94	%		40,627			1,213		2.99	%		38,511			486		1.26	%


Total interest earning assets		583,870			39,798		6.82	%		536,839			29,353		5.47	%		414,090			19,680		4.75	%

Non-interest earning assets:
Cash and due from banks		23,809								27,107								20,006
Premises and equipment		2,639								2,176								2,060
Other assets		13,679								8,019								7,179
Less: allowance for loan losses		(3,992	)							(2,824	)							(1,705	)

Total non-interest earning assets		36,135								34,478								27,540

Total Assets	$	620,005							$	571,317							$	441,630


Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
Interest-bearing demand deposits	$	38,330		$	617		1.61	%	$	39,755		$	488		1.23	%	$	23,880		$	246		1.03	%
Money market deposit accounts		22,898			688		3.00	%		29,916			554		1.85	%		22,702			308		1.36	%
Savings accounts		4,217			67		1.59	%		3,926			53		1.35	%		3,056			34		1.11	%
Time deposits		201,030			9,049		4.50	%		184,591			5,913		3.20	%		162,108			4,401		2.71	%

Total interest-bearing deposits		266,475			10,421		3.91	%		258,188			7,008		2.71	%		211,746			4,989		2.36	%
FHLB Advances		39,463			1,590		4.03	%		21,068			682		3.24	%		19,617			486		2.48	%
Other borrowings		123,984			6,511		5.25	%		81,789			2,812		3.44	%		51,669			1,377		2.67	%

Total interest-bearing liabilities		429,922			18,522		4.31	%		361,045			10,502		2.91	%		283,032			6,852		2.42	%

Non-interest bearing liabilities:
Demand deposits		132,972								158,944								115,617
Other liabilities		5,932								4,104								2,702

Total Liabilities		568,826								524,093								401,351
Stockholders’ Equity		51,179								47,224								40,279

Total Liabilities and Stockholders’ Equity:	$	620,005							$	571,317							$	441,630


Interest Spread ⁽³⁾							2.51	%							2.56	%							2.33	%


Net Interest Margin ⁽⁴⁾				$	21,276		3.64	%				$	18,851		3.51	%				$	12,828		3.10	%


⁽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 $476, $204 and $0 thousand in 2006, 2005 and 2004 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 3.64% for the year ended December 31, 2006, compared to 3.51% for 2005. The net interest income earned, on a fully taxable equivalent basis, grew from $18.9 million in 2005 to $21.3 million in 2006, an increase of 12.9%.

Average loan balances were $366.1 million for the year ended December 31, 2006, compared to $268.6 million for 2005. This is an increase of $97.5 million, or 36.3%. The related interest income from loans was $29.5 million in 2006, an increase of $11.4 million over the 2005 levels. The average yield on loans increased to 8.05% in 2006, up 129 basis points compared to the same period in 2005.

Investment securities income of $9.8 million (on a fully taxable equivalent basis) brought our net interest income level to $21.3 million (on a fully taxable equivalent basis) for the year ended December 31, 2006. This represents an increase of $2.4 million in net interest income (on a fully taxable equivalent basis) over the 2005 level of $18.9 million. The tax equivalent yields on investment securities for the year ended December 31, 2006 and 2005 were 4.74% and 4.39%, respectively. The decline in the investment portfolio is a result of strategic initiatives undertaken to reduce the investment portfolio and migrate earning assets to loans.

Excess liquidity results in federal funds sold for us. For the year ended December 31, 2006, federal funds sold contributed $503 thousand of interest income, compared to $1.2 million for the same period in 2005. Average interest-bearing liabilities (deposits and purchased funds) grew to $429.9 million in 2006, which was $68.9 million greater than the 2005 level of $361.0 million. Interest expense for all interest-bearing liabilities amounted to $18.5 million for the year ended December 31, 2006, an $8.0 million increase over the 2005 level of $10.5 million. Cost of interest bearing liabilities for the year ended December 31, 2005 was 4.31%, or 140 basis points higher than the 2005 level of 2.91%. Average other borrowings were $124.0 million as of December 31, 2006 up $42.2 million over the 2005 level. Average time deposits were $201.0 million, up $16.4 million over the 2005 level.

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,
	2006 compared to 2005								2005 compared to 2004
	Change Due To:								Change Due To:
	Increase /								Increase /
	(Decrease)			Volume			Rate		(Decrease)		Volume		Rate
	(Dollars in thousands)

Interest Earning Assets:
Investments	$	(155	)	$	(1,694	)	$	1,539	$	1,086	$	1,224	$	(138	)
Loans		11,310			7,411			3,899		7,860		6,073		1,787
Federal funds sold		(710	)		(5,481	)		4,771		727		28		699


Total Increase in Interest Income		10,445			236			10,209		9,673		7,325		2,348

Interest Bearing Liabilities:
Interest bearing deposits		3,413			470			2,943		2,019		969		1,050
Purchased funds		4,607			2,541			2,066		1,631		998		633


Total Increase in Interest Expense		8,020			3,011			5,009		3,650		1,967		1,683


Increase (Decrease) in Net Interest Income	$	2,425		$	(2,775	)	$	5,200	$	6,023	$	5,358	$	665

A key driver of our expanded net interest margin is the increased loan volume. As seen in the table above, loan interest income has increased by $11.3 million due primarily to the additional loan balances.

Allowance for Loan Losses and Asset Quality

On December 31, 2006, Alliance Bank had two loans that were on nonaccrual status totaling $476 thousand compared to a single loan that was on nonaccrual status totaling $204 thousand at December 31, 2005. The allowance for loan losses was $4.4 million at December 31, 2006, or 1.16% of loans outstanding, compared to $3.4 million or 1.12% of loans outstanding, at December 31, 2005. (These ratios exclude loans held for sale.) In 2006, we had net charge-offs of $65 thousand compared to $20 thousand in 2005 and $164 thousand since inception in 1998. As of December 31, 2006, there were no loans past due 90 days and still accruing interest.

As of December 31, 2006, we had loans to five borrowers that were recorded as “substandard” and “doubtful” on our internal loan watch list. These impaired loans amount to $819 thousand. We have allocated a $126 thousand of our allowance for loan losses towards these specific loans. This compares to an impaired loan balance of $1.8 million as of December 31, 2005. The allowance for loan losses as of December 31, 2005 included a specific allocation for the impaired loans of $115 thousand. (These balances include nonaccrual loans.)

The allowance for loan losses was 1.12% of net loans, or $3.4 million, at December 31, 2005, and 1.10% of net loans, or $2.3 million at December 31, 2004. Net charge-offs were $20 thousand in 2005, compared to $30 thousand in 2004.

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,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Balance, beginning of period	$	3,422		$	2,300		$	1,444		$	1,066		$	610

Provision for loan losses		1,020			1,142			886			396			478

Chargeoffs:
Commerical		55			—			—			44			16
Consumer		16			25			40			—			11

Total chargeoffs		71			25			40			44			27
Recoveries:
Commerical		—			—			—			23			—
Consumer		6			5			10			3			5

Total recoveries		6			5			10			26			5

Net chargeoffs		65			20			30			18			22


Balance, end of period	$	4,377		$	3,422		$	2,300		$	1,444		$	1,066


Allowance for loan losses to total loans		1.16	%		1.12	%		1.10	%		1.22	%		1.29	%
Allowance for loan losses to non-accrual loans		9.2	X		16.8	X	NM				72.2	X		N/A
Non-performing assets to allowance for loan losses		18.71	%		53.48	%		56.40	%		27.90	%		N/A
Net chargeoffs to average loans		0.01	%		0.01	%		0.02	%		0.01	%		0.03	%

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


	Allocation of the Allowance for Loan Losses
	Year Ended December 31,
	2006		2005		2004		2003		2002
	(Dollars in thousands)
Commercial	$	617	$	529	$	437	$	434	$	350
Commercial real estate		1,244		1,317		901		409		275
Real estate construction		1,196		1,155		383		127		150
Residential real estate		1,271		349		403		383		191
Consumer		38		26		40		24		100
Other		11		46		136		67		—


Total loans	$	4,377	$	3,422	$	2,300	$	1,444	$	1,066

Loans

We grant commercial business, commercial real estate, real estate construction, residential real estate and consumer loans in the normal course of business. The loan portfolio net of discounts and fees was $378.7 million as of December 31, 2006 or $74.5 million greater than the December 31, 2005 level of $304.2 million. The loan portfolio contains $322.1 million, or 85.1% in real estate related loans as of December 31, 2006. The real estate loans include home equity loans, owner-occupied commercial real estate and residential construction loans. Approximately $52.3 million or 13.8% of the loan portfolio at December 31, 2006 is represented by commercial business loans. These loans are generally secured and include adequate cashflows to support repayment of the loans.

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


	Loan Portfolio
	December 31,
	2006			2005			2004		2003		2002
	Amount			Amount			Amount		Amount		Amount
	(Dollars in thousands)
Commercial business	$	52,280		$	37,131		$	35,077	$	29,300	$	16,491
Commercial real estate		125,972			107,200			71,432		37,444		24,710
Real estate construction		99,636			87,046			38,578		11,264		11,111
Residential real estate		96,490			69,957			59,819		37,281		27,438
Consumer		4,409			2,957			4,020		3,190		3,036
Other		—			274			278		283		—
Less: unearned discount & fees		(111	)		(337	)		—		—		—


Total loans	$	378,676		$	304,228		$	209,204	$	118,762	$	82,786

The following table presents the maturities or repricing periods of selected loans outstanding at December 31, 2006:


	Loan Maturity Distribution
	December 31, 2006
	One Year		After One Year		After
	or Less		Through Five Years		Five Years		Total
	(Dollars in thousands)
Commercial business	$	17,792	$	23,635	$	10,853	$	52,280
Real estate construction		82,328		14,075		3,233		99,636


Total	$	100,120	$	37,710	$	14,086	$	151,916


Loans with:
Fixed rates	$	18,732	$	44,356	$	34,706	$	97,794
Variable rates		216,104		64,322		456		280,882

Total	$	234,836	$	108,678	$	35,162	$	378,676

Loans Held for Sale. In 2001, we established our mortgage banking subsidiary, AHF. As part of our business strategy to offer complementary services to clients while minimizing risk, generally all loans originated by AHF were presold to correspondent lenders. As of December 31, 2006, $18.5 million of Loans Held for Sale were part of our asset base, as compared to $5.9 million at December 31, 2005. Our business objective includes having the loans sold, shipped and funded within a 90 day period. With the winding down of AHF in 2007, the Bank plans to have a similar mortgage lending business on a smaller scale as a division of the Bank with a similar shipping process.

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 thousand 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 $200.7 million as of December 31, 2006, a decrease of $28.0 million compared to the December 31, 2005 level of $228.7 million. The effects of unrealized losses on the portfolio were ($4.2) million at December 31, 2006 and ($5.8) million at December 31, 2005. The unrealized losses amounted to 2.1% of the investment portfolio value as of December 31, 2006 and 2.5% of the investment portfolio value as of December 31, 2005.

Our investment portfolio at December 31, 2006 and 2005 contained callable US government agency securities, US government agency collateralized mortgage obligations (CMOs), US government agency mortgage backed securities (MBS), state and municipal bonds, Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) 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, 2006 or December 31, 2005. We actively manage our portfolio duration and composition with changing market conditions and changes in balance sheet risk management needs. Additionally, the securities are pledged as collateral for certain borrowing transactions and repurchase agreements.

Contractual maturities of CMOs and MBS 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.

Bankshares has developed and implemented an investment strategy focused on three key prongs. The first prong focuses on managing the base duration of the callable bond portions of the portfolio. The second prong focuses on expanding the cash flowing portion of the investment portfolio. The final prong focuses on managing the municipal bond or higher yielding portion of the portfolio. All of these strategies are 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. Bankshares investment strategy for the US government agency sector is for 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. The December 31, 2006 US government agency portfolio was $58.4 million with a weighted average yield of 4.45% and a weighted average life of 5.1 years. This compares to the December 31, 2005 level of $67.2 million with a weighed average yield of 4.59% and a weighted average life of 6.1 years.

Cashflowing Instruments. The second prong of the investment strategy is to maximize monthly cash flow. This type of investment allows the organization to have liquidity in most economic times. As such we have developed an investment portfolio composed of a variety of cashflowing bonds. We currently own US government agency MBS, US government agency CMOs and private label CMOs (PCMOs). 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 PCMOs 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, 2006, these instruments amounted to $112.3 million with a weighted average yield of 4.55% and a weighted average life of 3.1 years, compared to $143.9 million with a weighted average yield of 4.54% and a weighted average life of 3.6 years at December 31, 2005. In 2006 we received principal payments of $24.4 million from all investment securities.

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 2035. Many of the instruments have call features which would allow the issuer to redeem the bonds prior to final maturity.

The December 31, 2006 municipal portfolio was $25.3 million with a weighted average tax equivalent yield of 5.84% and a weighted average life of 13.9 years. This compares to the December 31, 2005 level of $13.1 million with a weighed average yield of 5.44% and a weighted average life of 10.1 years.

The overall investment portfolio had a base case duration of 3.5 years as of November 30, 2006. If interest rates rise 100 basis points, the base case duration extends to 4.5 years or very similar to the duration of a 5 year US Treasury security which has a duration of 4.3 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.

Investment securities available for sale amounted to $228.7 million at December 31, 2005, a $19.7 million increase over the December 31, 2004 level of $209.0 million. 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 following table sets forth a summary of the investment securities portfolio at December 31, 2006, 2005 and 2004:


	Investment Securities ⁽¹⁾
	December 31,
	2006		2005		2004
	(Dollars in thousands)
Available For Sale Securities
U.S. government agency securities	$	58,399	$	67,228	$	56,323
U.S. government agency CMOs & PCMOs		88,589		110,449		75,959
U.S. government agency MBS		23,694		33,438		45,450
Municipal securities		25,309		13,112		27,910
FHLB & FRB Common Stock		4,673		4,409		3,344
Other investments		55		55		55


Total Available For Sale Securities ⁽²⁾	$	200,719	$	228,691	$	209,041


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


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


Total Investment Securities ⁽²⁾	$	200,819	$	228,791	$	209,141


⁽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.

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, 2006:


	Maturities of Investment Securities
	December 31, 2006
	(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
U.S. government agency securities	$	—		0.00	%	$	28,034		4.17	%	$	32,248		4.74	%	$	—		0.00	%	$	60,282		4.48	%
U.S. government agency CMOs & PCMOs ⁽¹⁾		—		0.00	%		—		0.00	%		—		0.00	%		90,100		4.83	%		90,100		4.83	%
U.S. government agency MBS ⁽²⁾		—		0.00	%		6,665		4.19	%		3,510		4.07	%		14,125		4.22	%		24,300		4.19	%
Municipal securities ⁽²⁾		—		0.00	%		—		0.00	%		2,444		4.85	%		22,929		5.89	%		25,373		5.79	%
Other securities		—		0.00	%		—		0.00	%		—		0.00	%		4,728		5.55	%		4,728		5.55	%

Total Available For Sale Securities	$	—		0.00	%	$	34,699		4.18	%	$	38,202		4.68	%	$	131,882		4.97	%	$	204,783		4.79	%


Held To Maturity Securities
Certificate of Deposit	$	—		0.00	%	$	100		5.35	%	$	—		0.00	%	$	—		0.00	%	$	100		5.35	%

Total Held To Maturity Securities	$	—		0.00	%	$	100		5.35	%	$	—		0.00	%	$	—		0.00	%	$	100		5.35	%


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

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

Non-Interest Income

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


	Year Ended December 31,
	2006			2005			2004		2003		2002
	(Dollars in thousands)
Gain on loan sales	$	4,110		$	2,997		$	5,362	$	6,325	$	2,995
Insurance commissions		1,618			103			—		—		—
Net gain (loss) on sale of securities		(140	)		(21	)		346		1,837		820
Net gain on trading activities		—			—			51		250		302
Deposit account service charges		240			171			205		180		114
Other		199			264			217		182		125

Total	$	6,027		$	3,514		$	6,181	$	8,774	$	4,356

A key source of non-interest income is gains on the sale of residential mortgage loans. Gains from sales of mortgage loans were $4.1 million for the year ended December 31, 2006. This represents an increase of $1.1 million over the $3.0 million level in 2005. Mortgage origination 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. Since inception in 2001, our goal was to have a small, customer focused, profitable mortgage banking unit. Our business results over the past several years have fallen short of that objective. Therefore, on December 27, 2006, Bankshares announced its intention to restructure the mortgage banking operations conducted by AHF. Bankshares took a fourth quarter pre-tax charge of $680 thousand to wind down the separate operations of the AHF subsidiary, with an after-tax charge of $449 thousand. The charges covered staff severance, systems charges, estimated subleasing costs and various other costs associated with the closure of AHF. Our mortgage banking services will continue in but as a division of Alliance Bank. Bankshares expects to wind up the existing AHF operations in early 2007. Our gains on mortgage loan sales amounted to $3.0 million during the year ended December 31, 2005. This represented a $2.4 million decrease over the 2004 level of $5.4 million.

Another key source of non-interest income is insurance commissions. AIA was in operation for the full year ended December 31, 2006. As a result of this, commission revenues added $1.6 million in non-interest income for the year ended December 31, 2006, a $1.5 million increase over the year ended December 31, 2005, during which AIA operated for less than two months.

In the year ended December 31, 2006, we had a net loss of ($140) thousand on the sale of investment securities. This represents an increase in the loss of $119 thousand over the 2005 level net loss of ($21) thousand. 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 years ended December 31, 2006 and 2005 we had no net gains on trading activities, compared to $51 thousand for the year ended December 31, 2004.

Routine banking fees such as account maintenance, insufficient funds, online banking, stop payment, and wire transfer fees amounted to $240 thousand, $171 thousand and $205 thousand, for each of the years ended December 31, 2006, 2005 and 2004, respectively. Our other non-interest income is predominately from ATM fees. This type of fee income is a nominal activity for Alliance Bank.

Non-Interest Expense

Non-interest expense for the year ended December 31, 2006 amounted to $19.4 million, compared to the 2005 level of $15.0 million. Salary and benefits expense for the year ended December 31, 2006 was $10.2 million, compared to the December 31, 2005 level of $7.9 million. The increase results from commissions and incentives paid on mortgage banking production, the addition of AIA, as well as new personnel in Alliance Bank. Total salary and benefits expense for AHF amounted to $3.8 million for the year ended December 31, 2006 and $2.7 million for the year ended December 31, 2005. Total salary and benefit expense for AIA was $776 thousand for the year ended December 31, 2006. Occupancy and furniture and equipment costs were up $1.0 million in 2006 from the 2005 level of $2.2 million. The change in occupancy expense is directly related to the acquisition of our insurance agency, and the relocating of our corporate offices. Other operating expenses amounted to $5.9 million in 2006, compared to $4.9 million in 2005. Other operating expenses increased due to increased marketing efforts, absorption of branch operating costs and professional fees. Included in salaries, occupancy, equipment and other expense is approximately $588 thousand of transitional costs related to AHF (see Note 11 of the Notes to Consolidated Financial Statements).

Non-interest expense for 2005 amounted to $15.0 million, compared to the 2004 level of $14.0 million. The increase was directly related to our expansion activities in 2005. The largest component of non-interest expense is salaries and benefits. Salary and benefits expenses in 2005 were $7.9 million, or $72 thousand higher than the 2004 level of $7.8 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 AHF contributed to the growth in salaries and other non-interest expense. Occupancy and furniture and equipment costs in 2005 were up $224 thousand over the 2004 level of $2.0 million. Other operating expenses amounted to $4.9 million in 2005, compared to $4.1 million in 2004. The costs associated with opening additional locations in 2005 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,
	2006		2005		2004		2003		2002
	(Dollars in thousands)
Business development	$	814	$	702	$	605	$	549	$	465
Office expense		1,372		1,062		767		735		518
Bank operations expense		1,063		977		920		746		565
Data processing & professional fees		1,542		1,422		1,146		775		596
Other		1,144		735		671		563		364

Total	$	5,935	$	4,898	$	4,109	$	3,368	$	2,508

Income Taxes

We recorded an income tax expense of $2.2 million in 2006 compared to an income tax expense of $1.7 million in 2005. Our effective tax rates were 32.5% for the year ended December 31, 2006 and 29.5% for the year ended December 31, 2005. The effective tax rate is lower than the statutory rate of 34% primarily due to the benefits of our municipal bond portfolio, which has decreased in size over the years.

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 slower real estate markets, as evidenced in 2006. 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, 2006, the deposit portfolio was $471.3 million, a $10.1 million increase over the December 31, 2005 level of $461.2 million. Certificates of deposit in 2006 were up to $242.6 million, an increase of $44.0 million over the 2005 level of $198.6 million.

As the business activity changes, and particularly if average title and mortgage loan closing deposits decline, we may use wholesale or brokered deposits more frequently. In 2006, we experienced significant loan growth and a reduction in core deposits. We used wholesale funding more frequently to offset funding gaps. At December 31, 2006, we had $122.6 million in such deposits. The balance of the $122.6 million consists of two types of “brokered” deposits. At December 31, 2006, we had $10.0 million of brokered deposits that relate to a state government program and $112.6 million of brokered deposits that are part of a periodic marketing program by a licensed broker on our behalf. We have entered into a series of brokered deposits 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 new mortgage banking division. 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, 2005, deposits were $461.2 million, a $105.5 million increase over the December 31, 2004 level of $355.7 million. At December 31, 2005, we had $79.9 million in brokered deposits, compared to $58.3 million at December 31, 2004. The December 31, 2005 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 were part of a periodic marketing program by a licensed broker on our behalf. The December 31, 2004 balance of $58.3 million consisted of $10.0 million of brokered deposits that related to a government program and $48.3 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,
	2006							2005							2004
	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	$	38,330	$	617		1.61	%	$	39,755	$	488		1.23	%	$	23,880	$	246		1.03	%
Money market deposit accounts		22,898		688		3.00	%		29,916		554		1.85	%		22,702		308		1.36	%
Savings accounts		4,217		67		1.59	%		3,926		53		1.35	%		3,056		34		1.11	%
Time deposits		201,030		9,049		4.50	%		184,591		5,913		3.20	%		162,108		4,401		2.71	%

Total interest-bearing deposits		266,475	$	10,421		3.91	%		258,188	$	7,008		2.71	%		211,746	$	4,989		2.36	%

Non-interest bearing deposits		132,972							158,944							115,617

Total deposits	$	399,447						$	417,132						$	327,363

The following is a summary of the maturity distribution of certificates of deposit as of December 31, 2006:


	Certificates of Deposit Maturity Distribution
	December 31, 2006
	Three Months		Three Months to		Over
	or Less		Twelve Months		Twelve Months		Total
	(Dollars in thousands)
Certificates of deposit:
Less than $100,000	$	29,863	$	19,352	$	83,444	$	132,659
Greater than or equal to $100,000		5,955		22,225		81,732		109,912


Total	$	35,818	$	41,577	$	165,176	$	242,571

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 $54.6 million as of December 31, 2006 and $48.6 million as of December 31, 2005. The increase in equity is primarily attributable to net income, which added $4.5 million to stockholders’ equity as of December 31, 2006 and changes in accumulated other comprehensive income, which added $1.1 million as of December 31, 2006. Book value per share increased to $9.84 in 2006 from $8.79 as of December 31, 2005. Additionally, on June 28, 2006 Bankshares’ shareholders approved an amendment to Bankshares’ Articles of Incorporation to increase the number of authorized shares of common stock from 10,000,000 to 15,000,000.

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 thousand. 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, 2006 was 8.51%.

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, 2006, 2005 and 2004, the entire amount was considered Tier I capital.

Alliance Bankshares is considered “well capitalized” as of December 31, 2006, 2005 and 2004. 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,
	2006				2005			2004
				(Dollars in thousands)
Tier I Capital:
Common stock	$	22,206			$	19,244		$	19,173
Capital surplus		29,126				19,955			19,855
Retained earnings		5,987				13,218			9,160
Less: disallowed assets		(5,389	)			(3,096	)		—
Add: Qualifying Trust Preferred Securities		10,000				10,000			10,000

Total tier I capital		61,930				59,321			58,188

Tier II Capital:
Allowance for loan losses		4,377				3,422			2,300
Qualifying Trust Preferred Securities		—				—			—

Total tier II capital		4,377				3,422			2,300


Total Risk Based Capital	$	66,307			$	62,743		$	60,488


Risk weighted assets	$	443,344			$	369,659		$	271,118


Quarterly average assets	$	636,293			$	595,857		$	500,625


	December 31,									Regulatory
Capital Ratios:	2006			2005			2004			Minimum
Tier 1 risk based capital ratio		14.0	%		16.1	%		21.5	%		4.0	%
Total risk based capital ratio		15.0	%		17.0	%		22.3	%		8.0	%
Leverage ratio		9.7	%		10.0	%		11.6	%		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 $43.3 million at December 31, 2006, compared to $37.7 million at December 31, 2005 and $29.9 million at December 31, 2004. Outstanding federal funds purchased were $9.4 million, $20.0 million and $15.0 million at December 31, 2006, December 31, 2005, and December 31, 2004, respectively.

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 our mortgage banking division, title company balances, 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.

In 2006 and 2005 Alliance Bank provided a warehouse line of credit to AHF. The funds advanced on this line allow us to originate and hold mortgages until they are sold to third party investors. In 2006, advances under this line of credit averaged $12.3 million, compared to $14.7 million in 2005. Our liquidity in the future will be impacted by ABMD. We will provide temporary funding on presold loans originated by ABMD. The liquidity requirements vary based upon market conditions, production staff performance and general economic conditions.

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


	Purchased Funds Distribution
	Year Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
At Period End
FHLB long term advances	$	50,000		$	30,000		$	20,000
Customer repos		43,306			37,668			29,890
Other borrowed funds		9,891			20,421			15,462

Total at period end	$	103,197		$	88,089		$	65,352


Average Balances
FHLB long term advances	$	39,463		$	21,068		$	19,617
Customer repos		32,340			52,571			33,941
Other borrowed funds		91,644			29,218			17,728

Total average balance	$	163,447		$	102,857		$	71,286


Average rate paid on all borrowed funds, end of period		4.41	%		3.37	%		2.28	%


Average rate paid on all borrowed funds, during the period		4.96	%		3.40	%		2.61	%


Maximum outstanding at any month end period	$	134,990		$	91,884		$	70,322

Return on Average Assets and Average Equity

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

Return on Average Assets and Return on Average Equity


	December 31,
	2006			2005			2004
	(Dollars in thousands)
Average total assets	$	620,005		$	571,317		$	441,630

Average stockholders’ equity	$	51,179		$	47,224		$	40,279

Net income	$	4,479		$	4,058		$	2,767

Cash dividends declared	$	—		$	—		$	—

Return on average assets		0.72	%		0.71	%		0.63	%


Return on average stockholders’ equity		8.75	%		8.59	%		6.87	%


Average stockholders’ equity to average total assets		8.25	%		8.27	%		9.12	%

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, 2006. The table does not include deposit liabilities or repurchase agreements entered into in the ordinary course of banking.


	Payments Due By Period
	December 31, 2006
			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		11,289		1,772		2,912		2,363		4,242
Federal Home Loan Bank advances		50,000		—		10,000		15,000		25,000
Data processing services		1,168		644		404		120		—


Total	$	72,767	$	2,416	$	13,316	$	17,483	$	39,552

Off-Balance Sheet Activities

Alliance Bankshares, Alliance Bank, AHF and AIA 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.

Quarterly Financial Results

The following tables list quarterly financial results for 2006 and 2005:

Quarterly Data
Years Ended December 31, 2006 and 2005
($ in thousands, except per share data)


	2006
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter

Interest income	$	10,480	$	10,537	$	9,785	$	8,773
Interest expense		5,365		5,103		4,239		3,815

Net interest income		5,115		5,434		5,546		4,958
Provision for loan losses		100		255		375		290

Net interest income after provision for loan losses		5,015		5,179		5,171		4,668
Non interest income		1,331		1,402		1,671		1,623
Non interest expense		5,519		4,579		4,749		4,575

Income before income taxes		827		2,002		2,093		1,716
Provision for income taxes		273		633		693		560

Net income	$	554	$	1,369	$	1,400	$	1,156

Earnings per share, basic⁽¹⁾	$	0.10	$	0.25	$	0.25	$	0.21

Earnings per share, diluted⁽¹⁾	$	0.09	$	0.23	$	0.24	$	0.19


	2005
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter

Interest income	$	8,320	$	7,665	$	6,962	$	5,982
Interest expense		3,028		2,773		2,598		2,102

Net interest income		5,292		4,892		4,364		3,880
Provision for loan losses		285		280		365		212

Net interest income after provision for loan losses		5,007		4,612		3,999		3,668
Non interest income		663		834		1,297		720
Non interest expense		3,926		3,495		3,936		3,691

Income before income taxes		1,744		1,951		1,360		697
Provision for income taxes		633		763		271		27

Net income	$	1,111	$	1,188	$	1,089	$	670

Earnings per share, basic⁽¹⁾	$	0.20	$	0.22	$	0.20	$	0.12

Earnings per share, diluted⁽¹⁾	$	0.19	$	0.20	$	0.19	$	0.11


⁽¹⁾		All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity. In 2004, we engaged a consulting firm to assist management in developing “best practices” in the ALM process. A core component of the project was the development of a more in-depth ALM model that measures NII and EVE results on a monthly basis. Recent NII and EVE analysis 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 2006), 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 on future net interest income. This analysis involves shocking the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of Bankshares’ shorter-term interest rate risk. This analysis is accomplished by assuming a static balance sheet over a period of time with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under various rate scenarios. These assumptions might include prepayments, the sensitivity of non-maturity deposit rates, and other factors deemed significant by Bankshares.

The ALM results for December 31, 2006 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 3.7%. Assuming a shift downward of 100 basis points, Bankshares would expect net interest income to decrease over the next twelve months by 8.1%. 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 table below shows as of December 31, 2006 and 2005 ALM model results under various interest rate shocks:


	December 31, 2006						December 31, 2005
Interest Rate Shocks	NII			EVE			NII			EVE
-200 bp		-19.7	%		-2.5	%		-20.7	%		-3.3	%
-100 bp		-8.1	%		-1.2	%		-5.5	%		-0.5	%
+100 bp		3.7	%		-2.5	%		6.1	%		-1.6	%
+200 bp		11.9	%		-6.4	%		11.3	%		-5.0	%

Interest Rate Gap. In addition to the NII and EVE models, management reviews our “static” gap position. The cumulative positive gap position within one year was $19.4 million, or 3.0% of total assets, at December 31, 2006. The positive gap suggests that the net interest margin will increase in a market of rising interest rates, as assets will reprice faster than liabilities. While this measurement technique is common in the financial services industry, it has limitations and is not our sole tool for measuring interest rate sensitivity. We do not believe this model accurately reflects Bankshares’ true short and long term interest rate exposure. As an example, $170 million of the investment securities at December 31, 2006 are classified as greater than five years due to the contractual maturity of the instruments. A significant portion of the securities are expected to provide cash flow within one to two years. The shifting of the cash flow to a more realistic measurement provides a significantly different picture of the interest sensitivity of the organization.

The following table reflects our December 31, 2006 “static” interest rate gap position:


	December 31, 2006
	Maturing or Repricing
	Within			4 - 12			1 -5			Over
	3 Months			Months			Years			5 Years			Total
				(Dollars in thousands)
Interest earning assets:
Investment securities	$	—		$	—		$	34,799		$	170,084		$	204,883
Loans held for sale		18,534			—			—			—			18,534
Loans		216,362			18,474			108,678			35,162			378,676
Interest-bearing deposits		200			—			—			—			200
Federal funds sold		11,727			—			—			—			11,727

Total interest earning assets		246,823			18,474			143,477			205,246			614,020


Interest-bearing liabilities:
Interest-bearing demand deposits		46,814			—			—			—			46,814
Money market deposit accounts		19,389			—			—			—			19,389
Savings accounts & IRAs		3,831			—			—			—			3,831
Time deposits		35,818			41,577			140,688			24,488			242,571

Total interest-bearing deposits		105,852			41,577			140,688			24,488			312,605

FHLB long term advances		35,000			—			15,000			—			50,000
Repos		43,306			—			—			—			43,306
Other borrowings		9,891			—			—			—			9,891
Trust Preferred Capital Notes		10,310			—			—			—			10,310

Total interest-bearing liabilities		204,359			41,577			155,688			24,488			426,112


Period Gap	$	42,464		$	(23,103	)	$	(12,211	)	$	180,758		$	187,908


Cumulative Gap	$	42,464		$	19,361		$	7,150		$	187,908		$	187,908


Cumulative Gap / Total Assets		6.6	%		3.0	%		1.1	%		29.2	%		29.2	%

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.

The interest sensitivity position does not measure the impact of interest rate changes on the market value of our investment securities portfolio. Rising interest rates will cause a decline in the market value of our investment securities. A decline in the market value of the investment portfolio could make managing the net interest income exposure more difficult.

There is no guarantee that the risk management and balance sheet management strategies we employ will be effective in periods of rapid rate movements. We believe our strategies are prudent in the base case of our modeling efforts as of December 31, 2006.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Alliance Bankshares Corporation
Chantilly, Virginia

We have audited the accompanying consolidated balance sheets of Alliance Bankshares Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that Alliance Bankshares Corporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Alliance Bankshares Corporation and subsidiaries’ management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included 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, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that Alliance Bankshares Corporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, Alliance Bankshares Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Winchester, Virginia
March 15, 2007

Alliance Bankshares Corporation
Consolidated Balance Sheets
December 31, 2006 and 2005


(Dollars in thousands)	2006			2005

ASSETS

Cash and due from banks	$	21,918		$	25,224
Federal funds sold		11,727			37,522
Investment securites available-for-sale, at fair value		200,719			228,691
Investment securities held-to-maturity, at amortized cost		100			100
Loans held for sale		18,534			5,936
Loans, net of allowance for loan losses of $4,377 and $3,422		374,299			300,806
Premises and equipment, net		2,394			1,952
Accrued interest and other assets		14,680			11,254


TOTAL ASSETS	$	644,371		$	611,485


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Non-interest bearing deposits	$	158,728		$	185,877
Savings and NOW deposits		50,645			52,235
Money market deposits		19,389			24,422
Other time deposits		242,571			198,644

Total deposits		471,333			461,178

Repurchase agreements, federal funds purchased and other borrowings		53,197			58,089
Federal Home Loan Bank advances		50,000			30,000
Trust Preferred Capital Notes		10,310			10,310
Other liabilities		4,894			3,297
Commitments and contingent liabilities		—			—

Total liabilities		589,734			562,874

STOCKHOLDERS’ EQUITY:
Common stock, $4 par value; 15,000,000 shares authorized; 5,551,477 and 4,811,050 shares issued and outstanding at December 31, 2006 and 2005		22,206			19,244
Capital surplus		29,126			19,955
Retained Earnings		5,987			13,218
Accumulated other comprehensive (loss), net		(2,682	)		(3,806	)

Total stockholders’ equity		54,637			48,611


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	644,371		$	611,485

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

Alliance Bankshares Corporation
Consolidated Statements of Income
For the Years Ended December 31, 2006, 2005 and 2004


(Dollars in thousands)	2006			2005			2004
INTEREST INCOME:
Loans	$	29,458		$	18,149		$	10,289
Investment securities		9,614			9,567			8,376
Federal funds sold		503			1,213			486

Total interest income		39,575			28,929			19,151

INTEREST EXPENSE:
Savings and NOW deposits		684			541			280
Other time deposits		9,049			5,913			4,401
Money market deposits		688			554			308
Borrowings		8,101			3,493			1,863

Total interest expense		18,522			10,501			6,852


Net interest income		21,053			18,428			12,299

Provision for loan losses		1,020			1,142			886

Net interest income after provision for loan losses		20,033			17,286			11,413

OTHER INCOME:
Deposit account service charges		240			171			205
Gain on sale of loans		4,110			2,997			5,362
Insurance commissions		1,618			103			—
Net gain (loss) on sale of securities		(140	)		(21	)		346
Net gain on trading activities		—			—			51
Other operating income		199			264			217

Total other income		6,027			3,514			6,181


OTHER EXPENSES:
Salaries and employee benefits		10,248			7,911			7,839
Occupancy expense		1,950			1,302			1,270
Equipment expense		1,289			937			745
Operating expenses		5,935			4,898			4,109

Total other expenses		19,422			15,048			13,963


INCOME BEFORE INCOME TAXES		6,638			5,752			3,631

Income tax expense		2,159			1,694			864


NET INCOME	$	4,479		$	4,058		$	2,767


Net income per common share, basic	$	0.81		$	0.74		$	0.53

Net income per common share, diluted	$	0.76		$	0.69		$	0.49

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

Alliance Bankshares Corporation
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2006, 2005 and 2004

								Acccumulated						Total
								Other						Stock-
	Common		Capital		Retained			Comprehensive			Comprehensive			holders’
(Dollars in thousands, except share data)	Stock		Surplus		Earnings			(Loss)			Income			Equity
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 gains 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 (loss), net of tax:
unrealized holding losses on securities available for sale, net of tax of $1,160		—		—		—			—			(2,254	)		—
Add: reclassification adjustment, net income taxes of $7												14

Other comprehensive (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
Comprehensive income:
Net income		—		—		4,479			—		$	4,479			4,479
Other comprehensive income, net of tax:
unrealized holding gains on securities available for sale, net of tax of $531		—		—		—			—			1,032			—
Add: reclassification adjustment, net income taxes of $48												92

Other comprehensive income, net of tax		—		—		—			1,124		$	1,124			1,124

Total comprehensive income		—		—		—			—		$	5,603			—

Stock dividend in the form of a three-for-twenty stock split		2,888		8,822		(11,710	)		—						—
Stock based compensation expense		—		274		—			—						274
Exercise of stock options		74		75		—			—						149

BALANCE, DECEMBER 31, 2006	$	22,206	$	29,126	$	5,987		$	(2,682	)				$	54,637

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, 2006, 2005 and 2004


(Dollars in thousands)	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,479		$	4,058		$	2,767
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion		1,027			1,864			1,320
Disposal of fixed assets		563			—			—
Provision for loan losses		1,020			1,142			886
Origination of loans held for sale		(199,559	)		(174,345	)		(235,043	)
Proceeds from sale of loans held for sale		191,071			196,152			228,692
Gain on sale of loans		(4,110	)		(2,997	)		(5,362	)
Stock-based compensation expense		274			—			—
Net loss (gain) on sale of securities available-for-sale and trading		140			21			(397	)
Deferred tax (benefit)		(404	)		(686	)		(113	)
Changes in assets and liabilities affecting operations:
Accrued interest and other assets		(3,600	)		(3,248	)		(344	)
Other liabilities		1,597			1,552			(648	)

Net cash provided by (used in) operating activities		(7,502	)		23,513			(8,242	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold		25,795			(36,383	)		31,570
Purchase of investment securities available-for-sale		(17,886	)		(99,334	)		(173,880	)
Proceeds from sale of securities available-for-sale		22,842			37,358			102,070
Proceeds from calls and maturities of securities available-for-sale		—			2,000			13,024
Paydowns on investment securities available-for-sale		24,366			36,767			25,813
Net change in FHLB stock		(264	)		(920	)		(1,037	)
Net increase in loan portfolio		(74,513	)		(95,044	)		(90,472	)
Purchase of premises and equipment		(1,556	)		(595	)		(1,070	)

Net cash (used in) investing activities		(21,216	)		(156,151	)		(93,982	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash realized from (expended on):
Non-interest bearing deposits		(27,149	)		57,590			39,413
Savings and NOW deposits		(1,590	)		15,201			12,440
Money market deposits		(5,033	)		(3,401	)		10,545
Other time deposits		43,927			36,097			16,554
Repurchase agreements, federal funds purchased and other borrowings		(4,892	)		12,737			10,101
FHLB advances		20,000			10,000			7,000
Proceeds from exercise of stock options		149			171			590
Proceeds from issuance of common stock		—			—			23,727

Net cash provided by financing activities		25,412			128,395			120,370

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,306	)		(4,243	)		18,146

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


CASH AND CASH EQUIVALENTS, END OF YEAR	$	21,918		$	25,224		$	29,467

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 December 27, 2006, Bankshares announced its intention to exit the mortgage banking operations conducted by AHF, but continue these operations as a division of the Bank. Bankshares expects to wind up the existing AHF operations in early 2007.

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

		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.

		On December 14, 2006, AIA acquired certain assets and liabilities of Battlefield Insurance Agency, Inc. and Northern Virginia Insurance Agency, Inc. The operation is managed under the trade name Alliance/Battlefield Insurance Agency, LLC (Battlefield). Battlefield is a wholly-owned insurance subsidiary of AIA 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 Virginia Capital Trust I, Alliance Bank Corporation, Alliance Home Funding, LLC, Alliance Insurance Agency, and Alliance/Battlefield Insurance Agency, LLC. In consolidation all significant inter-company accounts and transactions have been eliminated. FASB Interpretation No. 46 R requires that Bankshares no longer consolidate Trust. 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. Our insurance companies offer a variety of comprehensive insurance and financial services to diverse clients locally and nationally.

		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.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		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.”

		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, 2006 and 2005, Bankshares held no trading securities.

		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.

		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.

		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. As of December 31, 2006, 2005 and 2004 the impact was not material.

		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.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		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 after 90 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.

		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.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		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.

		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 – In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R). SFAS No. 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and nonvested shares based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Bankshares adopted SFAS 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

		The following illustrates the effect on net income and earnings per share if Bankshares had applied the fair value method of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), prior to January 1, 2006.


	2005			2004
Net income, as reported	$	4,058		$	2,767

Deduct: total stock-based employee compensation expense determined based on fair value method of awards, net of tax		(1,041	)		(394	)

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


Earnings per share:
Basic, as reported *	$	0.74		$	0.53

Basic, pro forma *	$	0.55		$	0.45


Diluted, as reported *	$	0.69		$	0.49

Diluted, pro forma *	$	0.51		$	0.43


*		All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		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 123R. The acceleration of vesting of these underwater stock options eliminates approximately $787 thousand of future compensation expense which Bankshares would have been required to record as an income statement charge over the remaining vesting periods under the transitional provisions of SFAS 123R, which became effective for Bankshares on January 1, 2006.

		As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $274 thousand which had a $.03 impact on basic earnings per share and a $.02 impact on diluted earnings per share as of December 31, 2006.

		As of December 31, 2006, there was $741 thousand of total unrecognized compensation expense related to stock options, which will be recognized over the remaining requisite service period.

		On May 25, 2006 the Board of Directors of Bankshares declared a three-for-twenty stock split in the form of a 15% stock dividend. Each shareholder received three additional shares for every twenty shares of stock held on the record date. The stock dividend was paid on June 30, 2006 to shareholders of record at the close of business on June 9, 2006. In total, 721,927 additional shares were issued pursuant to the stock dividend. All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split.

		Prior to the adoption of SFAS 123R, Bankshares presented the benefit of all tax deductions resulting from the exercise of stock options as operating cash flows in the consolidated statements of cash flows. SFAS 123R requires the benefits of tax deductions in excess of grant-date fair value be reported as financing cash flow, rather than as an operating cash flow. Options totaling 18,500 were exercised during the twelve months ended December 31, 2006.

		Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 2006: price volatility of 21.35%, risk-free interest rates of 4.99%, dividend rate of 0.00% and expected lives up to 5 years. The weighted average assumptions for grants in 2005 were: price volatility of 23.03%, risk-free interest rates of 4.28%, dividend rate of 0.00% and expected lives up to 6.29 years.

		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.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		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, 2006, 2005 and 2004 were $372 thousand, $379 thousand and $241 thousand, respectively.

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

		Recent Account Pronouncements – In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the SEC staff’s views regarding the process of quantifying financial statement misstatements. These interpretations were issued to address diversity in practice and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 expresses the SEC staff’s view that a registrant’s materiality evaluation of an identified unadjusted error should quantify the effects of the error on each financial statement and related financial statement disclosures and that prior year misstatements should be considered in quantifying misstatements in current year financial statements. SAB 108 also states that correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements. Registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in SAB 108 in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment should be made to the opening balance of retained earnings for that year. Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should also include when and how each error arose and the fact that the errors had previously been considered immaterial. The SEC staff encourages early application of the guidance in SAB 108 for interim periods of the first fiscal year ending after November 15, 2006. The implementation of SAB 108 did not have a material impact on our financial statements.

		In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 permits fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. The Statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133. It establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Bankshares does not expect the implementation of SFAS 155 to have a material impact on its consolidated financial statements.

		In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into certain servicing contracts. The Statement also requires all separately

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

		recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to choose between the amortization and fair value methods for subsequent measurements. At initial adoption, the Statement permits a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights. SFAS 156 also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. Bankshares does not expect the adoption of SFAS 156 at the beginning of 2007 to have a material impact on its financial statements.

		In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but may change current practice for some entities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. Bankshares does not expect the implementation of SFAS 157 to have a material impact on its consolidated financial statements.

		In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan will be measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. For any other postretirement plan, the benefit obligation is the accumulated postretirement benefit obligation. SFAS 158 requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The Statement also requires additional disclosure in the notes to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. Bankshares is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Bankshares does not expect the implementation of SFAS 158 to have a material impact on its financial statements, since we do not have a defined benefit plan.

		In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109. The Interpretation prescribes a recognition threshold and measurement principles for the financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Bankshares does not expect the implementation of FIN 48 to have a material impact on its financial statements.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

PURCHASE OF INSURANCE AGENCIES

			On 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 value of goodwill and transaction costs was $1.5 million as of December 31, 2006 and $1.6 million as of December 31, 2005. For the year ended December 31, 2006, amortization expense for all insurance agencies was $166 thousand, compared to $20 thousand for December 31, 2005. Amortization of customer intangibles for both insurance agencies will be $265 thousand annually for 2007 thru 2011.

			On December 14, 2006, Alliance Insurance Agency acquired certain assets and liabilities of Battlefield Insurance Agency, Inc and Northern Virginia Insurance Agency, Inc. both Virginia based insurance agencies. AIA paid a total of $2,385,000, of which $1,500,000 was in cash with contract payments of $295,000 due each of the next three years amounting to $885,000. We engaged a nationally recognized third party to evaluate the goodwill and intangible assets created from the transaction. Approximately, $1.0 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 $1.4 million of goodwill and transaction costs, was recorded on the balance sheet as of December 31, 2006.

INVESTMENT SECURITIES

The amortized cost, unrealized holding gains and losses, and the fair value of securities at December 31, 2006 are summarized as follows:


	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
Available for sale securities:
U.S. government corporations
and agencies	$	60,282	$	—	$	(1,883	)	$	58,399
U.S. government agency CMOs & PCMOs		90,100		7		(1,518	)		88,589
U.S. government agency MBS		24,300		—		(606	)		23,694
Municipal securities		25,373		140		(204	)		25,309
Restricted stocks:
Community Bankers Bank		55		—		—			55
Federal Reserve Bank		1,201		—		—			1,201
Federal Home Loan Bank		3,472		—		—			3,472

Total	$	204,783	$	147	$	(4,211	)	$	200,719

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

Total	$	100	$	—	$	—		$	100

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

The amortized cost, unrealized holding gains and losses, and the fair value of securities at December 31, 2005 are summarized as follows:


	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
Available for sale securities:
U.S. government corporations and agencies	$	69,728	$	—	$	(2,500	)	$	67,228
U.S. government agency CMOs & PCMOs		112,662		7		(2,220	)		110,449
U.S. government agency MBS		34,192		3		(757	)		33,438
Municipal securities		13,411		3		(302	)		13,112
Restricted stocks:
Community Bankers Bank		55		—		—			55
Federal Reserve Bank		1,201		—		—			1,201
Federal Home Loan Bank		3,208		—		—			3,208

Total	$	234,457	$	13	$	(5,779	)	$	228,691


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

Total	$	100	$	—	$	—		$	100

The amortized cost and fair value of securities as of December 31, 2006, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issues may have the right to call or prepay obligations without any penalties. Management expects these securities to prepay or be called prior to their contractual maturity.


	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due after one year through
five years	$	34,699	$	33,709	$	100	$	100
Due after five years through
ten years		38,202		36,950		—		—
Due after ten years		127,154		125,332		—		—
Restricted securities		4,728		4,728		—		—

Total	$	204,783	$	200,719	$	100	$	100

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

			Proceeds from sales and calls of securities available for sale were $22.8 million, $39.4 million and $115.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. Gross gains of $16 thousand, $106 thousand and $675 thousand and gross losses of $156 thousand, $127 thousand and $278 thousand were realized on these sales during 2006, 2005 and 2004, respectively. The tax provision (benefit) applicable to the net realized gain (loss) amounted to ($48) thousand, ($7) thousand and $135 thousand, respectively.

			At December 31, 2006 and 2005, securities with a carrying value of $186.4 million and $119.1 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, 2006 and 2005. 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.

2006


	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. government corporations
and agencies	$	—	$	—		$	58,399	$	(1,883	)	$	58,399	$	(1,883	)
U.S. government agency CMOs
and PCMOs		1,579		(2	)		84,490		(1,516	)		86,069		(1,518	)
U.S. government agency MBS		—		—			23,694		(606	)		23,694		(606	)
Municipal securities		3,210		(35	)		7,261		(169	)		10,471		(204	)

Total temporarily impaired
investment securities:	$	4,789	$	(37	)	$	173,844	$	(4,174	)	$	178,633	$	(4,211	)

			There are a total of 115 investment securities that have an unrealized loss as of December 31, 2006: 28 U.S. government agencies, 50 U.S. government agency CMO’s, 15 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

2005


	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. government corporations
and agencies	$	13,359	$	(170	)	$	52,669	$	(2,330	)	$	66,028	$	(2,500	)
U.S. government agency CMOs
and PCMOs		63,059		(1,126	)		45,016		(1,094	)		108,075		(2,220	)
U.S. 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	)

LOANS

Loans are summarized as follows at December 31:


	2006			2005
Real estate:
Residential real estate	$	96,490		$	69,957
Commercial real estate		125,972			107,200
Construction		99,636			87,046

Total real estate		322,098			264,203
Agricultural		—			274
Commercial		52,280			37,131
Consumer		4,409			2,957

Gross loans		378,787			304,565

Less: unearned discounts and fees		(111	)		(337	)
Less: allowance for loan losses		(4,377	)		(3,422	)

Net loans	$	374,299		$	300,806

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses are summarized as follows for the year ended December 31:


	2006			2005			2004
Balance, beginning of year	$	3,422		$	2,300		$	1,444
Provision for loan losses		1,020			1,142			886
Loans charged off		(71	)		(25	)		(40	)
Recoveries of loans charged off		6			5			10

Net charge-offs		(65	)		(20	)		(30	)

Balance, end of year	$	4,377		$	3,422		$	2,300

Impaired loans and non-accrual loans are summarized as follows for the year ended December 31:


	2006		2005		2004
Impaired loans without a valuation allowance	$	183	$	—	$	—
Impaired loans with a valuation allowance		636		1,830		1,297
Total impaired loans	$	819	$	1,830	$	1,297

Valuation allowance related to impaired loans	$	126	$	115	$	161


	2006		2005		2004
Average investment in impaired loans	$	632	$	1,537	$	110

Interest income recognized on impaired loans	$	35	$	82	$	73

Interest income recognized on a cash basis on impaired loans	$	35	$	82	$	73

			No additional funds are committed to be advanced in connection with impaired loans.

			There were no non-accrual loans excluded from impaired loan disclosures as of December 31, 2006, 2005 and 2004.

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 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 thousand. 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, 2006 was 8.51% compared to 7.64% as of December 31, 2005.

			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, 2006 and 2005, the entire amount was considered Tier I capital.

10.

INCOME TAXES

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


	2006			2005			2004
Current	$	2,563		$	2,380		$	977
Deferred tax (benefit)		(404	)		(686	)		(113	)

Income tax expense	$	2,159		$	1,694		$	864

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


	2006			2005			2004
Computed at the expected statutory rate	$	2,257		$	1,949		$	1,235
Tax exempt income, net		(152	)		(252	)		(378	)
Other		54			(3	)		7

Income tax expense	$	2,159		$	1,694		$	864

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

On December 27, 2006, Bankshares made a filing that included an estimate of transitional costs regarding its subsidiary, AHF. The following table identifies charges included in Bankshares fourth quarter results for the transitioning from a separate subsidiary to a division within the Bank:


Description	Amount
Interest income:
Loans	$	(28	)
Other income:
Gain (loss) on sale of loans	$	(64	)
Other expenses:
Salaries and employee benefits	$	60
Occupancy expense	$	135
Equipment expense	$	264
Operating expenses	$	129

Total pre-tax charge:	$	680

Total after-tax charge:	$	449

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, 2006 and 2005 was approximately $404 thousand and $397 thousand, respectively. During 2006, new loans and line of credit advances to such related parties amounted to $93 thousand in the aggregate and payments amounted to $86 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, 2006 and 2005 amounted to $3.0 million and $4.9 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, 2006 and 2005, the aggregate amounts of daily average required balances were $14.1 million and $11.0 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 16 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.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

Total rental expense for the occupancy leases for the year ended December 31, 2006, 2005 and 2004 was $1.6 million, $1.0 million, and $963 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, 2006, 2005 and 2004 was $219 thousand, $137 thousand and $147 thousand, respectively.

Bankshares leases office space for four of its branch locations, three of its mortgage lending locations, three of its insurance agency locations 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, 2006, minimum annual rental commitments under these leases (in thousands) are as follows:


2007	$	1,772
2008		1,543
2009		1,369
2010		1,180
2011		1,183
Thereafter		4,242

Total	$	11,289

14.		SUPPLEMENTAL CASH FLOW INFORMATION

		Supplemental Disclosures of Cash Flow Information (in thousands):


	2006		2005			2004
Interest paid during the year	$	16,613	$	10,236		$	6,916

Income taxes paid during the year	$	3,275	$	1,305		$	1,149

Supplemental Disclosures of Noncash Activities:
Fair value adjustment for securities	$	1,703	$	(3,393	)	$	277

15.		DEPOSITS

		The aggregate amount of time deposits in denominations of $100 thousand or more at December 31, 2006 and 2005 was $109.9 million and $95.5 million, respectively. Brokered deposits totaled $122.6 million and $79.9 million at December 31, 2006 and 2005, respectively.

		At December 31, 2006, the scheduled maturities of time deposits (in thousands) are as follows:


2007	$	77,395
2008		89,713
2009		50,976
2010		20,469
2011		4,018

Total	$	242,571

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

Bankshares has made a special effort to obtain deposits from title and mortgage loan closing companies. These balances represent a substantial portion of our non-interest bearing deposits, which creates a real estate industry concentration.

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, 2006 and 2005, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands):


	2006		2005
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	117,152	$	132,068
Standby letters of credit		3,849		2,482

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, 2006, Bankshares had rate lock commitments to originate mortgage loans totaling $4.7 million and loans held for sale of $18.5 million. It is management’s intent to enter into corresponding commitments, on a best-efforts basis, to sell these loans to third-party investors.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

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, 2006, 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, 2006, exceeded the insurance limits of the Federal Deposit Insurance Corporation by $12.0 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 $164 thousand, $84 thousand and $56 thousand, for the years ended December 31, 2006, 2005 and 2004, 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, 2006, 2005 and 2004.

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.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

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 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

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

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, 2006 and 2005, the carrying amounts and fair values of loan commitments and standby letters of credit were immaterial.

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


	2006				2005
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and short-term investments	$	21,918	$	21,918	$	25,224	$	25,224
Federal funds sold		11,727		11,727		37,522		37,522
Securities		200,819		200,819		228,791		228,791
Loans, net		374,299		377,584		300,806		300,036
Loans held for sale		18,534		18,534		5,936		5,936
Accrued interest receivable		4,132		4,132		3,356		3,356

Financial liabilities:
Noninterest-bearing deposits	$	158,728	$	158,728	$	185,877	$	185,877
Interest-bearing deposits		312,605		300,497		275,301		275,861
Short-term borrowings		53,197		52,731		58,089		57,668
FHLB advances		50,000		50,214		30,000		30,198
Trust Preferred Capital Notes		10,310		10,310		10,310		10,310
Accrued interest payable		2,926		2,926		1,017		1,017

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

		Federal and state banking regulations place certain restrictions on cash dividends paid and loans or advances made by the Bank to Bankshares. The total amount of dividends which may be paid at any date is generally limited to a portion of retained earnings as defined. As of December 31, 2006, the aggregate amount of unrestricted funds, which could be transferred from the banking subsidiary to the Parent Company, without prior regulatory approval, totaled $13.1 million or 24.0% of consolidated net assets. As of December 31, 2006, 2005 and 2004, no cash 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, 2006 and 2005, that Bankshares and the Bank meet all capital adequacy requirements to which they are subject.

		As of December 31, 2006, the most recent notification from the Federal Reserve categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. Bankshares’ and the Bank’s actual capital amounts and ratios as of December 31, 2006 and 2005 are also presented in the table.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements


											Minimum
											To Be Well
											Capitalized Under
						Minimum Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006:
Total Capital (to Risk Weighted Assets)
Consolidated	$	66,307		15.0	%	$	35,468		8.0	%		N/A		N/A
Alliance Bank Corporation	$	58,769		13.3	%	$	35,404		8.0	%	$	44,255		10.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	61,930		14.0	%	$	17,734		4.0	%		N/A		N/A
Alliance Bank Corporation	$	54,392		12.3	%	$	17,702		4.0	%	$	26,553		6.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	61,930		9.7	%	$	25,452		4.0	%		N/A		N/A
Alliance Bank Corporation	$	54,392		8.6	%	$	25,419		4.0	%	$	31,774		5.0	%

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	%

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 1,143,675 shares to directors, key employees and consultants. All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006. 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,
	2006			2005			2004
Dividend yield		0.00	%		0.00	%		0.00	%
Expected life	5.00 years			6.29 years			6.60 years
Expected volatility		21.35	%		23.03	%		25.89	%
Risk-free interest rate		4.99	%		4.28	%		3.76	%

The expected volatility is based on historical volatility. The risk-free interest rates for the periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on Bankshares history and expectation of dividend payouts.

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


	2006							2005					2004
				Weighted							Weighted					Weighted
				Average		Average					Average					Average
	Number of			Exercise		Intrinsic*		Number of			Exercise		Number of			Exercise
	Shares			Price		Value		Shares			Price		Shares			Price
Outstanding at January 1		862,256		$	6.17				756,226		$	4.89		677,293		$	5.42
Granted		20,975			16.18				133,285			13.99		207,345			15.65
Forfeited		(6,450	)		14.90				(6,900	)		14.15		(49,795	)		12.69
Exercised		(18,500	)		8.05				(20,355	)		6.78		(78,617	)		3.96

Outstanding at December 31		858,281		$	8.96	$	5,841		862,256		$	6.17		756,226		$	4.89


Exercisable at end of year		683,285				$	5,227		644,741					444,683

Weighted-average fair value per option of options granted during the year	$	4.86						$	4.75				$	4.31


*		The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on changes in the market value of Bankshares stock. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

The status of the options outstanding at December 31, 2006 is as follows:


		Weighted
		Average	Weighted				Weighted
		Remaining	Average				Average
Number		Contractual	Exercise		Number		Exercise
Outstanding		Life	Price		Exercisable		Price
	322,375	3 years	$	3.87		322,375	$	3.87
	19,406	5 years	$	4.25		19,406	$	4.25
	61,151	6 years	$	4.87		61,151	$	4.87
	147,344	7 years	$	9.48		91,282	$	9.59
	160,195	8 years	$	15.98		159,821	$	15.99
	129,835	9 years	$	13.99		29,250	$	13.96
	17,975	10 years	$	16.22		—	$	—


	858,281	5.9 years	$	8.96		683,285	$	8.05

All options granted, available, and exercisable under the Plan have been restated giving effect to the common stock dividends distributed by Bankshares.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

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. All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split in the form of a 15% stock dividend distributed on June 30, 2006. Potential dilutive common stock had no effect on income available to common shareholders.


	2006				2005				2004
			Per Share				Per Share				Per Share
	Shares		Amount		Shares		Amount		Shares		Amount
Basic earnings per share		5,536,771	$	0.81		5,518,743	$	0.74		5,228,035	$	0.53


Effect of dilutive securities, stock options		385,704				348,042				376,009


Diluted earnings per share		5,922,475	$	0.76		5,866,785	$	0.69		5,604,044	$	0.49

Average shares of 120,750, 143,750 and 211,600 have been excluded from the earnings per share calculation for 2006, 2005 and 2004, respectively, because their effects were anti-dilutive.

23.		COMMON STOCK DIVIDEND AND CAPITALIZATION

		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 earning assets as our business grows.

		On May 25, 2006 the Board of Directors of Bankshares declared a three-for-twenty stock split in the form of a 15% stock dividend. Each shareholder received three additional shares for every twenty shares of stock held on the record date. The stock dividend was paid on June 30, 2006 to shareholders of record at the close of business on June 9, 2006. In total, 721,927 additional shares were issued pursuant to the stock dividend. All share amounts and dollar amounts per share have been adjusted to reflect the three-for-twenty stock split.

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

ALLIANCE BANKSHARES CORPORATION
(Parent Corporation Only)

Statements of Cash Flows
For the Years Ended December 31, 2006, 2005 and 2004


	2006			2005			2004
Cash Flows from Operating Activities
Net income	$	4,479		$	4,058		$	2,767
Adjustments to reconcile net income to net cash (used in) operating activities:
Undistributed income of subsidiaries		(5,271	)		(4,650	)		(3,176	)
Increase in other assets		(213	)		(91	)		(170	)
Increase in accrued expenses		404			60			51

Net cash (used in) operating activities		(601	)		(623	)		(528	)


Cash Flows from Investing Activities
Increase in investment in subsidiaries		—			(5,000	)		(15,000	)

Net cash (used in) investing activities		—			(5,000	)		(15,000	)


Cash Flows from Financing Activities
Net proceeds from issuance of common stock		149			171			24,317

Net cash provided by financing activities		149			171			24,317


Cash and Cash Equivalents
Net increase (decrease) in Cash and Cash Equivalents		(452	)		(5,452	)		8,789
Beginning of Year		7,291			12,743			3,954

End of Year	$	6,839		$	7,291		$	12,743

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements

25.		SEGMENT REPORTING

		Bankshares has three reportable segments: traditional commercial banking, a mortgage banking business, and an insurance agency. 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. Insurance agency revenues consist of property and casualty commissions, contingency commissions and employee benefits commissions. For the year ended December 31, 2005 insurance agency commissions were $103 thousand. There was no income from insurance agency commissions in 2004. Therefore, the insurance agency income was not a reportable segment in 2005 and 2004.

		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, 2006, 2005 and 2004:


	2006
	Commercial		Mortgage			Insurance					Consolidated
	Banking		Banking			Agencies		Eliminations			Totals
Revenues:
Interest income	$	39,595	$	660		$	—	$	(680	)	$	39,575
Gain on sale of loans		—		4,110			—		—			4,110
Insurance commissions		—		—			1,618		—			1,618
Other		293		6			—		—			299

Total operating income		39,888		4,776			1,618		(680	)		45,602

Expenses:
Interest expense		18,522		680			—		(680	)		18,522
Provision for loan loss		1,020		—			—		—			1,020
Salaries and employee benefits		5,714		3,758			776		—			10,248
Other		7,199		1,691			284		—			9,174

Total operating expenses		32,455		6,129			1,060		(680	)		38,964

Income before income taxes	$	7,433	$	(1,353	)	$	558	$	—		$	6,638


Total assets	$	644,367	$	22,280		$	515	$	(22,791	)	$	644,371


Capital expenditures	$	1,284	$	249		$	23	$	—		$	1,556

Alliance Bankshares Corporation
Notes To Consolidated Financial Statements


	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


	2004
	Commercial		Mortgage						Consolidated
	Banking		Banking			Eliminations			Totals
Revenues:
Interest income	$	19,177	$	1,447		$	(1,473	)	$	19,151
Gain on sale of loans		—		5,362			—			5,362
Other		785		34			—			819

Total operating income		19,962		6,843			(1,473	)		25,332

Expenses:
Interest expense		6,852		1,473			(1,473	)		6,852
Provision for loan losses		886		—			—			886
Salaries and employee benefits		3,535		4,304			—			7,839
Other		5,033		1,091			—			6,124

Total operating expenses		16,306		6,868			(1,473	)		21,701

Income before income taxes	$	3,656	$	(25	)	$	—		$	3,631


Total assets	$	477,738	$	29,278		$	(27,296	)	$	479,720


Capital expenditures	$	800	$	270		$	—		$	1,070


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

None.

Item 9A. Controls and Procedures

Disclosure controls and Procedures. Bankshares, under the supervision and with the participation of the Bankshares’ management, including Bankshares Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of Bankshares disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that Bankshares disclosure controls and procedures are effective to ensure that information required to be disclosed by Bankshares in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and regulations and that such information is accumulated and communicated to Bankshares’ management, including Bankshares Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that Bankshares disclosure controls and procedures will detect or uncover every situation involving the failure of persons within Bankshares or its subsidiary to disclose material information otherwise required to be set forth in Bankshares periodic reports.

Management’s Report on Internal Control over Financial Reporting. Management of Bankshares is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Bankshares internal control over financial reporting is designed to provide reasonable assurance to Bankshares management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of Bankshares internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2006, Bankshares internal control over financial reporting was effective based on those criteria.

Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by Yount, Hyde & Barbour, P.C., the independent registered public accounting firm, who also audited Bankshares consolidated financial statements included in this Annual Report on Form 10-K. Yount, Hyde & Barbour, P.C.’s attestation report on management’s assessment of the Bankshares internal control over financial reporting appears on page 51 hereof.

Changes in Internal Controls. During the course of the assessment discussed above, management identified certain aspects of Bankshares’ internal control over financial reporting that it felt could be strengthened beyond what currently existed. As a result, Bankshares’ implemented various changes to its internal control over financial reporting in the fourth quarter of 2006. In particular, Bankshares has enhanced controls related to the review of changes made to its deposit and loan accounts that are performed by employees in the general course of their duties. Bankshares believes these changes have improved the overall control environment over its 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’ 2007 Annual Meeting of Shareholders (the “2007 Proxy Statement”) to be held in June 2007.

Item 10. Directors, Executive Officers and Corporate Governance

Information with respect to Alliance Bankshares’ directors and audit committee is contained in the 2007 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 2007 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 2007 Proxy Statement under the captions “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by reference. Information regarding director compensation is contained in the 2007 Proxy Statement under the caption “Director Compensation,” 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 2007 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 2007 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, and Director Independence

Information regarding transactions with management is contained in the 2007 Proxy Statement under the caption “Interest of Management in Certain Transactions” and “Meetings and Committees of the Board of Directors” and is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information regarding principal accounting fees and services and pre-approval policies is contained in the 2007 Proxy Statement under the caption “Principal Accountant Fees and Services” and “Pre-Approval Policies,” and is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)

Exhibits

	2.1		Agreement and Plan of Reorganization between Alliance Bankshares Corporation and Alliance Bank Corporation, dated as of May 22, 2002 (incorporated by reference to Exhibit 2.0 to Form 8-K12g-3 filed August 21, 2002).

	2.2		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).

	2.3		Asset Purchase Agreement dated as of September 13, 2006 by and between Battlefield Insurance Agency, Inc., Northern Virginia Insurance Agency, Inc., Oswald H. Skewes, Jr. and Alliance/Battlefield Insurance Agency, LLC (incorporated by reference to Exhibit 2.3 to Form 8-K filed September 19, 2006).

	3.1		Articles of Incorporation of Alliance Bankshares Corporation (as amended July 6, 2006) (incorporated by reference to Exhibit 3.1 to Form 10-Q filed August 14, 2006).

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

Certain instruments relating to capital securities not being registered have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.


		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.


*		Management Contracts


	2006			2005
Leasehold improvements	$	1,303		$	979
Furniture, fixtures and equipment		4,416			3,748

		5,719			4,727
Less: accumulated depreciation
and amortization		(3,325	)		(2,775	)

Premises and equipment, net	$	2,394		$	1,952


	December 31, 2006
Type of Advance	Interest Rate			Advance Term	Maturity Date		Balance
Adjustable Rate Credit		3.94	%	5 years		2008		$ 10,000
Convertible*		4.21	%	5 years		2011		15,000
Convertible*		4.62	%	15 years		2021		25,000

Total FHLB advances								$ 50,000


	December 31, 2005
Type of Advance	Interest Rate			Advance Term	Maturity Date		Balance
Adjustable Rate Credit		4.37	%	3 months		2006		$ 10,000
Adjustable Rate Credit		3.59	%	5 years		2008		10,000
Convertible*		2.04	%	5 years		2009		7,000
Convertible*		4.52	%	10 years		2011		3,000

Total FHLB advances								$ 30,000


*		Certain conversion options exist that may cause the advance to mature or convert prior to final maturity.


	2006		2005
Deferred tax assets:
Bad debt expense	$	1,488	$	1,151
Deferred rent		58		13
Deferred loan fees (costs), net		36		112
Depreciation and amortization		94		5
Other		47		4
Unrealized loss on securities available-for-sale		1,381		1,960

		3,104		3,245


Deferred tax liabilities:
Other		61		27

		61		27

Net defered tax assets	$	3,043	$	3,218


March 16, 2007 Date				/s/ Thomas A. Young, Jr. Thomas A. Young, Jr.
				President & CEO
				(principal executive officer)

March 16, 2007 Date				/s/ Paul M. Harbolick, Jr. Paul M. Harbolick, Jr.
				Executive Vice President & CFO,
				Corporate Secretary
				(principal financial and accounting officer)


March 16, 2007 Date				/s/ Harvey E. Johnson, Jr. Harvey E. Johnson, Jr.
				Chairman of the Board of Directors

March 16, 2007				/s/ William M. Drohan

Date				William M. Drohan
				Director

March 16, 2007				/s/ Lawrence N. Grant

Date				Lawrence N. Grant
				Director

March 16, 2007				/s/ Serina Moy

Date				Serina Moy
				Director

March 16, 2007				/s/ George S. Webb

Date				George S. Webb
				Director

March 16, 2007				/s/ Robert G. Weyers

Date				Robert G. Weyers
				Director

March 16, 2007				/s/ Thomas A. Young, Jr.

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

March 16, 2007				/s/ Paul M. Harbolick, Jr.

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