UNITEDTable STATESof Contents

~~SECURITIES~~UNITED ~~AND~~STATES ~~EXCHANGE COMMISSION~~

~~Washington,~~SECURITIES ~~D.C.~~AND ~~20549~~EXCHANGE COMMISSION

~~FORM~~Washington, ~~10-Q~~ D.C. 20549

~~(Mark~~FORM ~~One)~~ 10-Q

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

~~For~~x ~~the~~QUARTERLY ~~quarterly~~REPORT ~~period~~PURSUANT ~~ended~~TO ~~March 31,~~SECTION ~~2012~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OrFor the quarterly period ended June 30, 2012

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

~~For~~¨ ~~the~~TRANSITION ~~transition~~REPORT ~~period~~PURSUANT ~~from to~~ TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission File~~For ~~Number:~~the ~~000-49976~~transition period from to

~~ALLIANCE~~Commission ~~BANKSHARES~~File ~~CORPORATION~~Number: 000-49976

~~(Exact~~ALLIANCE ~~name~~BANKSHARES ofCORPORATION ~~registrant as specified in its charter)~~

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

(Exact name of registrant as specified in its charter)

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

VIRGINIA

46-0488111

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(~~703~~Address of principal executive offices) ~~814-7200~~(Zip Code)

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

~~N/A~~(Registrant’s telephone number, including area code)

~~(Former~~N/A ~~name, former address and former fiscal year, if changed since last report)~~

~~Indicate by check mark whether the registrant~~ (~~1) has~~Former ~~filed~~name, ~~all~~former ~~reports~~address ~~required~~and toformer befiscal ~~filed~~year, byif ~~Section 13~~changed orsince ~~15(d)~~last ~~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~~report)~~, and~~ ~~(2) has been subject to such filing requirements for the past 90 days. Yes x No ¨~~

Indicate by check mark whether the registrant (1) has ~~submitted~~filed ~~electronically~~all ~~and~~reports ~~posted on its corporate Web site, if any, every Interactive Data File~~ required to be ~~submitted~~filed ~~and~~by ~~posted~~Section 13 ~~pursuant~~or to15(d) ~~Rule 405~~ of ~~Regulation~~the ~~S-T~~Securities ~~(§232.405~~Exchange Act of ~~this~~1934 ~~chapter)~~ during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit~~file such reports), and ~~post~~(2) has been subject to such filing requirements for the past 90 ~~files)~~days. Yes x No ¨

Indicate by check mark whether the registrant ishas asubmitted ~~large~~electronically ~~accelerated~~and ~~filer,~~posted anon ~~accelerated~~its ~~filer,~~corporate aWeb ~~non-accelerated~~site, ~~filer~~if any, orevery aInteractive ~~smaller~~Data ~~reporting~~File ~~company.~~required ~~See~~to ~~the~~be ~~definitions~~submitted ofand ~~“large~~posted ~~accelerated~~pursuant to Rule ~~filer,”~~405 ~~“accelerated~~of ~~filer”~~Regulation ~~and~~S-T ~~“smaller~~(§232.405 ~~reporting~~of ~~company”~~this inchapter) ~~Rule~~during ~~12b-2~~the ofpreceding 12 months (or for such shorter period that the ~~Exchange~~registrant ~~Act~~was required to submit and post such files). Yes x No ¨

~~Large~~Indicate by check mark whether the registrant is a large accelerated filer, ¨an ~~Accelerated~~accelerated filer, ¨a ~~Non~~non-accelerated filer, ¨or ~~(Do~~a ~~not~~smaller ~~check~~reporting ifcompany. aSee the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company)” ~~Smaller~~in ~~reporting~~Rule ~~company~~12b-2 xof the Exchange Act.

~~Indicate~~Large byaccelerated ~~check~~filer ~~mark~~¨ ~~whether~~Accelerated ~~the~~filer ~~registrant~~¨ isNon-accelerated afiler ~~shell~~¨ ~~company~~ (asDo ~~defined~~not incheck ~~Rule~~if ~~12b-2~~a ofsmaller ~~the~~reporting ~~Exchange Act~~company)~~. Yes ¨~~ ~~No x~~Smaller reporting company x

AsIndicate ofby ~~May 11,~~check ~~2012~~mark whether the ~~number~~ ofregistrant ~~outstanding~~is ~~shares~~a ofshell ~~registrant’s~~company ~~common~~(as ~~stock,~~defined ~~par~~in ~~value~~Rule ~~$4.00~~12b-2 ~~per~~of ~~share~~the ~~was: 5,109,969~~Exchange Act). Yes ¨ No x

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

INDEXTable of Contents

		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011,		2
	Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011 (Unaudited)		3
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 (Unaudited)		4
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011 (Unaudited)		5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (Unaudited)		6
	Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		57
Item 4.	Controls and Procedures		60
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		61
Item 1A.	Risk Factors		61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		62
Item 3.	Defaults Upon Senior Securities		62
Item 4.	Mine Safety Disclosures		62
Item 5.	Other Information		62
Item 6.	Exhibits		63
SIGNATURES			64

ALLIANCE BANKSHARES CORPORATION

1INDEX

PART I. FINANCIAL INFORMATION


		Page
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements		3
Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011 (Audited)			3
Consolidated Statements of Operations for the three months ended June 30, 2012 and 2011 (Unaudited)			4
Consolidated Statements of Operations for the six months ended June 30, 2012 and 2011 (Unaudited)			5
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012			6
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and 2011 (Unaudited)			7
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (Unaudited)			8
Notes to Consolidated Financial Statements (Unaudited)			9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		72
Item 4.	Controls and Procedures		75

PART II OTHER INFORMATION			76
Item 1.	Legal Proceedings		76
Item 1A.	Risk Factors		76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		76
Item 3.	Defaults Upon Senior Securities		76
Item 4.	Mine Safety Disclosures		76
Item 5.	Other Information		76
Item 6.	Exhibits		77

SIGNATURES			78

Item 1.Table Financialof Statements Contents

~~Alliance~~PART ~~Bankshares~~I. ~~Corporation~~FINANCIAL INFORMATION

~~Consolidated~~Item 1. ~~Balance~~Financial ~~Sheets~~Statements

~~March 31,~~Alliance ~~2012~~Bankshares ~~and~~Corporation ~~December 31, 2011~~

~~(Dollars~~Consolidated inBalance ~~thousands,~~Sheets ~~except share and per share amounts)~~

	March 31,2012			December 31,2011
	(unaudited)			(audited)
ASSETS
Cash and due from banks	$	66,589		$	45,837
Federal funds sold		25,307			16,567
Trading security, at fair value		454			596
Investment securities available-for-sale, at fair value		105,744			123,463
Restricted stock, at cost		4,772			4,772
Loans, net of allowance for loan losses of $5,070 and $5,393		292,015			301,483
Premises and equipment, net		1,297			1,415
Other real estate owned, net		4,683			3,748
Deferred tax assets, net of allowance $5,291 and $5,291		1,378			1,553
Accrued interest and other assets		6,425			7,049
TOTAL ASSETS	$	508,664		$	506,483
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Non-interest bearing deposits	$	118,067		$	112,450
Savings and NOW deposits		57,415			51,475
Money market deposits		15,885			23,370
Time deposits		189,106			193,148
Total deposits		380,473			380,443
Repurchase agreements		43,842			40,420
Federal Home Loan Bank advances ($28,887 and $29,350 at fair value)		43,887			44,350
Trust Preferred Capital Notes		10,310			10,310
Other liabilities		2,421			2,838
Commitments and contingent liabilities		—			—
Total liabilities		480,933			478,361
SHAREHOLDERS’ EQUITY:
Common stock, $4 par value; 15,000,000 shares authorized; 5,109,969 shares issued and outstanding at March 31, 2012 and December 31, 2011		20,440			20,440
Capital surplus		25,924			25,915
Retained (deficit)		(18,702	)		(18,269	)
Accumulated other comprehensive income, net		69			36
Total shareholders’ equity		27,731			28,122
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	508,664		$	506,483

June 30, 2012 and December 31, 2011

~~See~~(Dollars ~~Notes~~in tothousands, ~~Consolidated~~except ~~Financial~~share ~~Statements~~and ~~(Unaudited~~per share amounts).


	June 30, 2012			December 31, 2011
	(Unaudited)			(Audited)
ASSETS

Cash and due from banks	$	74,777		$	45,837
Federal funds sold		22,880			16,567
Trading security, at fair value		300			596
Investment securities available-for-sale, at fair value		103,353			123,463
Restricted stock, at cost		4,150			4,772
Loans, net of allowance for loan losses of $5,055 and $5,393		288,416			301,483
Premises and equipment, net		1,211			1,415
Other real estate owned, net		4,031			3,748
Deferred tax assets, net		1,442			1,553
Accrued interest and other assets		7,258			7,049


TOTAL ASSETS	$	507,818		$	506,483


LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES:
Non-interest bearing deposits	$	119,553		$	112,450
Savings and NOW deposits		66,643			51,475
Money market deposits		18,087			23,370
Time deposits		177,916			193,148

Total deposits		382,199			380,443

Repurchase agreements		40,388			40,420
Federal Home Loan Bank advances ($29,559 and $29,350 at fair value)		44,559			44,350
Trust Preferred Capital Notes		10,310			10,310
Other liabilities		3,223			2,838
Commitments and contingent liabilities		—			—

Total liabilities		480,679			478,361


SHAREHOLDERS’ EQUITY:
Common stock, $4 par value; 15,000,000 shares authorized; 5,109,969 shares issued and outstanding at June 30, 2012 and December 31, 2011		20,440			20,440
Capital surplus		25,933			25,915
Retained (deficit)		(19,621	)		(18,269	)
Accumulated other comprehensive income, net		387			36

Total shareholders’ equity		27,139			28,122


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	507,818		$	506,483

~~Alliance~~See ~~Bankshares~~Notes ~~Corporation~~to Consolidated Financial Statements (Unaudited).

~~Consolidated~~3 ~~Statements of Operations~~

(Unaudited)Table of Contents

~~For the~~Alliance ~~Three~~Bankshares ~~Months~~Corporation ~~Ended March 31, 2012 and 2011~~

~~(Dollars~~Consolidated inStatements ~~thousands,~~of ~~except~~Operations ~~share and per share amounts)~~

	2012			2011
INTEREST INCOME:
Loans	$	4,183		$	4,545
Investment securities		323			1,321
Trading security		10			33
Federal funds sold		15			10
Total interest income		4,531			5,909
INTEREST EXPENSE:
Savings and NOW deposits		29			32
Time deposits		747			997
Money market deposits		30			49
Repurchase agreements		57			88
FHLB advances		268			259
Trust preferred capital notes		103			92
Total interest expense		1,234			1,517
Net interest income		3,297			4,392
Provision for loan losses		450			306
Net interest income after provision for loan losses		2,847			4,086
OTHER INCOME:
Deposit account service charges		34			37
Net gain on sale of available-for-sale securities		3			79
Gain (loss) and fair value adjustments on trading securities		(71	)		(127	)
Fair value adjustments on FHLB advances		463			151
Other operating income		40			44
Total other income		469			184
OTHER EXPENSES:
Salaries and employee benefits		1,164			1,392
Occupancy expense		591			561
Equipment expense		134			168
Other real estate owned expense		41			35
FDIC assessments		222			350
Operating expenses		1,439			1,217
Total other expenses		3,591			3,723
Income (loss) before income taxes		(275	)		547
Income tax expense		158			182
NET INCOME (LOSS)	$	(433	)	$	365
Net income (loss) per common share, basic	$	(0.08	)	$	0.07
Net income (loss) per common share, diluted	$	(0.08	)	$	0.07

For the Three Months Ended June 30, 2012 and 2011

~~See~~(Dollars ~~Notes~~in tothousands, ~~Consolidated~~except ~~Financial~~per ~~Statements~~share ~~(Unaudited~~amounts).


	2012			2011
INTEREST INCOME:
Loans	$	4,089		$	4,555
Investment securities		331			1,167
Trading security		9			12
Federal funds sold		24			12

Total interest income		4,453			5,746

INTEREST EXPENSE:
Savings and NOW deposits		30			30
Time deposits		694			971
Money market deposits		32			45
Repurchase agreements		49			52
FHLB advances		268			256
Trust preferred capital notes		129			93

Total interest expense		1,202			1,447

Net interest income		3,251			4,299
Provision for loan losses		—			769

Net interest income after provision for loan losses		3,251			3,530

OTHER INCOME (LOSS):
Deposit account service charges		41			39
Net gain on sale of available-for-sale securities		—			835
Gain (loss) and fair value adjustments on trading security		(100	)		94
Fair value adjustments on FHLB advance		(672	)		(224	)
Other operating income		39			75

Total other income (loss)		(692	)		819

OTHER EXPENSES:
Salaries and employee benefits		1,148			1,404
Professional fees		608			503
Occupancy expense		532			564
Equipment expense		136			155
Other real estate owned expense		54			16
FDIC assessments		210			290
Merger expenses		410			—
Other operating expenses		609			832

Total other expenses		3,707			3,764

Income (loss) before income taxes		(1,148	)		585
Income tax expense (benefit)		(229	)		191

NET INCOME (LOSS)	$	(919	)	$	394

Net income (loss) per common share, basic	$	(0.18	)	$	0.08

Net income (loss) per common share, diluted	$	(0.18	)	$	0.08

~~Alliance~~See ~~Bankshares~~Notes ~~Corporation~~to Consolidated Financial Statements (unaudited)

~~Consolidated~~4 ~~Statements of Comprehensive Income~~

(Unaudited)Table of Contents

~~For the~~Alliance ~~Three~~Bankshares ~~Months~~Corporation ~~Ended March 31, 2012 and 2011~~

~~(Dollars~~Consolidated inStatements ~~thousands)~~of Operations

	2012			2011
NET INCOME (LOSS)	$	(433	)	$	365
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities net of taxes of $19 in 2012 and ($125) in 2011		35			(244	)
Reclassification adjustment, net of taxes of ($1) in 2012 and ($27) in 2011		(2	)		(52	)
Total other comprehensive income (loss)		33			(296	)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(400	)	$	69

For the Six Months Ended June 30, 2012 and 2011

~~See~~(Dollars ~~Notes~~in tothousands, ~~Consolidated~~except ~~Financial~~per ~~Statements~~share ~~(Unaudited~~amounts).


	2012			2011
INTEREST INCOME:
Loans	$	8,272		$	9,100
Investment securities		655			2,488
Trading security		18			45
Federal funds sold		39			22

Total interest income		8,984			11,655

INTEREST EXPENSE:
Savings and NOW deposits		59			62
Time deposits		1,441			1,968
Money market deposits		61			94
Repurchase agreements		94			140
FHLB advances		536			515
Trust preferred capital notes		243			185

Total interest expense		2,434			2,964

Net interest income		6,550			8,691
Provision for loan losses		450			1,075

Net interest income after provision for loan losses		6,100			7,616

OTHER INCOME (LOSS):
Deposit account service charges		74			76
Net gain on sale of available-for-sale securities		3			914
Gain (loss) and fair value adjustments on trading security		(171	)		(33	)
Fair value adjustments on FHLB advance		(209	)		(73	)
Other operating income		78			119

Total other income (loss)		(225	)		1,003

OTHER EXPENSES:
Salaries and employee benefits		2,321			2,796
Professional fees		1,093			1,893
Occupancy expense		1,123			1,125
Equipment expense		270			323
Other real estate owned expense		95			51
FDIC assessments		431			640
Merger expenses		418			—
Other operating expenses		1,547			659

Total other expenses		7,298			7,487

Income (loss) before income taxes		(1,423	)		1,132
Income tax expense (benefit)		(71	)		373

NET INCOME (LOSS)	$	(1,352	)	$	759

Net income (loss) per common share, basic	$	(0.26	)	$	0.15

Net income (loss) per common share, diluted	$	(0.26	)	$	0.15

~~Alliance~~See ~~Bankshares~~Notes ~~Corporation~~to Consolidated Financial Statements (Unaudited)

~~Consolidated~~5 ~~Statements of Changes in Shareholders’ Equity~~

(Unaudited)Table of Contents

~~For the~~Alliance ~~Three~~Bankshares ~~Months~~Corporation ~~Ended March 31, 2012 and 2011~~

~~(Dollars~~Consolidated inStatements ~~thousands~~of Comprehensive Income (Loss)

	CommonStock		CapitalSurplus			RetainedEarnings			AccumulatedOtherComprehensiveIncome (Loss)			TotalShare-holders’Equity
BALANCE, DECEMBER 31, 2010		20,427	$	25,857		$	(12,311	)	$	(288	)	$	33,685
Net income		—		—			365			—			365
Other comprehensive (loss), net of tax		—		—			—			(296	)		(296	)
Exercise of stock options		6		(2	)		—			—			4
BALANCE, March 31, 2011	$	20,433	$	25,855		$	(11,946	)	$	(584	)	$	33,758
BALANCE, DECEMBER 31, 2011	$	20,440	$	25,915		$	(18,269	)	$	36		$	28,122
Net (loss)		—		—			(433	)		—			(433	)
Other comprehensive income, net of tax		—		—			—			33			33
Stock-based compensation expense		—		9			—			—			9
BALANCE, March 31, 2012	$	20,440	$	25,924		$	(18,702	)	$	69		$	27,731

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

~~See~~(Dollars ~~Notes~~in ~~to Consolidated Financial Statements (Unaudited~~thousands).


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

Total other comprehensive income		318			1,625

TOTAL COMPREHENSIVE INCOME (LOSS)	$	(601	)	$	2,019

~~Alliance~~See ~~Bankshares~~Notes ~~Corporation~~to Consolidated Financial Statements (Unaudited)

Consolidated Statements of Cash Flows


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

Total other comprehensive income		351			1,329

TOTAL COMPREHENSIVE INCOME (LOSS)	$	(1,001	)	$	2,088

See Notes to Consolidated Financial Statements (Unaudited)

~~For the~~6 ~~Three Months Ended March 31, 2012 and 2011~~

(DollarsTable inof thousands) Contents

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(433	)	$	365
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		719			371
Loss on disposal of fixed assets		—			15
Provision for loan losses		450			306
Losses and valuation adjustments on other real estate owned		28			12
Stock-based compensation expense		9			—
Net (gain) on sale of securities available-for-sale		(3	)		(79	)
Fair value adjustments		(392	)		(24	)
Deferred tax expense		158			—
Changes in assets and liabilities affecting operations:
Accrued interest and other assets		622			833
Other liabilities		(417	)		(160	)
Net cash provided by operating activities		741			1,639
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold		(8,740	)		9,598
Purchase of securities available-for-sale		(59,582	)		(9,756	)
Proceeds from sale of securities available-for-sale		71,020			15,264
Paydowns on securities available-for-sale		5,755			4,293
Net change in trading securities		71			1,867
Net change in restricted stock		—			(19	)
Net change in loan portfolio		8,055			12,517
Proceeds from sale of other real estate owned		—			292
Purchase of premises and equipment		(20	)		(168	)
Net cash provided by investing activities		16,559			33,888
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash provided by (expended on):
Non-interest bearing deposits		5,617			(3,952	)
Savings and NOW deposits		5,940			(3,336	)
Money market deposits		(7,485	)		(853	)
Time deposits		(4,042	)		7,328
Repurchase agreements		3,422			(9,161	)
Proceeds from exercise of stock options		—			4
Net cash provided by (used in) financing activities		3,452			(9,970	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		20,752			25,557
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		45,837			24,078
CASH AND CASH EQUIVALENTS, END OF YEAR	$	66,589		$	49,635

Alliance Bankshares Corporation

~~See~~Consolidated ~~Notes~~Statements toof ~~Consolidated~~Changes ~~Financial~~in ~~Statements~~Shareholders’ ~~(Unaudited).~~Equity

6For the Six Months Ended June 30, 2012 and 2011

~~Notes~~(Dollars toin ~~Consolidated Financial Statements (Unaudited~~thousands)

1. General


	Common Stock		Capital Surplus			Retained Deficit			Acccumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
BALANCE, DECEMBER 31, 2010	$	20,427	$	25,857		$	(12,311	)	$	(288	)	$	33,685

Net income		—		—			759			—			759
Other comprehensive income, net of tax		—		—			—			1,329			1,329
Exercise of stock options		9		(3	)		—			—			6

BALANCE, June 30, 2011	$	20,436	$	25,854		$	(11,552	)	$	1,041		$	35,779


BALANCE, DECEMBER 31, 2011	$	20,440	$	25,915		$	(18,269	)	$	36		$	28,122

Net (loss)		—		—			(1,352	)		—			(1,352	)
Other comprehensive income, net of tax		—		—			—			351			351
Stock-based compensation expense		—		18			—			—			18

BALANCE, June 30, 2012	$	20,440	$	25,933		$	(19,621	)	$	387		$	27,139

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

On7 ~~June 26, 2003, Alliance Virginia Capital Trust I (Trust), a Delaware statutory trust and a subsidiary of Bankshares, was formed for the purpose of issuing Bankshares’ trust preferred debt.~~

OnTable May 3, 2012, WashingtonFirst Bankshares, Inc. (WFBI), Bankshares and the Bank entered into an Agreement and Plan of Reorganization (Merger Agreement), pursuant to which Bankshares will merge with and into WFBI, with WFBI being the surviving corporation (Merger). Each share of Bankshares’ outstanding common stock will be converted into and become the right to receive, subject to proration in accordance with the terms of the Merger Agreement and at the election of each shareholder of Bankshares, either 0.4435 shares of common stock of WFBI or cash in the amount of $5.30, subject in either case to adjustment in certain circumstances, provided that no more than 20% of the common shares of Bankshares may elect to receive cash. Completion of the Merger is subject to (i) approval of the Merger by the shareholders of each of Bankshares and WFBI, (ii) applicable regulatory approvals, including the Federal Reserve Board and the Virginia State Corporation Commission, and (iii) other customary closing conditions. Contents

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

~~The~~Consolidated ~~accompanying~~Statements ~~unaudited consolidated financial statements reflect the financial condition and results~~ of ~~operations~~Cash ofFlows Bankshares on a consolidated basis and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly Bankshares’ financial position as of March 31, 2012, and December 31, 2011, results of operations and comprehensive income for the three month period ended March 31, 2012 and 2011, and cash flows and changes in shareholders’ equity for the three month period ended March 31, 2012 and 2011. The notes included herein should be read in conjunction with the financial statements and accompanying notes included in Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (the SEC).

~~Operating~~For ~~results for~~ the ~~three~~Six ~~month~~Months ~~periods~~Ended ~~ended March~~June 3130, 2012 and 2011 ~~are not necessarily indicative of full year financial results.~~

7(Dollars in thousands)

2. Stock Option Plan


	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,352	)	$	759
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		1,424			622
Loss on disposal of fixed assets		—			15
Provision for loan losses		450			1,075
Losses and valuation adjustments on other real estate owned		67			10
Stock-based compensation expense		18			—
Net (gain) on sale of securities available-for-sale		(3	)		(914	)
Fair value adjustments		380			106
Changes in assets and liabilities affecting operations:
Accrued interest and other assets		(279	)		1,502
Other liabilities		385			(508	)

Net cash provided by operating activities		1,090			2,667

CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold		(6,313	)		(2,489	)
Purchase of securities available-for-sale		(64,582	)		(26,943	)
Proceeds from sale of securities available-for-sale		71,017			50,430
Paydowns on securities available-for-sale		13,057			6,175
Net change in trading security		125			1,908
Net change in restricted stock		622			790
Net change in loan portfolio		11,654			9,641
Proceeds from sale of other real estate owned		613			739
Purchase of premises and equipment		(67	)		(384	)

Net cash provided by investing activities		26,126			39,867

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash provided by (expended on):
Non-interest bearing deposits		7,103			6,199
Savings and NOW deposits		15,168			1,064
Money market deposits		(5,283	)		(1,591	)
Time deposits		(15,232	)		(583	)
Repurchase agreements		(32	)		(9,271	)
Proceeds from exercise of stock options		—			6

Net cash provided by (used in) financing activities		1,724			(4,176	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		28,940			38,358
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		45,837			24,078

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	74,777		$	62,436

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

As8 of March 31, 2012, there was $73 thousand of total unrecognized compensation expense related to stock options, which will be recognized over the remaining requisite service period which is estimated to be three years or less.

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

~~Stock~~Notes ~~option~~to ~~activity~~Consolidated ~~for~~Financial ~~the~~Statements ~~three~~(Unaudited) ~~months ended March 31, 2012 is summarized below:~~

	Numberof Shares			WeightedAverageExercisePrice		WeightedAverageRemainingContractualLife (inyears)		AggregateIntrinsicValue(1) (inthousands)
Outstanding at January 1, 2012		257,846		$	8.88
Granted		—			—
Exercised		—			—
Forfeited		(15,700	)		11.29
Expired		(4,750	)		11.72
Outstanding at March 31, 2012		237,396		$	8.67		4.5	$	91
Exercisable at March 31, 2012		181,246		$	10.48		4.5	$	22

1.	General

Alliance Bankshares Corporation (1Bankshares or Company) ~~Intrinsic~~is a bank holding company that conducts substantially all its operations ~~value~~through isits ~~the~~subsidiaries. ~~difference~~Alliance ~~between~~Bank Corporation (the ~~underlying~~Bank) ~~stock’s~~is ~~price~~state-chartered and a member of the ~~strike~~Federal ~~price~~Reserve System. IfThe Bank places special emphasis on serving the ~~difference~~needs isof ~~negative~~individuals, small and medium size businesses and professional concerns in the ~~intrinsic~~greater ~~value~~Washington, isD.C. ~~given~~Metropolitan asregion, ~~zero~~primarily in the Northern Virginia submarket.

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

~~Bankshares~~On ~~uses~~May 3, ~~fair~~2012, ~~value~~WashingtonFirst ~~measurements~~Bankshares, toInc. ~~record~~(WFBI), ~~fair~~Bankshares ~~value~~and ~~adjustments~~the toBank ~~certain~~entered ~~assets~~into ~~and~~an ~~liabilities~~Agreement and toPlan ~~determine~~of ~~fair~~Reorganization ~~value disclosures.~~(Merger InAgreement), ~~accordance~~pursuant ~~with~~to ~~the~~which ~~Fair~~Bankshares ~~Value~~will ~~Measurements~~merge with and ~~Disclosures~~into ~~topic~~WFBI, ofwith ~~Financial~~WFBI ~~Accounting~~being ~~Standards~~the ~~Board~~surviving corporation (~~FASB~~Merger),. ~~ASC~~Each ~~820-10,~~share ~~the~~of ~~fair~~Bankshares’ ~~value~~outstanding ofcommon astock ~~financial~~will ~~instrument~~be isconverted ~~the~~into ~~price~~and ~~that~~become ~~would~~the beright ~~received~~to receive, subject to ~~sell~~proration anin ~~asset~~accordance orwith ~~paid~~the ~~to transfer~~terms aof ~~liability~~the inMerger Agreement anand ~~orderly~~at ~~transaction~~the ~~between~~election ~~market~~of ~~participants~~each atshareholder ~~the~~of ~~measurement~~Bankshares, ~~date~~either 0.4435 ~~Fair~~shares ~~value~~of iscommon ~~best~~stock ~~determined~~of ~~based~~WFBI ~~upon~~or ~~quoted~~cash ~~market~~in ~~prices.~~the ~~However~~amount of $5.30, subject in ~~many~~either ~~instances,~~case ~~there~~to ~~are~~adjustment noin ~~quoted~~the ~~market~~event ~~prices~~that ~~for~~ Bankshares’ shareholders’ equity (as ~~various~~defined ~~financial~~in ~~instruments.~~the InAgreement) ~~cases~~at ~~where~~the ~~quoted~~month-end ~~market~~prior ~~prices~~to ~~are~~completion ~~not~~of ~~available~~the Merger has declined by more than 10% from the amount of Bankshares’ shareholders’ equity at December 31, ~~fair~~2011, ~~values~~and ~~are~~provided ~~based~~that onno ~~estimates~~more ~~using~~than ~~present~~20% ~~value~~of orthe ~~other~~common shares ~~valuation~~of ~~techniques~~Bankshares may elect to receive cash. ~~Those~~Completion ~~techniques~~of ~~are~~the ~~significantly~~Merger ~~affected~~is bysubject to (i) approval of the ~~assumptions~~Merger ~~used, including~~by the ~~discount~~shareholders ~~rate~~of each of Bankshares and ~~estimates~~WFBI, of(ii) applicable ~~future~~regulatory ~~cash~~approvals, ~~flows.~~including ~~Accordingly~~those of the Federal Reserve Board, the ~~fair~~Federal ~~value~~Deposit ~~estimates~~Insurance ~~may~~Corporation ~~not~~and bethe ~~realized~~Virginia inState anCorporation ~~immediate~~Commission, ~~settlement~~and of(iii) other ~~the~~customary ~~instrument~~closing conditions.

8Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from, among other things, redeeming, purchasing or otherwise acquiring any shares of its capital stock, amending its articles of incorporation or bylaws, soliciting any third party acquisition proposals and entering into any new line of business, without the consent of WFBI.

The ~~fair~~accompanying ~~value~~unaudited ~~guidance~~consolidated ~~provides~~financial astatements ~~consistent~~reflect ~~definition~~the offinancial ~~fair~~condition ~~value,~~and ~~which~~results ~~focuses~~of onoperations of ~~exit~~Bankshares ~~price~~on ina ~~an orderly~~consolidated ~~transaction~~basis ~~(that~~and ~~is,~~have ~~not~~been aprepared ~~forced~~in ~~liquidation~~accordance orwith ~~distressed~~accounting ~~sale)~~principles ~~between~~generally ~~market~~accepted ~~participants~~in at the ~~measurement~~United ~~date~~States ~~under~~of ~~current~~America ~~market~~(GAAP) ~~conditions.~~for Ifinterim ~~there~~financial ~~has~~reporting. ~~been~~All a significant ~~decrease~~intercompany inbalances ~~the volume~~ and ~~level of activity for the~~transactions ~~asset~~have orbeen ~~liability,~~eliminated. aIn ~~change in valuation technique or~~ the ~~use~~opinion of ~~multiple valuation techniques may be appropriate. In such instances~~management, ~~determining~~ the ~~price~~accompanying atunaudited ~~which~~consolidated ~~willing~~financial ~~market~~statements ~~participants~~contain ~~would~~all ~~transact~~adjustments atand ~~the~~reclassifications ~~measurement~~considered ~~date~~necessary ~~under~~to ~~current market~~present ~~conditions~~fairly ~~depends~~Bankshares’ onfinancial ~~the~~position ~~facts~~as ~~and~~of June 30, ~~circumstances~~2012 and ~~requires~~December 31, 2011, the ~~use~~results of ~~significant~~operations ~~judgment.~~for ~~The~~the ~~fair~~three ~~value~~and issix amonth ~~reasonable~~periods ~~point~~ended ~~within~~June 30, ~~the~~2012 ~~range~~and ~~that~~2011, isconsolidated ~~most~~statements ~~representative~~ of ~~fair~~comprehensive ~~value~~income ~~under~~for ~~current~~the ~~market~~three ~~conditions.~~and six month periods

~~Fair~~9 ~~Value Hierarchy~~

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

• ended ~~Level~~June 30, 12012 –and ~~Valuation~~2011, ischanges ~~based~~in ~~upon~~shareholders’ ~~quoted~~equity ~~prices~~for the six month periods ended June 30, 2012 and 2011 and consolidated statements of cash flows for ~~identical~~the ~~instruments~~six ~~traded~~month periods ended June 30, 2012 and 2011. The notes included herein should be read in ~~active~~conjunction ~~markets~~with the financial statements and accompanying notes included in Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (the SEC).

•Operating ~~Level~~results ~~2 – Valuation is based on observable inputs including quoted prices in active markets~~ for ~~similar~~the ~~assets~~three and ~~liabilities,~~six ~~quoted~~month ~~prices~~periods ~~for~~ended ~~identical or similar assets and liabilities in less active markets~~June 30, 2012 and ~~model-based~~2011 ~~valuation~~are ~~techniques~~not ~~for~~necessarily ~~which~~indicative ~~significant~~of ~~assumptions~~full ~~can~~year befinancial ~~derived primarily from or corroborated by observable data in the market~~results.

~~• Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market~~2. ~~These~~Stock ~~unobservable~~Option assumptions reflect Bankshares’ own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.Plan

AAccounting ~~financial~~Standards ~~instrument’s~~Codification ~~categorization~~(ASC) ~~within~~718-10, “Stock Compensation”, requires companies to recognize the ~~valuation~~cost ~~hierarchy~~of isemployee services received in exchange for awards of equity instruments, such as stock options and nonvested shares, based ~~upon~~on the ~~lowest~~fair ~~level~~value of ~~input~~those ~~that~~awards isat the date of grant. ~~significant~~Compensation tocost has been measured using the fair value ~~measurement~~of an award on the grant date and is recognized over the service period, which is usually the vesting period.

~~The~~As ~~following~~of ~~describes~~June 30, ~~the~~2012, ~~valuation~~there ~~techniques~~was ~~used~~$64 bythousand ~~Bankshares~~of total unrecognized compensation expense related to ~~measure~~stock ~~certain~~options, ~~financial assets~~which ~~and~~will ~~liabilities~~be ~~recorded~~recognized atover ~~fair~~the ~~value~~remaining onrequisite aservice ~~recurring~~period ~~basis~~which inis estimated ~~the~~to ~~financial~~be ~~statements:~~three years or less.

~~Trading~~Stock ~~and~~option ~~Available-for-Sale~~compensation ~~Securities –~~expense ~~Trading~~is ~~and~~the ~~available-for-sale~~estimated ~~securities~~fair ~~are~~value ~~recorded~~of atoptions ~~fair~~granted ~~value~~amortized on a straight-line ~~recurring~~ basis. ~~Fair~~over ~~value~~the ~~measurement~~requisite isservice ~~based~~period ~~upon~~for ~~quoted~~each ~~market~~separately ~~prices,~~vesting ~~when~~portion ~~available~~of ~~(Level~~the 1)award. IfThe ~~quoted market prices are not available,~~ fair ~~values~~value ~~are measured utilizing independent valuation techniques~~ of ~~identical~~each orgrant ~~similar~~is ~~securities~~estimated ~~for~~at ~~which~~the ~~significant~~grant ~~assumptions~~date ~~are~~using ~~derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine~~ the ~~fair~~Black-Scholes ~~value of identical or similar securities by using~~ option-pricing ~~models that consider observable market data (Level 2)~~model. ~~Financial~~There ~~assets~~were ~~and~~no ~~liabilities~~grants ~~that~~of ~~are~~stock ~~traded infrequently have values based on prices or valuation~~options ~~techniques~~for ~~that require inputs that are both unobservable and significant to~~ the ~~overall~~first ~~fair~~six ~~value~~months ~~measurement.~~of ~~These inputs reflect management’s own view about the assumptions that market participants would use in pricing the asset or liability (Level 3)~~2012.

~~FHLB~~10 Advances – Under the fair value accounting standards, certain liabilities can be carried at fair value. The designated instruments are recorded on a fair value basis at the time of issuance. As of March 31, 2012, Bankshares had one wholesale liability as a fair value instrument: a long-term Federal Home Loan Bank (FHLB) advance.

9Table of Contents

~~Wholesale~~Stock ~~instruments~~option ~~are~~activity ~~designated as either Level 2 or Level 3 under the ASC 820-10 fair value hierarchy. Level 2 liabilities are based on quoted market prices using independent valuation techniques~~ for similar instruments with like characteristics. This information is deemed to be observable market data. Level 3 liabilities are financial instruments that are difficult to value due to dysfunctional, distressed markets or lack of actual trading volume. Management gathers certain data to value the ~~instrument,~~six ~~including~~months ~~swap~~ended ~~curves~~June 30, ~~conversion~~2012 ~~swaptions~~is ~~and~~summarized ~~discounted~~below: ~~cash flows. These data points are modeled to reflect the estimate of the fair value of the liability.~~

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


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value¹ (in thousands)

Outstanding at January 1, 2012		257,846		$	8.88
Granted		—			—
Exercised		—			—
Forfeited		(15,700	)		11.29
Expired		(22,690	)		6.12


Outstanding at June 30, 2012		219,456		$	8.86		4.6	$	112


Exercisable at June 30, 2012		173,301		$	10.64		4.6	$	42

	Fair Value Measurements at March 31, 2012
	CarryingValue		QuotedPrices inActiveMarkets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs(Level 3)		Assets/Liabilities atFair Value
	(Dollars in thousands)
Assets:
Trading security – PCMO	$	454	$	—	$	454	$	—	$	454
Available-for-sale securities:
U.S. treasuries		—		—		—		—		—
U.S. corporations and agencies		18,692		—		18,692		—		18,692
U.S. government CMOs		55,964		—		55,964		—		55,964
U.S. government agency MBS		21,533		—		21,533		—		21,533
PCMOs		967		—		967		—		967
Municipal securities		8,588		—		8,588				8,588
Total assets	$	106,198	$	—	$	106,198	$	—	$	106,198
Liabilities:
FHLB advance	$	28,887	$	—	$	—	$	28,887	$	28,887
Total liabilities	$	28,887	$	—	$	—	$	28,887	$	28,887

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

103. Fair Value Measurements

	Fair Value Measurements at December 31, 2011
	CarryingValue		QuotedPrices inActiveMarkets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs (Level3)		Assets/Liabilitiesat FairValue
	(Dollars in thousands)
Assets:
Trading security – PCMO	$	596	$	—	$	596	$	—	$	596
Available-for-sale securities:
U.S. treasuries		71,115		71,115		—		—		71,115
U.S. corporations and agencies		9,751		—		9,751		—		9,751
U.S. government CMOs		31,038		—		31,038		—		31,038
U.S. government agency MBS		7,698		—		7,698		—		7,698
PCMOs		950		—		950		—		950
Municipal securities		2,911		—		2,911				2,911
Total assets	$	124,059	$	71,115	$	52,944	$	—	$	124,059
Liabilities:
FHLB advance	$	29,350	$	—	$	—	$	29,350	$	29,350
Total liabilities	$	29,350	$	—	$	—	$	29,350	$	29,350

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

The ~~following~~fair ~~tables~~value ~~present~~guidance ~~the~~provides ~~activity~~a inconsistent ~~Level~~definition 3of fair value, ~~measurements~~which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the ~~three~~asset ~~months~~or ~~ended~~liability, ~~March 31~~a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and ~~2012~~circumstances and requires the ~~year~~use ~~ended~~of ~~December 31,~~significant ~~2011:~~judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
( Dollars in thousands)
	Other RealEstate Owned			FHLBAdvances
Beginning balance, January 1, 2012	$	1,473		$	29,350
Transfers into (out of) Level 3		(1,473	)		—
Realized (gains) losses on liabilities		—			(463	)
Ending balance, March 31, 2012	$	—		$	28,887

11Table of Contents

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
( Dollars in thousands)
	Other RealEstate Owned		FHLBAdvances		AFSSecurities			TradingSecurities
Beginning balance, January 1, 2011	$	—	$	26,208	$	43,611		$	2,075
Transfers into (out of) Level 3		1,473		—		(26,940	)		(596	)
Sales, maturities or calls		—		—		(16,286	)		(1,489	)
Realized gains (losses) on assets		—		—		170			10
Realized (gains) losses on liabilities		—		3,142
Unrealized gains (losses) on assets		—		—		(555	)
Ending balance, December 31, 2011	$	1,473	$	29,350	$	—		$	—

Fair Value Hierarchy

~~For~~In ~~the~~accordance ~~assets~~with ~~and~~this ~~liabilities selected for fair value accounting where available~~guidance, ~~management~~Bankshares ~~obtained~~groups ~~pricing~~its onfinancial ~~each instrument~~assets ~~from independent third parties who relied upon pricing models using widely available~~ and ~~industry~~liabilities ~~standard~~generally ~~yield~~measured ~~curves.~~at Atfair ~~December 31,~~value ~~2011,~~in ~~the securities previously carried at level~~ three ~~were~~levels, ~~moved~~based toon ~~level~~the ~~two~~markets ~~due~~in towhich the ~~fact that~~assets ~~the~~and ~~pricing~~liabilities ~~was~~are traded ~~identical~~and to the ~~normal~~reliability ~~market~~of ~~price.~~the ~~Management~~assumptions ~~will~~used ~~continue~~ to ~~monitor~~determine ~~these instruments. Changes in~~ fair ~~values associated with fluctuations in market values reported above are reported as fair~~ value ~~adjustments on the Consolidated Statements of Operations~~.

~~The~~• ~~following~~Level ~~table~~1 ~~displays~~— ~~quantitative~~Valuation ~~information~~is ~~about~~based ~~level~~upon 3quoted ~~fair~~prices ~~value measurements~~ for ~~March 31,~~ ~~2012~~identical ~~(Dollars~~instruments traded in ~~thousands):~~active markets.

FairValue

ValuationTechnique

UnobservableInput

Range(Weighted Average)

FHLB advance

28,887

Pricing model

Yield curves

2.27% - 2.52% (2.50%)

•

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

~~Certain~~• ~~financial~~Level ~~and~~3 ~~nonfinancial~~— ~~assets~~Valuation ~~are~~is ~~measured~~generated atfrom ~~fair~~model-based ~~value~~techniques onthat ause ~~nonrecurring~~significant ~~basis~~assumptions innot ~~accordance~~observable ~~with~~in ~~GAAP~~the market. ~~Adjustments~~ toThese ~~the~~unobservable ~~fair~~assumptions ~~value~~reflect Bankshares’ own estimates of ~~these~~assumptions ~~assets~~that ~~usually~~market ~~result~~participants ~~from~~would ~~the~~use ~~application~~in ofpricing ~~lower-of-cost-or-market~~the ~~accounting~~asset or ~~write-downs~~liability. Valuation techniques include use of ~~individual~~option ~~assets.~~pricing models, discounted cash flow models and similar techniques.

~~The~~A ~~following~~financial ~~describes~~instrument’s categorization within the valuation ~~techniques~~hierarchy ~~used~~is bybased ~~Bankshares~~upon tothe ~~measure~~lowest ~~certain~~level ~~financial~~of ~~and~~input ~~nonfinancial~~that ~~assets~~is significant ~~recorded~~to atthe fair value onmeasurement. ~~a nonrecurring basis in the financial statements:~~

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

12Trading and Available-for-Sale Securities – Trading and available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). Financial assets and liabilities that are traded infrequently have values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own view about the assumptions that market participants would use in pricing the asset or liability (Level 3).

~~Other~~FHLB ~~Real~~Advances ~~Estate~~– ~~Owned~~Under ~~(OREO).~~the ~~OREO is measured at~~ fair value ~~using~~accounting anstandards, ~~income~~certain orliabilities ~~market valuation~~can ~~approach~~be ~~based~~carried onat anfair ~~appraisal~~value. The ~~conducted~~designated byinstruments anare ~~independent,~~recorded ~~licensed~~on ~~appraiser~~a ~~using~~fair ~~observable~~value ~~market~~basis ~~data~~at ~~(Level~~the ~~2).~~time ~~However,~~of ifissuance. anAs ~~appraisal~~ of ~~the~~June 30, ~~real estate property is over two years old~~2012, ~~then~~Bankshares ~~the~~had ~~fair~~one ~~value~~wholesale isliability ~~considered~~as toa ~~be Level 3. Any~~ fair value ~~adjustments~~instrument: ~~are~~a ~~recorded~~long-term inFederal ~~the~~Home ~~period~~Loan ~~recognized~~Bank as(FHLB) ~~OREO expense in the Consolidated Statements of Operations~~advance.

~~The following~~Wholesale ~~tables~~instruments ~~summarize~~are ~~Bankshares’~~designated ~~assets~~as ~~that~~either ~~were~~Level ~~measured~~2 ator Level 3 under the ASC 820-10 fair value hierarchy. Level 2 liabilities are based on aquoted market ~~nonrecurring~~prices ~~basis~~using asindependent ofvaluation ~~the~~techniques ~~dates~~for ~~indicated:~~similar instruments with like characteristics. This

	Carrying Value at March 31, 2012
Description	CarryingValue		QuotedPrices inActiveMarkets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans, net of valuation allowance	$	5,813	$	—	$	5,813	$	—
OREO	$	4,683	$	—	$	4,683	$	—

	Carrying Value at December 31, 2011
Description	CarryingValue		QuotedPrices inActiveMarkets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans, net of valuation allowance	$	6,760	$	—	$	6,760	$	—
OREO	$	3,748	$	—	$	2,275	$	1,473

~~The~~ information ~~following~~is ~~describes~~deemed ~~the~~to ~~valuation~~be ~~techniques~~observable ~~used~~market bydata. ~~Bankshares~~Level to3 ~~measure~~liabilities ~~certain~~are financial ~~assets~~instruments ~~and~~that ~~liabilities not~~are ~~previously~~difficult ~~described~~to invalue ~~this~~due ~~note~~to ~~that~~dysfunctional, ~~are~~distressed ~~not~~markets ~~recorded~~or atlack ~~fair~~of actual trading volume. Management gathers certain data to value onthe ainstrument ~~recurring~~including ~~basis~~swap incurves, conversion swaptions and discounted cash flows. These data points are modeled to reflect the ~~financial~~estimate ~~statements:~~of the fair value of the liability.

~~Cash,~~The ~~Due from~~following ~~Banks,~~tables present the balances of financial assets and ~~Federal~~liabilities ~~Funds~~measured ~~Sold~~at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:

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


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


Total assets	$	103,653	$	5,000	$	98,653		—	$	103,653


Liabilities:
FHLB advance	$	29,559	$	—	$	—	$	29,559	$	29,559

Total liabilities	$	29,559	$	—	$	—	$	29,559	$	29,559

~~Loans~~13 ~~Receivable~~

For variable-rateTable 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. Contents


	Fair Value Measurements at December 31, 2011
	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Assets/ Liabilities at Fair Value
	(Dollars in thousands)

Assets:
Trading securities - PCMO	$	596	$	—	$	596	$	—	$	596
Available-for-sale securities:
U. S. treasuries		71,115		71,115				—		71,115
U. S. corporations and agencies		9,751		—		9,751		—		9,751
U. S. government CMOs		31,038		—		31,038		—		31,038
U. S. government MBS		7,698		—		7,698		—		7,698
PCMOs		950		—		950		—		950
Municipal securities		2,911		—		2,911		—		2,911


Total assets	$	124,059	$	71,115	$	52,944		—	$	124,059


Liabilities:
FHLB advance	$	29,350	$	—	$	—	$	29,350	$	29,350

Total liabilities	$	29,350	$	—	$	—	$	29,350	$	29,350

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

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

~~Accrued~~Significant ~~Interest~~Unobservable Inputs

~~The~~(Level ~~carrying amounts~~3) ~~of accrued interest approximate fair value.~~

~~Deposit~~(Dollars ~~Liabilities~~in thousands)

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.


	FHLB Advance

Beginning balance, April 1, 2012	$	28,887
Realized losses on liabilities		672

Ending balance, June 30, 2012	$	29,559

~~Short-Term~~14 ~~Borrowings~~

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

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

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

~~Off-Balance-Sheet~~Significant ~~Financial~~Unobservable ~~Instruments~~Inputs

~~The~~(Level ~~fair~~3) value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Fair value of off-balance sheet financial commitments are considered immaterial and are therefore not included in the table below.

14(Dollars in thousands)

The following table reflects the fair value of financial instruments as of March 31, 2012 and December 31, 2011:


	Other Real Estate Owned			FHLB Advances

Beginning balance, January 1, 2012	$	1,473		$	29,350
Transfers out of Level 3		(1,473	)		—
Realized losses on liabilities		—			209

Ending balance, June 30, 2012	$	—		$	29,559

	Fair Value Measurements at March 31, 2012, Using:
	CarryingValue		Quoted Pricesin ActiveMarkets forIdentical AssetsLevel 1		SignificantOtherObservableInputsLevel 2		SignificantUnobservableInputsLevel 3		Balance
	(Dollars in thousands)
Financial assets:
Cash and due from banks	$	66,589	$	66,589	$	—	$	—	$	66,589
Federal funds sold		25,307		25,307		—		—		25,307
Trading securities		454		—		454		—		454
Available-for-sale securities		105,744		—		105,744		—		105,744
Loans, net		292,015		—		288,217		—		288,217
Accrued interest receivable		1,613		—		1,613		—		1,613
Financial liabilities:
Non-interest-bearing deposits	$	118,067		—	$	118,067	$	—	$	118,067
Interest-bearing deposits		262,406		—		263,730		—		263,730
Short-term borrowings		43,842		—		43,842		—		43,842
FHLB advances		15,000		—		15,000		—		15,000
FHLB advances, at fair value		28,887		—		—		28,887		28,887
Trust Preferred Capital Notes		10,310		—		10,310		—		10,310
Accrued interest payable		1,243		—		1,243		—		1,243

Fair Value Measurements Using

15Significant Unobservable Inputs

	Fair Value Measurements at December 31, 2011, Using:
	CarryingValue		Quoted Pricesin ActiveMarkets forIdenticalAssets Level 1		SignificantOtherObservableInputsLevel 2		SignificantUnobservableInputs Level3		Balance
	(Dollars in thousands)
Financial assets:
Cash and due from banks	$	45,837	$	45,837	$	—	$	—	$	45,837
Federal funds sold		16,567		16,567		—		—		16,567
Trading security		596		—		596		—		596
Available-for-sale securities		123,463		—		123,463		—		123,463
Loans, net		301,483		—		297,163		—		297,163
Accrued interest receivable		1,815		—		1,815		—		1,815
Financial liabilities:
Non-interest-bearing deposits	$	112,450		—	$	112,450	$	—	$	112,450
Interest-bearing deposits		267,993		—		268,691		—		268,691
Short-term borrowings		40,420		—		40,420		—		40,420
FHLB advances		15,000		—		15,000		—		15,000
FHLB advances, at fair value		29,350		—		—		29,350		29,350
Trust Preferred Capital Notes		10,310		—		10,310		—		10,310
Accrued interest payable		1,155		—		1,155		—		1,155

(Level 3)

4.( ~~Trading~~Dollars ~~Security~~in thousands)

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


	Other Real Estate Owned		FHLB Advances		AFS Securities			Trading Securities

Beginning balance, January 1, 2011	$	—	$	26,208	$	43,611		$	2,075
Transfers into (out of) Level 3		1,473		—		(26,940	)		(596	)
Sales, maturities or calls		—		—		(16,286	)		(1,489	)
Realized gains on assets		—		—		170			10
Realized losses on liabilities		—		3,142		—			—
Unrealized (losses) on assets		—		—		(555	)		—


Ending balance, December 31, 2011	$	1,473	$	29,350	$	—		$	—

	March 31,2012					December 31,2011
	FairValue		Yield			FairValue		Yield
	(Dollars in thousands)
Trading security:
PCMO(1)	$	454		5.40	%	$	596		5.44	%
Total trading security	$	454		5.40	%	$	596		5.44	%

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

~~(1)~~15 As of March 31, 2012, trading assets consisted of one PCMO instrument. This PCMO was rated AAA by at least one ratings agency on the purchase date. Currently the security has a rating below investment grade.

ThisTable instrumentof is currently performing as expectedContents

AtThe ~~March 31,~~following ~~2012~~table ~~and~~displays ~~December 31,~~quantitative ~~2011,~~information ~~the~~about ~~trading~~Level ~~security~~3 ~~was~~fair ~~not~~value ~~pledged.~~measurements as of June 30, 2012 (Dollars in thousands):


	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)

FHLB advance	$	29,559	Pricing model	Yield curves	1.95% - 2.19% (2.11%)

5Certain financial and nonfinancial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. ~~Investment~~Adjustments ~~Securities~~to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The ~~amortized~~following ~~cost,~~describes ~~unrealized~~the ~~holding~~valuation ~~gains~~techniques ~~and~~used ~~losses,~~by ~~and~~Bankshares ~~the~~to ~~fair~~measure ~~value~~certain offinancial ~~investment~~and ~~securities~~nonfinancial assets recorded at ~~March 31,~~fair ~~2012~~value ~~are~~on a ~~summarized~~nonrecurring asbasis ~~follows~~in the financial statements:

	March 31, 2012
	Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Available-for-sale securities:
U.S. government corporations and agencies	$	18,702	$	29	$	(39	)	$	18,692
U.S. government agency CMOs		55,774		315		(125	)		55,964
U.S. government agency MBS		21,458		79		(4	)		21,533
PCMOs		970		—		(3	)		967
Municipal securities		8,733		67		(212	)		8,588
Total available-for-sale securities	$	105,637	$	490	$	(383	)	$	105,744

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

~~The~~Other ~~amortized~~Real ~~cost~~Estate Owned (OREO). OREO is measured at fair value using an income or market valuation approach based on an appraisal conducted by an independent, ~~unrealized~~licensed ~~holding~~appraiser ~~gains~~using observable ~~and~~market ~~losses~~data (Level 2). However, ~~and~~if an appraisal of the real estate property is over two years old, then the fair value ofis ~~investment~~considered ~~securities~~to atbe ~~December 31, 2011~~Level 3. Any fair value adjustments are ~~summarized~~recorded in the period recognized as ~~follows:~~OREO expense in the Consolidated Statements of Operations.

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

ThereTable wereof no held-to-maturity investments at March 31, 2012 or December 31, 2011. Contents

The following tables ~~present~~summarize ~~the~~Bankshares’ ~~aggregate~~assets ~~amount of unrealized loss in investment securities as of March 31, 2012 and December 31, 2011. The aggregate amount is determined by summation of all the related securities~~ that ~~have~~were ameasured ~~continuous loss~~ at ~~period end, and the length of time that the loss has been unrealized is shown by terms of “less than 12 months” and “12 months or more.” The~~ fair value ison ~~the~~a ~~approximate~~nonrecurring basis ~~market value~~ as of the ~~period~~dates ~~end~~indicated.


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

	March 31, 2012
	Carrying Value at December 31, 2011
	Less than 12 months					12 months or more					Total
Description	CarryingValue		QuotedPrices inActiveMarkets(Level 1)			SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs(Level 3)
	FairValue		UnrealizedLoss			FairValue		UnrealizedLoss			FairValue		UnrealizedLoss
	(Dollars in thousands)
	(Dollars in thousands)
Assets:
U.S. government corporations and agencies	$	3,990	$	(39	)	$	—	$	—			3,990	$	(39	)
Impaired loans, net of valuation allowance	$	6,760	$	—		$	6,760	$	—
U.S. government agency CMOs		17,701		(125	)		—		—			17,701		(125	)
OREO	$	3,748	$	—		$	2,275	$	1,473
U.S. government agency MBS		5,298		(4	)		—		—			5,298		(4	)
PCMOs		967		(3	)		—		—			967		(3	)
Municipal securities		6,183		(91	)		548		(121	)		6,731		(212	)
Total temporarily impaired investment securities	$	34,139	$	(262	)	$	548	$	(121	)	$	34,687	$	(383	)

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

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

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

18For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

~~There~~Loans ~~are~~Receivable a total of 22 investment securities totaling $34.7 million that have an unrealized loss and are considered temporarily impaired as of March 31, 2012. Management believes the unrealized losses noted in the table above are a result of current market conditions and interest rates, and do not reflect on the ability of the issuers to repay the obligations. Approximately $27.0 million or 77.8% of the investment securities with an unrealized loss are backed by U.S. Government Agencies or Corporations and other forms of underlying collateral.

~~Bankshares’~~For variable-rate ~~investment~~loans inthat ~~Federal~~reprice ~~Home~~frequently ~~Loan~~and ~~Bank~~with ~~(FHLB)~~no ~~stock~~significant ~~totaled~~change ~~$3.4~~in ~~million~~credit ~~at March 31~~risk, ~~2012.~~fair ~~FHLB~~values ~~stock~~are isbased ~~generally~~on ~~viewed~~carrying asvalues. aFair ~~long term~~values ~~investment~~for ~~and~~certain asmortgage aloans ~~restricted~~(e.g., ~~investment~~one-to-four ~~security~~family ~~which~~residential), iscredit ~~carried~~card ~~at cost~~loans, ~~because~~and ~~there~~other isconsumer loans noare ~~market~~based ~~for~~on ~~the~~quoted ~~stock~~market ~~other~~prices ~~than~~of ~~the~~similar ~~FHLBs~~loans orsold ~~member~~in ~~institutions.~~conjunction ~~Therefore~~with securitization transactions, ~~when~~adjusted ~~evaluating~~for ~~FHLB~~differences ~~stock~~in loan characteristics. Fair values for ~~impairment~~other loans (e.g., ~~its~~commercial ~~value~~real isestate ~~based~~and oninvestment property ~~ultimate~~mortgage ~~recoverability~~loans, ofcommercial ~~the~~and ~~par~~industrial ~~value~~loans) ~~rather~~are ~~than~~estimated byusing ~~recognizing~~discounted ~~temporary~~cash ~~declines~~flow inanalyses, ~~value.~~using ~~Bankshares~~interest ~~does~~rates ~~not~~currently ~~consider~~being ~~this~~offered ~~investment~~for toloans bewith ~~other~~similar ~~than~~terms ~~temporarily~~to ~~impaired~~borrowers as of ~~March 31,~~similar ~~2012~~credit ~~and~~quality. noFair ~~impairment~~values ~~has~~for ~~been~~nonperforming ~~recognized. FHLB~~loans ~~stock~~are isestimated ~~included~~using indiscounted ~~restricted~~cash ~~stock~~flow onanalyses ~~the~~or ~~Consolidated~~underlying ~~Balance~~collateral ~~Sheets~~values, where applicable.

6.17 ~~Loans~~

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

	March 31, 2012						December 31, 2011
	Amount			Percentage			Amount			Percentage
	(Dollars in thousands)
Real estate:
Residential real estate	$	94,921			32.0	%	$	101,248			33.0	%
Commercial real estate		133,332			44.9	%		137,610			44.8	%
Construction/land		41,172			13.9	%		39,176			12.8	%
Total real estate		269,425			90.7	%		278,034			90.6	%
Commercial and industrial		26,018			8.8	%		26,820			8.7	%
Consumer		1,642			0.5	%		2,022			0.7	%
Gross loans		297,085			100.0	%		306,876			100.0	%
Less: allowance for loan losses		(5,070	)					(5,393	)
Net loans	$	292,015					$	301,483

Restricted Stock

AsRestricted ofinvestments ~~March 31,~~in ~~2012~~correspondent ~~and~~banks ~~December 31,~~are ~~2011,~~carried ~~there~~at ~~were~~cost $9based ~~thousand~~on ~~and~~the ~~$25~~underlying ~~thousand,~~redemption ~~respectively,~~provisions inof ~~checking account~~the ~~overdrafts~~instruments ~~that~~and ~~were~~therefore ~~reclassified~~are onnot ~~the~~included ~~Consolidated~~in ~~Balance~~the ~~Sheets~~fair asvalue ~~loans~~disclosures.

19Accrued Interest

The ~~following~~carrying amounts ~~tables represent the credit quality~~ of ~~loans~~accrued byinterest ~~class~~approximate ~~for~~fair ~~March 31,~~value. ~~2012 and 2011:~~

	Credit Quality Loans By Class As of March 31, 2012 (Dollars in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		SpecialMention		Substandard		Doubtful		Loss		TotalLoans
Risk Rating Number		1 to 5		6		7		8		9		10
Commercial and industrial	$	22,849	$	914	$	477	$	1,778	$	—	$	—	$	26,018
Commercial real estate
Owner occupied		62,843		1,155		2,005		3,538		—		—		69,541
Non-owner occupied		52,335		5,033		4,607		1,816		—		—		63,791
Construction/land
Residential construction		15,456		800		—		—		544		—		16,800
Other construction & land		14,442		47		1,831		6,816		1,236		—		24,372
Residential real estate
Equity lines		28,155		59		100		—		—		—		28,314
Single family		52,679		3,417		2,132		2,922		—		—		61,150
Multifamily		5,457		—		—		—		—		—		5,457
Consumer – non real estate		1,458		—		184		—		—		—		1,642
Totals	$	255,674	$	11,425	$	11,336	$	16,870	$	1,780	$	—	$	297,085

Deposit Liabilities

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

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

20The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on Bankshares’ current incremental borrowing rates for similar types of borrowing arrangements.

~~The~~Trust ~~following~~Preferred ~~tables~~Capital ~~set~~Notes ~~forth aging and non-accrual loans by class:~~

	Aging and Non-accrual Loans by ClassAs of March 31, 2012
	(Dollars in thousands)
	30-59 DaysPast Due		60-89 DaysPast Due		90 Days orMore PastDue		Total PastDue		Current		90-daysPast Dueand StillAccruing		Non-accrualLoans
Commercial & industrial	$	1,002	$	18	$	370	$	1,390	$	24,628	$	370	$	955
Commercial real estate
Owner occupied		109		—		2,560		2,669		66,872		—		2,560
Non-owner occupied		5,490		—		—		5,490		58,301		—		—
Construction/land
Residential construction		—		—		544		544		16,256		—		544
Other construction & land		1,071		1,029		5,933		8,033		16,339		—		6,961
Residential real estate
Equity lines		498		—		—		498		27,816		—		—
Single family		695		—		163		858		60,292		—		163
Multifamily		—		—		—		—		5,457		—		—
Consumer-non real estate		—		—		—		—		1,642		—		—
Total loans	$	8,865	$	1,047	$	9,570	$	19,482	$	277,603	$	370	$	11,183

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

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

Off-Balance-Sheet Financial Instruments

21The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

7.18 ~~Allowance for Loan Losses~~

TheTable followingof table summarizes the activity in the allowance for loan losses for the periods presented: Contents

	ThreeMonthsEndedMarch 31,2012			Year EndedDecember 31,2011			ThreeMonthsEndedMarch 31,2011
	(Dollars in thousands)
Balance, beginning of year	$	5,393		$	5,281		$	5,281
Provision for loan losses		450			1,549			306
Loans charged off		(782	)		(1,702	)		(206	)
Recoveries of loans charged off		9			265			230
Net charge-offs		(773	)		(1,437	)		24
Balance, end of year	$	5,070		$	5,393		$	5,611

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

~~The~~Fair ~~following~~Value ~~tables represent the allocation~~ of ~~allowance~~Financial ~~for~~Instruments ~~loan losses by segment:~~

	Allowance for Loan LossesAs of March 31, 2012
	Fair Value Measurements at June 30, 2012, Using:
	(Dollars in thousands)
	CarryingValue			Quoted Pricesin ActiveMarkets forIdentical AssetsLevel 1			SignificantOtherObservableInputsLevel 2		SignificantUnobservableInputsLevel 3			Balance
	CommercialandIndustrial			CommercialReal Estate			ConstructionLand		ResidentialRealEstate			Consumer			Total
	(Dollars in thousands)
Beginning Balance:	$	210		$	1,508		$	1,808	$	1,826		$	41		$	5,393
Financial assets:
Charge-offs		—			—			—		(782	)		—			(782	)
Cash and due from banks	$	74,777		$	74,777		$	—	$	—		$	74,777
Recoveries		—			—			—		9			—			9
Federal funds sold		22,880			22,880			—		—			22,880
Provision		(56	)		(53	)		515		57			(13	)		450
Trading security		300			—			300		—			300
Ending Balance:	$	154		$	1,455		$	2,323	$	1,110		$	28		$	5,070
Available-for-sale securities		103,353			5,000			98,353		—			103,353
Individually evaluated for impairment	$	—		$	84		$	1,982	$	55		$	—		$	2,121
Loans, net		288,416			—			284,324		—			284,324
Collectively evaluated for impairment	$	210		$	1,424		$	276	$	998		$	41		$	2,949
Accrued interest receivable		1,665			—			1,665		—			1,665
Loans:
Financial liabilities:
Ending Balance:	$	26,018		$	133,332		$	41,172	$	94,921		$	1,642		$	297,085
Non-interest bearing deposits	$	119,553		$	—		$	119,553	$	—		$	119,553
Individually evaluated for impairment	$	955		$	2,560		$	7,505	$	163		$	—		$	11,183
Interest-bearing deposits		262,646			—			263,565		—			263,565
Collectively evaluated for impairment	$	25,063		$	130,772		$	33,667	$	94,758		$	1,642		$	285,902
Short-term borrowings		40,388			—			40,388		—			40,388
FHLB advances		15,000			—			15,000		—			15,000
FHLB advances, at fair value		29,559			—			—		29,559			29,559
Trust Preferred Capital Notes		10,310			—			10,310		—			10,310
Accrued interest payable		1,352			—			1,352		—			1,352


	Fair Value Measurements at December 31, 2011 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Balance
	(Dollars in thousands)

Financial assets:
Cash and due from banks	$	45,837	$	45,837	$	—	$	—	$	45,837
Federal funds sold		16,567		16,567		—		—		16,567
Trading security		596		—		596		—		596
Available-for-sale securities		123,463		—		123,463		—		123,463
Loans, net		301,483		—		297,163		—		297,163
Accrued interest receivable		1,815		—		1,815		—		1,815

Financial liabilities:
Non-interest bearing deposits	$	112,450	$	—	$	112,450	$	—	$	112,450
Interest-bearing deposits		267,993		—		268,691		—		268,691
Short-term borrowings		40,420		—		40,420		—		40,420
FHLB advances		15,000		—		15,000		—		15,000
FHLB advances, at fair value		29,350		—		—		29,350		29,350
Trust Preferred Capital Notes		10,310		—		10,310		—		10,310
Accrued interest payable		1,155		—		1,155		—		1,155

	Allowance for Loan LossesAs of December 31, 2011
	(Dollars in thousands)
	CommercialandIndustrial			CommercialReal Estate			ConstructionLand			ResidentialRealEstate			Consumer			Total
Beginning Balance:	$	463		$	1,420		$	700		$	2,613		$	85		$	5,281
Charge-offs		(10	)		(173	)		(404	)		(1,044	)		(71	)		(1,702	)
Recoveries		116			9			—			134			6			265
Provision		(359	)		252			1,512			123			21			1,549
Ending Balance:	$	210		$	1,508		$	1,808		$	1,826		$	41		$	5,393
Individually evaluated for impairment	$	—		$	135		$	1,376		$	760		$	—		$	2,271
Collectively evaluated for impairment	$	210		$	1,373		$	432		$	1,066		$	41		$	3,122
Loans:
Ending Balance:	$	26,820		$	137,610		$	39,176		$	101,248		$	2,022		$	306,876
Individually evaluated for impairment	$	977		$	2,610		$	7,678		$	1,999		$	—		$	13,264
Collectively evaluated for impairment	$	25,843		$	135,000		$	31,498		$	99,249		$	2,022		$	293,612

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

	March 31,2012		December 31,2011
	(Dollars in thousands)
Impaired loans without a valuation allowance	$	3,249	$	4,233
Impaired loans with a valuation allowance		7,934		9,031
Total impaired loans	$	11,183	$	13,264
Valuation allowance related to impaired loans	$	2,121	$	2,271
Total loans past due 90 days and still accruing	$	370	$	—
Average investment in impaired loans	$	11,587	$	13,538
Interest income recognized on impaired loans	$	—	$	234
Interest income recognized on a cash basis on impaired loans	$	—	$	234

4.	Trading Security

23The following table reflects the single trading security accounted for on a fair value basis and the effective yield of the instrument as of the dates indicated:

The following tables represent specific allocation for impaired loans by class:


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

Total trading security	$	300		5.43	%	$	596		5.44	%

	Specific Allocation for Impaired Loans by ClassAs of March 31, 2012
	RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance		AverageRecordedInvestment		InterestIncomeRecognized
	(Dollars in thousands)
With no related allowance:
Commercial & Industrial	$	955	$	1,025	$	—	$	1,027	$	—
Commercial Real Estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		—		—		—		—		—
Other construction & land		2,294		2,294		—		2,294		—
Residential real estate
Single family		—		—		—		—		—
With an allowance recorded:
Commercial & Industrial		—		—		—		—		—
Commercial real estate
Owner occupied		2,560		2,656		84		2,658		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		544		550		259		550		—
Other construction & land		4,667		4,891		1,723		4,892		—
Residential Real Estate
Single family		163		166		55		166		—
Total:	$	11,183	$	11,582	$	2,121	$	11,587	$	—

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

24At June 30, 2012 and December 31, 2011, the trading security was not pledged.

	Specific Allocation for Impaired Loans by Class As ofDecember 31, 2011
	RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance		AverageRecordedInvestment		InterestIncomeRecognized
	(Dollars in thousands)
With no related allowance:
Commercial & Industrial	$	977	$	1,033	$	—	$	1,037	$	15
Commercial Real Estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		—		—		—		—		—
Other construction & land		2,293		2,293		—		2,199		87
Residential real estate
Single family		963		963		—		968		37
With an allowance recorded:
Commercial & Industrial		—		—		—		—		—
Commercial real estate
Owner occupied		2,610		2,669		135		2,311		20
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		540		546		259		546		—
Other construction & land		4,845		5,049		1,118		5,436		53
Residential Real Estate
Single family		1,036		1,039		759		1,041		22
Total:	$	13,264	$	13,592	$	2,271	$	13,538	$	234

5.	Investment Securities

~~There~~The ~~were~~amortized nocost, ~~non-accrual~~unrealized ~~loans~~gains ~~excluded~~and ~~from~~losses, ~~impaired~~and ~~loan~~the ~~disclosures~~fair asvalue of ~~March 31,~~investment ~~2012~~securities ~~and~~at ~~December~~June 3130, ~~2011.~~ No2012 ~~additional funds~~ are ~~committed~~summarized toas follows: ~~be advanced in connection with impaired loans.~~

At March 31, 2012, there were $904 thousand in troubled debt restructured loans. At December 31, 2011, there were $956 thousand in troubled debt restructured loans. The following table reflects loan modifications classified as TDR’s during the period ended of March 31, 2012.


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

Total available-for-sale securities	$	102,763	$	852	$	(262	)	$	103,353

Modifications

For the Three Months Ended March 31, 2012

(Dollars in thousands)

NumberofContracts

Pre-ModificationOutstandingRecordedInvestment

Post-ModificationOutstandingRecordedInvestment

Troubled debt restructurings

Residential Real Estate-Single family

—

ThereTable wereof no troubled debt restructurings modified within the previous 12 months that defaulted during the three months ended March 31, 2012. Contents

~~For~~The ~~purposes~~amortized ~~of this disclosure~~cost, aunrealized ~~TDR~~gains ~~payment~~and ~~default occurs when~~losses, ~~within~~and 12the ~~months~~fair value of ~~the~~investment ~~original~~securities ~~TDR~~at ~~modification~~December 31, ~~either~~2011 ~~the~~are ~~TDR~~summarized isas ~~placed~~follows: ~~in non-accrual status or a charge-off has occurred.~~


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

Total available-for-sale securities	$	123,408	$	326	$	(271	)	$	123,463

8.There ~~Other~~were ~~Real~~no ~~Estate~~held-to-maturity ~~Owned~~investments ~~(OREO)~~at June 30, 2012 or December 31, 2011.

The ~~table~~following ~~below~~tables ~~reflects~~present ~~changes~~the aggregate amount of unrealized loss in ~~other~~investment ~~real~~securities ~~estate~~as ~~owned~~of ~~(OREO)~~June 30, ~~for~~2012 and December 31, 2011. The aggregate amount is determined by summation of all the ~~periods~~related ~~indicated:~~securities that have a continuous loss at period end, and the length of time that the loss has been unrealized is shown by terms of “less than 12 months” and “12 months or more.” The fair value is the approximate market value as of the period end.

	Three MonthsEndedMarch 31,2012			Twelve MonthsEndedDecember 31,2011
	June 30, 2012
	(Dollars in thousands)
	Less than 12 months						12 months or more					Total
Balance, beginning of period	$	3,748		$	4,627
	Fair			Unrealized			Fair		Unrealized			Fair		Unrealized
Properties acquired at foreclosure		963			434
	Value			Loss			Value		Loss			Value		Loss
Sales of foreclosed properties		—			(959	)
	(Dollars in thousands)
Valuation adjustments		(28	)		(354	)
U.S. treasuries	$	—		$	—		$	—	$	—			—	$	—
Balance, end of period	$	4,683		$	3,748
U.S. government corporations and agencies		—			—			—		—			—		—
U.S. government agency CMOs		27,709			(170	)		—		—			27,709		(170	)
PCMOs		—			—			—		—			—		—
Municipal securities		1,266			(3	)		586		(89	)		1,852		(92	)
Total temporarily impaired investment securities	$	28,975		$	(173	)	$	586	$	(89	)	$	29,561	$	(262	)

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


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


Total temporarily impaired investment securities	$	82,369	$	(79	)	$	1,475	$	(192	)	$	83,844	$	(271	)

	Three MonthsEndedMarch 31,2012		Twelve MonthsEndedDecember 31,2011
	(Dollars in thousands)
Net loss on sales of OREO	$	—	$	12
Valuation adjustments		28		354
Operating expenses		13		88
Total OREO related expense	$	41	$	454

9.Table Federalof Home Loan Bank Advances Contents

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

AtThere ~~March 31,~~are ~~2012~~a ~~and~~total ~~December 31,~~of ~~2011,~~15 ~~the~~investment ~~FHLB~~securities ~~advance~~with ~~accounted for on~~ a total fair value ~~basis~~of ~~had~~$29.6 amillion ~~value~~that have an aggregate unrealized loss of $~~28.9~~262 ~~million~~thousand and ~~$29.4~~are ~~million, respectively,~~considered ~~and~~temporarily ~~matures~~impaired inas ~~2021~~of June 30, 2012. Management ~~The~~believes ~~weighted~~the ~~average~~unrealized ~~interest~~losses ~~rate~~noted onin ~~this~~the ~~long-term~~table ~~FHLB~~above ~~advance~~are ~~was~~a ~~3.985%~~result atof ~~March 31,~~current ~~2012~~market conditions and ~~December 31~~interest rates, ~~2011.~~and ~~The~~do ~~par~~not ~~value~~reflect on the ability of ~~this~~the ~~FHLB~~issuers ~~advance~~to ~~was~~repay the obligations. Approximately $2527.07 million ator 93.7% ~~March 31,~~of ~~2012~~the investment securities with an unrealized loss are backed by U.S. government agencies and ~~December 31,~~ ~~2011~~other forms of underlying collateral.

AtBankshares’ ~~March~~investment in FHLB stock totaled $2.7 million at June 3130, 2012. ~~and~~FHLB ~~December 31,~~stock ~~2011,~~is ~~there~~generally ~~was~~viewed ~~one~~as ~~FHLB~~a ~~advance~~long ~~accounted~~term ~~for~~investment onand as a restricted investment security which is carried at cost, ~~basis. Bankshares~~because ~~renewed~~there ~~this~~is ~~floating~~no ~~rate~~market ~~advance~~for inthe stock other than the ~~first~~FHLBs ~~quarter~~or ofmember ~~2012~~institutions. Therefore, when evaluating FHLB stock for ~~$15.0~~impairment, ~~million.~~its ~~The~~value ~~advance~~is ~~matures~~based inon ~~2013~~ultimate ~~and~~recoverability of the par ~~interest~~value ~~rate~~rather atthan ~~March 31,~~by ~~2012~~recognizing ~~was~~temporary ~~0.32%~~declines ~~and~~in 0value.~~379%~~ atBankshares ~~December~~does not consider this investment to be other than temporarily impaired as of June 3130, ~~2011.~~2012 ~~The~~and ~~weighted~~no ~~average~~impairment ~~interest~~has ~~rate for~~been ~~both~~recognized. FHLB ~~advances~~stock ~~outstanding~~ is 2included in restricted stock on the Consolidated Balance Sheets.~~61%.~~

2622

10.Table Trust Preferred Capital Notes of Subsidiary Trust Contents

~~On June 30, 2003, Bankshares’ wholly-owned Delaware statutory business trust privately issued $10~~6.~~0 million~~ ~~face~~Loans amount of the Trust’s floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued $310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds of the sale to purchase $10.3 million principal amount of Bankshares’ floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption “Trust Preferred Capital Notes.” Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest expense in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through March 31, 2012, Bankshares elected to defer the interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of March 31, 2012 the total amount of deferred and compounded interest owed under the indenture is $1.1 million. The base interest rate as of March 31, 2012 was 3.62% and as of December 31, 2011 was 3.70%.

~~All~~The orfollowing atable ~~portion~~summarizes of the ~~Trust~~composition ~~Preferred Capital Notes may be included in the regulatory computation~~ of ~~capital adequacy as Tier 1 capital. Under~~ the ~~current~~loan ~~guidelines,~~portfolio ~~Tier~~by 1dollar ~~capital~~amount ~~may~~and ~~include~~percentage upas ~~to 25%~~ of ~~shareholders’ equity excluding accumulated other comprehensive income (loss) in~~ the ~~form~~dates ~~of Trust Preferred Capital Notes. At March 31, 2012 and December 31, 2011, $9.2 million and $9.4 million was considered Tier 1 capital.~~indicated:

11. Net Income (Loss) per Share


	June 30,						December 31,
	2012						2011
	Amount			Percentage			Amount			Percentage
	(Dollars in thousands)

Real estate:
Residential real estate	$	98,219			33.5	%	$	101,248			33.0	%
Commercial real estate		126,643			43.1	%		137,610			44.8	%
Construction / land		38,436			13.1	%		39,176			12.8	%

Total real estate		263,298			89.7	%		278,034			90.6	%
Commercial and industrial		28,700			9.8	%		26,820			8.7	%
Consumer		1,473			0.5	%		2,022			0.7	%

Gross loans		293,471			100	%		306,876			100.0	%

Less: allowance for loan losses		(5,055	)					(5,393	)

Net loans	$	288,416					$	301,483

~~The~~As ~~following table shows the weighted average number~~ of ~~shares~~June 30, ~~used~~2012 inand ~~computing~~December 31, ~~net~~2011, ~~income~~there ~~(loss)~~were ~~per~~$2 ~~common~~thousand ~~share~~ and ~~the~~$25 ~~effect~~thousand, ~~on weighted~~respectively, ~~average~~in ~~number~~checking ofaccount overdrafts ~~shares~~that ofwere ~~potential~~reclassified ~~dilutive common stock. Potential dilutive common stock had no effect~~ on ~~income~~the ~~(loss)~~Consolidated ~~available~~Balance toSheets ~~common~~as ~~shareholders for the periods presented~~loans.

Three Months Ended March 31,	2012						2011
	Shares			Per ShareAmount			Shares		Per ShareAmount
	(Dollars in thousands)
Basic net income per share		5,109,969		$	(0.08	)		5,108,048	$	0.07
Effect of dilutive securities, stock options		—						14,981
Diluted net income per share		5,109,969		$	(0.08	)		5,123,029	$	0.07
Net income (loss) utilized in the earnings per share calculations above	$	(433	)				$	365

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

Average shares of 160,909 and 310,341 have been excluded from the calculation for the three months ended March 31, 2012 and March 31, 2011, respectively, because their effects were anti-dilutive.


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

Totals	$	256,039	$	11,009	$	7,164	$	18,364	$	895	$	—	$	293,471

2723

12.Table Supplementalof Cash Flow Information Contents

Supplemental disclosures of cash flow information for the three months ended March 31, 2012 and 2011:


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

Totals	$	263,602	$	8,264	$	13,272	$	19,410	$	2,328	$	—	$	306,876

	March 31,2012		March 31,2011
	(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Interest paid during the three months	$	1,146	$	1,435
Income taxes paid during the three months	$	—	$	—
Supplemental Disclosures of Noncash Activities:
Fair value adjustment for securities	$	51	$	(448	)
Transfer of loans to foreclosed assets	$	963	$	210

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

~~13.~~The ~~Mergers~~following tables set forth aging and ~~Acquisitions~~non-accrual loans by class as of the dates indicated:

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


	Aging and Non-accrual Loans by Class
	As of June 30, 2012
	(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		90-days Past Due and Still Accruing		Non- accrual Loans

Commercial & Industrial	$	1,349	$	403	$	268	$	2,020	$	26,680	$	—	$	1,196
Commercial real estate
Owner occupied		206		2,597		—		2,803		60,267		—		2,492
Non-owner occupied		4,426		—		—		4,426		59,147		—		—
Construction/land
Residential construction		—		—		559		559		14,473		—		559
Other construction & land		1,053		—		4,876		5,929		17,475		—		5,874
Residential real estate
Equity Lines		599		14		150		763		27,475		—		150
Single Family		1,783		264		—		2,047		62,506		—		264
Multifamily		—		—		—		—		5,428		—		—
Consumer-non real estate		9		—		—		9		1,464		—		—

Total loans	$	9,425	$	3,278	$	5,853	$	18,556	$	274,915	$	—	$	10,535

~~The~~24 consideration to be received by the shareholders of Bankshares in the Merger is a combination of stock and cash. Pursuant to the Merger Agreement, each share of Bankshares’ outstanding common stock will be converted into and become the right to receive, subject to proration in accordance with the terms of the Merger Agreement and at the election of each shareholder of Bankshares, either 0.4435 shares of common stock of WFBI or cash in the amount of $5.30, subject in either case to adjustment in certain circumstances, provided that no more than 20% of the common shares of Bankshares may elect to receive cash.

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

14. Subsequent Events


	Aging and Non-accrual Loans By Class
	As of December 31, 2011
	(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		90-days Past Due and Still Accruing		Non- accrual Loans

Commercial and industrial	$	1,228	$	367	$	—	$	1,595	$	25,225	$	—	$	977
Commercial real estate
Owner occupied		121		—		2,610		2,731		65,438		—		2,610
Non-owner occupied		—		992		—		992		68,449		—		—
Construction/land
Residential construction		—		—		540		540		14,219		—		540
Other construction & land		—		1,225		5,988		7,213		17,204		—		7,139
Residential real estate
Equity Lines		304		33		184		521		28,585		—		236
Single Family		74		29		1,733		1,836		64,521		—		1,762
Multifamily		—		—		—		—		5,785		—		—
Consumer -non real estate		186		—		—		186		1,836		—		—

Total loans	$	1,913	$	2,646	$	11,055	$	15,614	$	291,262	$	—	$	13,264

~~Bankshares evaluated subsequent events that occurred after the balance sheet date, but before the financial statements are issued~~7. ~~There~~ ~~are~~Allowance ~~two~~for ~~types~~Loan ofLosses subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provided evidence about conditions that did not exist at the date of the balance sheet but arose after that date. As of the report date there were no subsequent events that would cause adjustments to or disclosures in the financial statements other than the Merger as described in Note 13.

28The following table summarizes the activity in the allowance for loan losses for the periods presented:

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


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

Net (charge offs)		(788	)		(1,437	)		(746	)

Balance, end of period	$	5,055		$	5,393		$	5,610

~~The~~25 following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operations of Bankshares and the Bank on a consolidated basis. This discussion and analysis should be read in conjunction with Bankshares’ Annual Report on Form 10-K for the year ended December 31, 2011, and the unaudited consolidated financial statements and accompanying notes included elsewhere in this report.

InternetTable Accessof to Corporate Documents Contents

~~Information~~The ~~about~~following ~~Bankshares~~tables ~~can~~represent ~~be found on~~ the ~~Bank’s~~allocation ~~website~~of atallowance ~~www.alliancebankva.com.~~for ~~Under “Documents~~loan /losses ~~SEC~~by ~~Filings”~~segment inas ~~the Investor Relations section~~ of the ~~website, Bankshares posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those reports as soon as reasonably~~dates ~~practicable~~indicated: ~~after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC). All such filings are available free of charge.~~

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


	June 30, 2012
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Construction Land		Residential Real Estate			Consumer			Total

Beginning Balance:	$	210		$	1,508		$	1,808	$	1,826		$	41		$	5,393
Charge-offs		—			—			—		(821	)		—			(821	)
Recoveries		—			—			—		33			—			33
Provision		(56	)		(53	)		515		57			(13	)		450

Ending Balance:	$	154		$	1,455		$	2,323	$	1,095		$	28		$	5,055


Individually evaluated for impairment	$	48		$	17		$	1,486	$	98		$	—		$	1,649

Collectively evaluated for impairment	$	106		$	1,438		$	837	$	997		$	28		$	3,406


Loans:
Ending Balance:	$	28,700		$	126,643		$	38,436	$	98,219		$	1,473		$	293,471


Individually evaluated for impairment	$	1,196		$	2,492		$	6,433	$	414		$	—		$	10,535

Collectively evaluated for impairment	$	27,504		$	124,151		$	32,003	$	97,805		$	1,473		$	282,936

~~Forward-Looking~~26 ~~Statements~~

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

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

•As ~~Changes in the strength~~ of ~~the national economy in general and the local economies in Bankshares’ market areas that adversely affect Bankshares’ customers and their ability to transact profitable business with us~~December 31, ~~including~~2011 ~~the ability of Bankshares’ borrowers to repay their loans according to their terms or a change in the value of the related collateral;~~

•(Dollars ~~Retention~~in ofthousands) ~~existing employees;~~

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


	Commercial and Industrial			Commercial Real Estate			Construction Land			Residential Real Estate			Consumer			Total
	(Dollars in thousands)

Beginning Balance:	$	463		$	1,420		$	700		$	2,613		$	85		$	5,281
Charge-offs		(10	)		(173	)		(404	)		(1,044	)		(71	)		(1,702	)
Recoveries		116			9			—			134			6			265
Provision		(359	)		252			1,512			123			21			1,549

Ending Balance:	$	210		$	1,508		$	1,808		$	1,826		$	41		$	5,393


Individually evaluated for impairment	$	—		$	135		$	1,376		$	760		$	—		$	2,271

Collectively evaluated for impairment	$	210		$	1,373		$	432		$	1,066		$	41		$	3,122


Loans:
Ending Balance:	$	26,820		$	137,610		$	39,176		$	101,248		$	2,022		$	306,876


Individually evaluated for impairment	$	977		$	2,610		$	7,678		$	1,999		$	—		$	13,264

Collectively evaluated for impairment	$	25,843		$	135,000		$	31,498		$	99,249		$	2,022		$	293,612

•27 ~~Changing trends in customer profiles and behavior;~~

•Table Directof and substantive competition from other financial services companies targeting certain key business lines;Contents

•Impaired ~~Other~~loans ~~competitive~~and ~~factors~~non-accrual ~~within~~loans are summarized as follows as of the ~~financial~~dates ~~services~~indicated: ~~industry;~~

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


	June 30, 2012		December 31, 2011
	(Dollars in thousands)

Impaired loans without a valuation allowance	$	4,369	$	4,233
Impaired loans with a valuation allowance		6,166		9,031

Total impaired loans	$	10,535	$	13,264


Valuation allowance related to impaired loans	$	1,649	$	2,271


Total loans past due 90 days and still accruing	$	—	$	—

Average investment in impaired loans	$	11,049	$	13,538


Interest income recognized on impaired loans	$	5	$	234


Interest income recognized on a cash basis on impaired loans	$	5	$	234

•28 ~~Changes in accounting policies, rules and practices;~~

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

29The following tables represent specific allocation for impaired loans by class as of the dates indicated:

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


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

Total:	$	10,535	$	11,020	$	1,649	$	11,049	$	5

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

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

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


	Specific Allocation for Impaired Loans By Class
	As of December 31, 2011
	Recorded Investment		Principal Balance		Related Allowance		Recorded Investment		Income Recognized
	(Dollars in thousands)
With no related allowance:
Commercial & Industrial	$	977	$	1,033	$	—	$	1,037	$	15
Commercial Real Estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		—		—		—		—		—
Other construction & land		2,293		2,293		—		2,199		87
Residential Real Estate
Single Family		963		963		—		968		37
Consumer		—		—		—
Other

With an allowance Recorded:
Commercial & Industrial		—		—		—
Commercial Real Estate
Owner occupied		2,610		2,669		135		2,311		20
Non-owner occupied		—		—		—		—		—
Construction/Land
Residential		540		546		259		546		—
Commercial		4,845		5,049		1,118		5,436		53
Residential Real Estate
Single Family		1,036		1,039		759		1,041		22

Total:	$	13,264	$	13,592	$	2,271	$	13,538	$	234

•There ~~The~~were ~~impact~~no ofnon-accrual ~~the~~loans ~~Dodd-Frank~~excluded ~~Wall~~from ~~Street~~impaired ~~Reform~~loan ~~and~~disclosures ~~Consumer~~as ~~Protection~~of ~~Act~~June 30, ~~related~~2012 ~~regulatory rulemaking processes~~ and ~~other~~December 31, 2011. ~~legislative~~No ~~and~~additional ~~regulatory~~funds ~~initiatives~~are oncommitted ~~the~~to ~~regulation~~be ~~and~~advanced ~~supervision~~in ofconnection ~~financial~~with ~~institutions,~~impaired ~~specifically~~loans. ~~depository institutions;~~

•At ~~The~~June 30, ~~impact~~2012, ofthere ~~changes~~were $900 tothousand ~~capital~~in ~~requirements~~troubled ~~that~~debt ~~apply~~restructured toloans. ~~financial~~At ~~institutions~~December 31, ~~and depository institutions~~2011, ~~including~~there ~~changes~~were ~~related~~$956 tothousand ~~the~~in ~~proposed~~troubled ~~Basel~~debt ~~III~~restructured ~~capital~~loans. ~~standards;~~

•There ~~Changes~~were inno ~~the~~loans ~~way~~modified as TDRs and no TDR defaults during the ~~FDIC~~three ~~insurance~~and ~~premiums~~six ~~are~~months ~~assessed;~~ended June 30, 2012.

•For ~~Changes~~purposes inof ~~interest~~this ~~rates~~disclosure, ~~and~~a ~~market~~TDR ~~prices~~payment default occurs when, ~~which~~within ~~could~~12 ~~reduce~~months ~~our~~of ~~net~~the ~~interest~~original ~~margins~~TDR modification, ~~asset~~either ~~valuations~~the ~~and~~TDR ~~expense~~is ~~expectations;~~placed in non-accrual status or a charge-off has occurred.

•30 ~~Timing and implementation of certain balance sheet strategies;~~

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

•8. ~~Assumptions~~Other ~~used~~Real ~~within~~Estate ~~our~~Owned ~~Asset Liability Management~~ (~~ALM~~OREO) ~~process and Net Interest Income (NII) and Economic Value of Equity (EVE) models;~~

•The ~~Changes~~table below reflects changes in ~~tax~~OREO ~~laws~~for ~~and~~the ~~regulations;~~periods indicated:

• Bankshares’ ability to recognize future tax benefits;


	Six Months Ended June 30, 2012			Twelve Months Ended December 31, 2011
	(Dollars in thousands)

Balance, beginning of period	$	3,748		$	4,627
Properties acquired at foreclosure		963			434
Sales of foreclosed properties		(651	)		(959	)
Valuation adjustments		(29	)		(354	)


Balance, end of period	$	4,031		$	3,748

•The ~~Impacts~~table ofbelow ~~implementing~~reflects ~~various~~expenses ~~accounting~~applicable ~~standards;~~to OREO for the periods indicated:

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


	Six Months Ended June 30, 2012		Twelve Months Ended December 31, 2011		Six Months Ended June 30, 2011
	(Dollars in thousands)

Loss on sales of OREO	$	38	$	12	$	12
Valuation adjustments		29		354		—
Operating expenses, net of rental income		28		88		39


Total OREO expense	$	95	$	454	$	51

•9. ~~The~~Federal ~~ability~~Home toLoan ~~complete~~Bank ~~the Merger as expected and within the expected timeframe;~~Advances

•Bankshares ~~The~~has ~~possibility~~two ~~that~~advances ~~required~~from ~~regulatory and shareholder approvals of~~ the ~~Merger~~FHLB: ~~may~~one ~~not~~fixed berate ~~obtained,~~advance orand one orfloating ~~more~~rate ofadvance. ~~the other conditions to the completion of the Merger may not be satisfied;~~

•At June 30, 2012 and December 31, 2011, the FHLB advance accounted for on a fair value basis had a value of $29.6 and $29.4 million, respectively, and matures in 2021. The ~~expected~~weighted ~~growth~~average ~~opportunities~~interest orrate ~~cost~~on ~~savings~~the ~~from~~long-term FHLB advance accounted for on a fair value basis was 3.985% at June 30, 2012 and December 31, 2011. The par value of the ~~Merger~~FHLB ~~may~~advance ~~not~~accounted befor ~~fully~~on ~~realized~~a fair orvalue ~~may~~basis ~~take~~was ~~longer~~$25.0 tomillion ~~realize~~at ~~than~~June 30, ~~expected;~~2012 and December 31, 2011.

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

3031

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

~~Because of these and other uncertainties, Bankshares’ actual results and performance may be materially different from results indicated by these forward-looking statements~~10. InTrust ~~addition, Bankshares’~~Preferred ~~past~~Capital ~~results~~Notes of ~~operations~~Subsidiary ~~are not necessarily indicative of future performance.~~ Trust

On June 30, 2003, Bankshares’ ~~cautions~~wholly-owned ~~you~~Delaware statutory business trust privately issued $10.0 million face amount ~~that~~of the ~~above~~Trust’s ~~list~~floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued $310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds of ~~important~~the ~~factors~~sale isto ~~not~~purchase ~~exclusive~~$10.3 ~~These~~million ~~forward-looking~~principal ~~statements~~amount of Bankshares’ floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable ~~made~~at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption “Trust Preferred Capital Notes.” Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest expense in its Consolidated Statements of Operations. The interest rate associated with the ~~date~~Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of ~~this~~interest ~~report~~for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through June 30, 2012, Bankshares ~~may~~elected ~~not~~to ~~undertake~~defer ~~steps~~the tointerest ~~update~~payments ~~these~~as ~~forward-looking~~permitted ~~statements~~under tothe ~~reflect~~indenture. The interest deferred under the ~~impact~~indenture compounds quarterly at the interest rate then in effect. As of ~~any~~June 30, 2012 the total amount of deferred and ~~circumstances~~compounded interest owed under the indenture is $1.2 million. The base interest rate as of June 30, 2012 was 3.62% and as of December 31, 2011 was 3.70%. All or ~~events~~a ~~that~~portion ~~arise~~of ~~after~~the Trust Preferred Capital Notes may be included in the regulatory ~~date~~computation of capital adequacy as Tier 1 capital. Under the ~~forward-looking~~current ~~statements~~guidelines, ~~are~~Tier ~~made~~1 capital may include up to 25% of shareholders’ equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At June 30, 2012 and December 31, 2011, $8.9 million and $9.4 million were considered Tier 1 capital.

~~Critical~~32 ~~Accounting Policies~~

Bankshares’Table 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. Bankshares uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that Bankshares uses in estimating risk. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of Bankshares’ transactions would be the same, the timing of events that would impact its financial statements could change. Contents

~~Allowance for Loan Losses~~11. ~~The~~Net ~~allowance~~Income ~~for loan losses is an estimate of the losses that may be sustained in Bankshares’ loan portfolio. The allowance is based on two basic principles of accounting:~~ (1Loss) ~~ASC~~ ~~450-10-05,~~Per Contingencies which requires that losses be accrued when they are probable of occurring and estimable, and (2) ASC 310-10-35, Receivables which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance for loan losses has two basic components: the general allowance and the specific allowance. Share

The ~~general allowance is developed~~ following ~~the~~tables ~~accounting~~show ~~principles contained in ASC 450-10-05, Contingencies and represents~~ the ~~largest~~ ~~component~~weighted ofaverage ~~the~~number total allowance. It is determined by aggregating unclassified loans and unimpaired loans by loan type based on common purpose, collateral, repayment source or other credit characteristics and then applying factors which in the judgment of ~~management~~shares ~~represent~~used ~~the expected losses inherent~~ in ~~the~~computing ~~portfolio.~~net Inincome ~~determining these factors, Bankshares considers the following:~~ (1loss) ~~delinquencies~~ ~~and~~per ~~overall~~share ~~risk~~and ~~ratings,~~the ~~(2) loss~~effect ~~history, (3) trends in volume~~on ~~and~~weighted ~~terms~~average ofnumber ~~loans, (4) effects~~ of ~~changes~~shares ~~in lending policy, (5) the experience and depth~~ of ~~the~~potential ~~borrowers’~~dilutive ~~management,~~common ~~(6) national~~stock. ~~and~~Potential ~~local~~dilutive ~~economic~~common ~~trends,~~stock ~~(7) concentrations~~had ofno ~~credit~~effect byon ~~individual~~income ~~credit size and by class of loans,~~ (8loss) ~~quality~~ ofavailable ~~loan~~to ~~review~~common ~~system~~shareholders ~~and~~for ~~(9)~~ the ~~effect~~periods ~~of external factors (e~~presented.~~g.,~~ ~~competition and regulatory requirements).~~

~~ASC~~Three ~~310-10-35,~~Months ~~Receivables~~Ended isJune 30, the basis upon which Bankshares determines specific reserves on individual loans which comprise the specific allowance. Specific loans to be evaluated for impairment are identified based on the borrower’s loan size and the loan’s risk


	2012						2011
	Shares			Per Share Amount			Shares		Per Share Amount
Basic net income per share		5,109,969			(0.18	)		5,108,821	$	0.08

Effect of dilutive securities, stock options		—						25,332

Diluted net income per share		5,109,969			(0.18	)		5,134,153	$	0.08

Net income utilized in the earnings per share calculations above (in thousands)		(919	)				$	394

~~rating,~~Six ~~collateral~~Months ~~position~~Ended ~~and payment history. If it is determined that it is likely that the Bank will not receive full payment in a timely manner~~June 30, the loan is determined to be impaired. Each such identified loan is then evaluated to determine the amount of reserve that is appropriate based on ASC 310-10-35. This standard also requires that losses be accrued based on the differences between the value of collateral, present value of expected future cash flows or values that are observable in the secondary market and the loan balance.

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


	2012						2011
	Shares			Per Share Amount			Shares		Per Share Amount
Basic net income per share		5,109,969			(0.26	)		5,108,436	$	0.15

Effect of dilutive securities, stock options		—						16,715

Diluted net income per share		5,109,969			(0.26	)		5,125,151	$	0.15

Net income utilized in the earnings per share calculations above (in thousands)		(1,352	)				$	759

~~Deferred~~No ~~Tax~~average ~~Asset.~~shares ~~Bankshares,~~have ~~using~~been aexcluded ~~third~~from ~~party consultant routinely evaluates~~ the ~~likelihood~~calculation offor the ~~recognition~~six ~~of deferred~~months ~~tax~~ended ~~assets.~~June 30, ~~The analysis is used to determine if a valuation allowance for deferred tax assets is necessary~~2012. ~~Bankshares~~Average ~~reviews~~shares ~~and analyzes various forms~~ of ~~positive~~287,699 ~~and~~have been ~~negative~~excluded ~~evidence~~from inthe ~~determining~~calculation ~~whether~~for athe ~~valuation~~six ~~allowance~~months ~~is necessary~~ended ~~and~~June 30, if2011, sobecause totheir ~~what~~effects ~~degree~~were ~~a valuation allowance is warranted~~anti-dilutive.

~~At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary~~12. ~~Its~~Supplemental ~~analysis~~Cash ~~reviewed~~Flow various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss, (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was not considered more likely than not, that Bankshares will not be able to realize all its deferred tax assets. A valuation allowance of $5.3 million related to the deferred tax asset was recorded at December 31, 2011and March 31, 2012. Information

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

On May 3, 2012, WashingtonFirst Bankshares, Inc. (WFBI), Bankshares and the Bank entered into an Agreement and Plan of Reorganization (Merger Agreement), pursuant to which Bankshares will merge with and into WFBI, with WFBI being the surviving corporation (the Merger). Under the Merger Agreement, Bankshares agreed to conduct its business in the ordinary course while the Merger is pending, and, except as permitted under the Merger Agreement, to generally refrain from specific actions without the consent of WFBI. Completion of the Merger is subject to approval by the shareholders of each of Bankshares and WFBI, applicable regulatory approval and customary closing conditions.


	June 30, 2012		June 30, 2011
	(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Interest paid during the six months	$	2,237	$	2,849


Income taxes paid during the six months	$	—	$	—


Supplemental Disclosures of Non-cash Activities:
Fair value adjustment for securities	$	532	$	2,014


Transfer of loans to foreclosed assets	$	963	$	434

3233

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

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

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

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

•The ~~Increasing~~Merger ~~low~~is ~~cost~~expected ~~deposits~~to byclose ~~local~~in ~~commercial~~the ~~and~~fourth ~~retail~~quarter ~~customers~~of 2012, ~~while~~pending ~~working~~approval toof ~~reduce~~the shareholders of each of Bankshares’ ~~brokered~~and ~~deposit~~WFBI ~~portfolio~~and the receipt of all required regulatory approvals, as well as other customary conditions as described in the Current Report on Form 8-K previously filed on May 8, 2012.

•14. ~~Reducing~~Subsequent ~~Bankshares’ operating and funding costs.~~Events

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

•34 Net loss for the quarter ended March 31, 2012 was $433 thousand compared to net income of $365 for the same period in 2011, a decrease of $798 thousand. Earnings per common share, basic and diluted, amounted to $(0.08) at March 31, 2012, compared to $0.07 at March 31, 2011.

•Table Total assets were $508.7 million at March 31, 2012, an increase of $2.2 million from December 31, 2011 total assets of $506.5 million. The increase in total assets is directly related to the increase of $20.8 million in cash and due from banks, with such increase being offset by a $9.5 million decrease in net loans and a $17.7 million decrease in the investment portfolio.Contents

~~• Total loans were $297~~Item 2.1 ~~million~~Management’s atDiscussion ~~March~~and ~~31,~~Analysis ~~2012, a decrease~~ of ~~$9.8~~Financial ~~million,~~

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