NoTable average shares have been excluded from the calculation for the six months ended June 30, 2012. Average shares of 287,699 have been excluded from the calculation for the six months ended June 30, 2011, because their effects were anti-dilutive. Contents

NoTable average shares have been excluded from the calculation for the six months ended June 30, 2012. Average shares of 287,699 have been excluded from the calculation for the six months ended June 30, 2011, because their effects were anti-dilutive. Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2012

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

For the transition period from to

Commission File Number: 000-49976

ALLIANCE BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

VIRGINIA

46-0488111

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices) (Zip Code)

(703) 814-7200

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

As of ~~July~~November 2713, 2012, the number of outstanding shares of registrant’s common stock, par value $4.00 per share was: 5,109,969.

ALLIANCE BANKSHARES CORPORATION

INDEX

		Page
PART I FINANCIAL INFORMATION
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements		3
Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011 (Audited)			3
Consolidated Balance Sheets at September 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 three months ended September 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 Operations for the nine months ended September 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 Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011 (Unaudited)			6
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and 2011 (Unaudited)			7
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2012 and 2011 (Unaudited)			7
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (Unaudited)			8
Consolidated Statements of Cash Flows for the nine months ended September 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		3539
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		7278
Item 4.	Controls and Procedures		7581
PART II OTHER INFORMATION			76
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		7682
Item 1A.	Risk Factors		7682
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		7682
Item 3.	Defaults Upon Senior Securities		7682
Item 4.	Mine Safety Disclosures		7682
Item 5.	Other Information		7682
Item 6.	Exhibits		7783
SIGNATURES			7884

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Alliance Bankshares Corporation

Consolidated Balance Sheets

~~June~~September 30, 2012 and December 31, 2011

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

	June 30,2012			December 31,2011
	September 30,2012			December 31,2011
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	74115,~~777~~515		$	45,837
Federal funds sold		2226,~~880~~594			16,567
Trading security, at fair value		~~300~~293			596
Investment securities available-for-sale, at fair value		~~103~~79,~~353~~411			123,463
Restricted stock, at cost		43,~~150~~972			4,772
Loans, net of allowance for loan losses of $5,055 and $5,393		288,416			301,483
Loans, net of allowance for loan losses of $4,866 and $5,393		283,115			301,483
Premises and equipment, net		1,~~211~~103			1,415
Other real estate owned, net		43,~~031~~575			3,748
Deferred tax assets, net		1,~~442~~601			1,553
Accrued interest and other assets		76,~~258~~751			7,049
TOTAL ASSETS	$	~~507~~521,~~818~~930		$	506,483
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Non-interest bearing deposits	$	~~119~~145,~~553~~295		$	112,450
Savings and NOW deposits		6684,~~643~~058			51,475
Money market deposits		18,~~087~~123			23,370
Time deposits		~~177~~166,~~916~~733			193,148
Total deposits	$	~~382~~414,~~199~~209		$	380,443
Repurchase agreements		4022,~~388~~558			40,420
Federal Home Loan Bank advances ($29,559 and $29,350 at fair value)		44,559			44,350
Federal Home Loan Bank advances ($30,018 and $29,350 at fair value)		45,018			44,350
Trust Preferred Capital Notes		10,310			10,310
Other liabilities		32,~~223~~766			2,838
Commitments and contingent liabilities		—			—
Total liabilities		~~480~~494,~~679~~861			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
Common stock, $4 par value; 15,000,000 shares authorized; 5,109,969 shares issued and outstanding at September 30, 2012 and December 31, 2011		20,440			20,440
Capital surplus		25,~~933~~942			25,915
Retained (deficit)		(19,~~621~~791	)		(18,269	)
Accumulated other comprehensive income, net		~~387~~478			36
Total shareholders’ equity		27,~~139~~069			28,122
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	~~507~~521,~~818~~930		$	506,483

See Notes to Consolidated Financial Statements (Unaudited).

Alliance Bankshares Corporation

Consolidated Statements of Operations

For the Three Months Ended ~~June~~September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands, except per share amounts)

	2012			2011
INTEREST INCOME:
Loans	$	43,~~089~~973		$	4,~~555~~574
Investment securities		~~331~~155			~~1,167~~802
Trading security		9			12
Federal funds sold		2433			1210
Total interest income		4,~~453~~170			5,~~746~~398
INTEREST EXPENSE:
Savings and NOW deposits		30			3026
Time deposits		~~694~~629			~~971~~877
Money market deposits		3234			45
Repurchase agreements		4911			5254
FHLB advances		~~268~~267			~~256~~261
Trust preferred capital notes		~~129~~128			93
Total interest expense		1,~~202~~099			1,~~447~~356
Net interest income		3,~~251~~071			4,~~299~~042
Provision for loan losses		—			769
Provision (recovery of ) for loan losses		(222	)		130
Net interest income after provision for loan losses		3,~~251~~293			3,~~530~~912
OTHER INCOME (LOSS):
OTHER (LOSS):
Deposit account service charges		4139			39
Net gain on sale of available-for-sale securities		—168			~~835~~2,120
Gain (loss) and fair value adjustments on trading security		~~(100~~58	)		94(43	)
Fair value adjustments on FHLB advance		(~~672~~459	)		(~~224~~2,801	)
Other operating income		3941			7534
Total other income (loss)		(692	)		819
Total other (loss)		(153	)		(651	)
OTHER EXPENSES:
Salaries and employee benefits		~~1,148~~956			1,~~404~~197
Professional fees		~~608~~465			~~503~~398
Occupancy expense		~~532~~581			~~564~~578
Equipment expense		~~136~~121			~~155~~163
Other real estate owned expense		54245			1626
FDIC assessments		~~210~~202			~~290~~220
Merger expenses		~~410~~248			—619
Other operating expenses		~~609~~648			~~832~~866
Total other expenses		3,~~707~~466			34,~~764~~067
Income (loss) before income taxes		(1,148	)		585
(Loss) before income taxes		(326	)		(806	)
Income tax expense (benefit)		(229	)		191
Income tax (benefit)		(156	)		(303	)
NET INCOME (LOSS)	$	(919	)	$	394
Net (loss)	$	(170	)	$	(503	)
Net income (loss) per common share, basic	$	(0.18	)	$	0.08
Net (loss) per common share, basic	$	(0.03	)	$	(0.10	)
Net income (loss) per common share, diluted	$	(0.18	)	$	0.08
Net (loss) per common share, diluted	$	(0.03	)	$	(0.10	)

See Notes to Consolidated Financial Statements (~~unaudited~~Unaudited)

Alliance Bankshares Corporation

Consolidated Statements of Operations

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands, except per share amounts)

	2012			2011
INTEREST INCOME:
Loans	$	812,~~272~~245		$	913,~~100~~674
Investment securities		~~655~~810			23,~~488~~290
Trading security		1827			4557
Federal funds sold		3972			2232
Total interest income		813,~~984~~154			1117,~~655~~053
INTEREST EXPENSE:
Savings and NOW deposits		5989			6288
Time deposits		12,~~441~~070			12,~~968~~845
Money market deposits		6195			94139
Repurchase agreements		94117			~~140~~194
FHLB advances		~~536~~803			~~515~~776
Trust preferred capital notes		~~243~~359			~~185~~278
Total interest expense		23,~~434~~533			24,~~964~~320
Net interest income		69,~~550~~621			812,~~691~~733
Provision for loan losses		~~450~~228			1,~~075~~205
Net interest income after provision for loan losses		69,~~100~~393			711,~~616~~528
OTHER INCOME (LOSS):
Deposit account service charges		74113			76115
Net gain on sale of available-for-sale securities		3171			~~914~~3,034
Gain (loss) and fair value adjustments on trading security		(171	)		(33	)
(Loss) and fair value adjustments on trading security		(113	)		(76	)
Fair value adjustments on FHLB advance		(~~209~~668	)		(732,874	)
Other operating income		78119			~~119~~153
Total other income (loss)		(~~225~~378	)		~~1,003~~352
OTHER EXPENSES:
Salaries and employee benefits		23,~~321~~277			23,~~796~~993
Professional fees		1,~~093~~558			1,~~893~~239
Occupancy expense		1,~~123~~704			1,~~125~~703
Equipment expense		~~270~~391			~~323~~486
Other real estate owned expense		95340			5177
FDIC assessments		~~431~~633			~~640~~860
Merger expenses		~~418~~666			—619
Other operating expenses		12,~~547~~195			~~659~~2,577
Total other expenses		710,~~298~~764			711,~~487~~554
Income (loss) before income taxes		(1,~~423~~749	)		~~1,132~~326
Income tax expense (benefit)		(71227	)		~~373~~70
NET INCOME (LOSS)	$	(1,~~352~~522	)	$	~~759~~256
Net income (loss) per common share, basic	$	(0.2630	)	$	0.1505
Net income (loss) per common share, diluted	$	(0.2630	)	$	0.1505

See Notes to Consolidated Financial Statements (Unaudited)

Alliance Bankshares Corporation

Consolidated Statements of Comprehensive Income (Loss)

For the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

	For the Three Months Ended June 30,
	For the Three Months Ended September 30,
	2012			2011
NET INCOME (LOSS)	$	(919	)	$	394
NET (LOSS)	$	(170	)	$	(503	)
Other comprehensive income
Other comprehensive income (loss):
Unrealized holding gains on securities net of taxes of $163 in 2012 and $1,120 in 2011		318			2,177
Unrealized holding gains on securities net of taxes of $104 in 2012 and $297 in 2011		202			576
Reclassification adjustment, net of taxes of $0 in 2012 and ($283) in 2011		—			(552	)
Reclassification adjustment, net of taxes of ($57) in 2012 and ($722) in 2011		(111	)		(1,398	)
Total other comprehensive income		318			1,625
Total other comprehensive income (loss)		91			(822	)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(601	)	$	2,019
TOTAL COMPREHENSIVE (LOSS)	$	(79	)	$	(1,325	)

See Notes to Consolidated Financial Statements (Unaudited)

	For the Six Months Ended June 30,
	For the Nine Months Ended September 30,
	2012			2011
NET INCOME (LOSS)	$	(1,~~352~~522	)	$	~~759~~256
Other comprehensive income
Other comprehensive income (loss):
Unrealized holding gains on securities net of taxes of $182 in 2012 and $995 in 2011		353			1,933
Unrealized holding gains on securities net of taxes of $286 in 2012 and $1,293 in 2011		555			2,509
Reclassification adjustment, net of taxes of ($1) in 2012 and ($310) in 2011		(2	)		(604	)
Reclassification adjustment, net of taxes of ($58) in 2012 and ($1,032) in 2011		(113	)		(2,002	)
Total other comprehensive income		~~351~~442			~~1,329~~507
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(1,~~001~~080	)	$	~~2,088~~763

See Notes to Consolidated Financial Statements (Unaudited)

Alliance Bankshares Corporation

Consolidated Statements of Changes in Shareholders’ Equity

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

	CommonStock		CapitalSurplus			RetainedDeficit			~~AcccumulatedOtherComprehensiveIncome~~AccumulatedOtherComprehensiveIncome (Loss)			TotalShareholders’Equity
BALANCE, DECEMBER 31, 2010	$	20,427	$	25,857		$	(12,311	)	$	(288	)	$	33,685
Net income		—		—			~~759~~256			—			~~759~~256
Other comprehensive income, net of tax		—		—			—			~~1,329~~507			~~1,329~~507
Exercise of stock options		9		(3	)		—			—			6
BALANCE, June 30, 2011	$	20,436	$	25,854		$	(11,552	)	$	1,041		$	35,779
Stock-based compensation expense		—		10			—			—			10
BALANCE, September 30, 2011	$	20,436	$	25,864		$	(12,055	)	$	219		$	34,464
BALANCE, DECEMBER 31, 2011	$	20,440	$	25,915		$	(18,269	)	$	36		$	28,122
Net (loss)		—		—			(1,~~352~~522	)		—			(1,~~352~~522	)
Other comprehensive income, net of tax		—		—			—			~~351~~442			~~351~~442
Stock-based compensation expense		—		1827			—			—			1827
BALANCE, June 30, 2012	$	20,440	$	25,933		$	(19,621	)	$	387		$	27,139
BALANCE, September 30, 2012	$	20,440	$	25,942		$	(19,791	)	$	478		$	27,069

See Notes to Consolidated Financial Statements (Unaudited)

Alliance Bankshares Corporation

Consolidated Statements of Cash Flows

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2012 and 2011 (Unaudited)

(Dollars in thousands)

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,~~352~~522	)	$	~~759~~256
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		12,~~424~~247			~~622~~976
Loss on disposal of fixed assets		—			15
Provision for loan losses		~~450~~228			1,~~075~~205
Losses and valuation adjustments on other real estate owned		67292			1015
Stock-based compensation expense		1827			—10
Net (gain) on sale of securities available-for-sale		(3171	)		(~~914~~3,034	)
Fair value adjustments		~~380~~780			~~106~~2,950
Changes in assets and liabilities affecting operations:
Accrued interest and other assets		~~(279~~23	)		13,~~502~~710
Other liabilities		~~385~~(72	)		(~~508~~752	)
Net cash provided by operating activities		1,~~090~~832			25,~~667~~351
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold		(610,~~313~~027	)		(25,~~489~~774	)
Purchase of securities available-for-sale		(6465,582	)		(2679,~~943~~724	)
Proceeds from sale of securities available-for-sale		7185,~~017~~257			50104,~~430~~642
Paydowns on securities available-for-sale		1323,~~057~~364			69,~~175~~014
Net change in trading security		~~125~~190			1,~~908~~963
Net change in restricted stock		~~622~~800			~~790~~1,131
Net change in loan portfolio		1117,~~654~~177			911,~~641~~575
Proceeds from sale of other real estate owned		~~613~~845			~~739~~946
Purchase of premises and equipment		(6782	)		(~~384~~442	)
Net cash provided by investing activities		2651,~~126~~942			3943,~~867~~331
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash provided by (expended on):
Non-interest bearing deposits		732,~~103~~845			61,~~199~~233
Savings and NOW deposits		1532,~~168~~583			1,~~064~~712
Money market deposits		(5,~~283~~247	)		(1,~~591~~864	)
Time deposits		(1526,~~232~~415	)		(~~583~~5,693	)
Repurchase agreements		(3217,862	)		(~~9,271~~657	)
Proceeds from exercise of stock options		—			6
Net cash provided by (used in) financing activities		115,~~724~~904			(45,~~176~~263	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		2869,~~940~~678			3843,~~358~~419
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		45,837			24,078
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	74115,~~777~~515		$	6267,~~436~~497

See Notes to Consolidated Financial Statements (Unaudited)

Notes to Consolidated Financial Statements (Unaudited)

1.	General

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

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

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

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

~~The~~Additionally, ~~accompanying~~Bankshares ~~unaudited~~and ~~consolidated~~the ~~financial~~Bank ~~statements~~are ~~reflect~~parties to a Memorandum of Understanding (the ~~financial~~MOU) ~~condition~~with ~~and~~the ~~results~~Federal Reserve Bank of ~~operations~~ Richmond and the Virginia Bureau of ~~Bankshares~~Financial onInstitutions, which is a ~~consolidated~~regulatory ~~basis~~means ~~and~~of seeking correction through informal administrative action from institutions considered to be of supervisory concern, but which have ~~been~~not ~~prepared~~deteriorated to inthe ~~accordance~~point ~~with~~where ~~accounting~~they ~~principles~~warrant ~~generally~~formal ~~accepted~~administrative action. Among the specific concerns cited in the ~~United~~MOU ~~States~~were ofasset ~~America~~quality, earnings, liquidity, and capital. The MOU imposes restrictions and/or requirements on Bankshares and the Bank, including (~~GAAP~~i) ~~for~~the ~~interim~~requirement ~~financial~~to ~~reporting~~be examined twice yearly by its regulators, (ii) the requirement to provide regular quarterly progress reports to the relevant regulators and (iii) the requirement that Bankshares and the Bank receive regulatory approval to pay dividends, repurchase common stock, and make interest or principal payments on subordinated debt and trust preferred securities. ~~All~~Bankshares has implemented significant ~~intercompany~~improvements ~~balances~~in credit policies, loan administration, and ~~transactions~~liquidity ~~have~~management ~~been~~in ~~eliminated.~~its Inefforts to comply with the ~~opinion~~terms of ~~management,~~the MOU. The MOU also requires Bankshares to maintain a written plan for compliance with the ~~accompanying~~capital ~~unaudited~~adequacy ~~consolidated~~rules ~~financial~~applicable ~~statements~~to ~~contain~~all state member banks under Federal Reserve Board Regulation H (12 CFR Part 208). These rules require all ~~adjustments~~state ~~and~~member ~~reclassifications~~banks, ~~considered~~including ~~necessary~~the Bank, to ~~present~~maintain ~~fairly~~adequate ~~Bankshares’~~capital ~~financial~~consistent ~~position~~with astheir risk profiles, which takes into account the volume of adversely classified loans, the adequacy of the loan loss ~~June 30~~reserve, ~~2012~~any planned asset growth and ~~December 31~~the nature and level of asset concentrations, ~~2011~~among other things. Given this, it is the ~~results~~policy of ~~operations~~federal ~~for~~banking ~~the~~regulators ~~three~~not ~~and~~to ~~six~~specify ~~month~~or ~~periods~~confirm ~~ended~~that ~~June 30~~a given capital level will be “adequate” at a future point in time. As a result, ~~2012~~federal banking regulators have not, and ~~2011~~Bankshares cannot, ~~consolidated~~identify ~~statements~~a specific dollar amount of ~~comprehensive~~capital ~~income~~required ~~for~~under the ~~three~~MOU. ~~and~~However, ~~six~~Bankshares ~~month~~estimates ~~periods~~that it would need $7.5 million to $10 million in new capital to be compliant with applicable capital adequacy rules.

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

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

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

2.	Stock Option Plan

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

As of ~~June~~September 30, 2012, there was $64 55 thousand of total unrecognized compensation expense related to stock options, which will be recognized over the remaining requisite service period which is estimated to be three years or less.

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

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

	Number ofShares			WeightedAverageExercisePrice		WeightedAverageRemainingContractualLife (in years)		AggregateIntrinsicValue1 (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
Outstanding at September 30, 2012		219,456		$	9.00		4.3	$	125
Exercisable at June 30, 2012		173,301		$	10.64		4.6	$	42
Exercisable at September 30, 2012		173,306		$	10.64		3.4	$	46

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

3.	Fair Value Measurements

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

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

Fair Value Hierarchy

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

•

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

•

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

•

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

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

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

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

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

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

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

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

	Fair Value Measurements at June 30, 2012
	Fair Value Measurements at September 30, 2012
	CarryingValue		QuotedPrices inActiveMarkets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs (Level 3)		Assets /Liabilitiesat Fair Value
	(Dollars in thousands)
Assets:
Trading securities - PCMO	$	~~300~~293	$	—	$	~~300~~293		—	$	~~300~~293
Available-for-sale securities:
U. S. treasuries		5,000		5,000		—				5,000
U. S. corporations and agencies		18,569		—		18,569		—		18,569
U. S. corporations and agencies		18,785		—		18,785		—		18,785
U. S. government CMOs		41,229		—		41,229		—		41,229
U. S. government CMOs		49,925		—		49,925		—		49,925
U. S. government MBS		9,768		—		9,768		—		9,768
U. S. government MBS		19,842		—		19,842		—		19,842
PCMOs		932		—		932		—		932
PCMOs		947		—		947		—		947
Municipal securities		8,913		—		8,913		—		8,913
Municipal securities		8,854		—		8,854		—		8,854
Total assets	$	79,704	$	—	$	79,704		—	$	79,704
Total assets	$	103,653	$	5,000	$	98,653		—	$	103,653
Liabilities:
FHLB advance	$	2930,~~559~~018	$	—	$	—	$	2930,~~559~~018	$	2930,~~559~~018
Total liabilities	$	2930,~~559~~018	$	—	$	—	$	2930,~~559~~018	$	2930,~~559~~018

	Fair Value Measurements at December 31, 2011
	CarryingValue		QuotedPrices inActiveMarkets(Level 1)		SignificantOtherObservableInputs(Level 2)		SignificantOtherUnobservableInputs (Level 3)		Assets/Liabilitiesat Fair Value
	(Dollars in thousands)
Assets:
Trading securities - PCMO	$	596	$	—	$	596	$	—	$	596
Available-for-sale securities:
U. S. treasuries		71,115		71,115				—		71,115
U. S. corporations and agencies		9,751		—		9,751		—		9,751
U. S. government CMOs		31,038		—		31,038		—		31,038
U. S. government MBS		7,698		—		7,698		—		7,698
PCMOs		950		—		950		—		950
Municipal securities		2,911		—		2,911		—		2,911
Total assets	$	124,059	$	71,115	$	52,944		—	$	124,059
Liabilities:
FHLB advance	$	29,350	$	—	$	—	$	29,350	$	29,350
Total liabilities	$	29,350	$	—	$	—	$	29,350	$	29,350

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

Fair Value Measurements Using


Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (Dollars in thousands)
	FHLB Advance

Beginning balance, July 1, 2012	$	29,559
Realized losses on liabilities		459

Ending balance, September 30, 2012	$	30,018

Significant Unobservable Inputs

(Level 3)

(Dollars in thousands)

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

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

Fair Value Measurements Using


Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (Dollars in thousands)
	Other Real Estate Owned			FHLB Advances

Beginning balance, January 1, 2012	$	1,473		$	29,350
Transfers out of Level 3		(1,473	)		—
Realized losses on liabilities		—			668

Ending balance, September 30, 2012		—		$	30,018

Significant Unobservable Inputs


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
( Dollars in thousands)
	Other Real Estate Owned		FHLB Advances		AFS Securities			Trading Securities

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


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

(Level 3)

(Dollars in thousands)

	OtherReal EstateOwned			FHLBAdvances
Beginning balance, January 1, 2012	$	1,473		$	29,350
Transfers out of Level 3		(1,473	)		—
Realized losses on liabilities		—			209
Ending balance, June 30, 2012	$	—		$	29,559

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

( Dollars in thousands)

	Other 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 on assets		—		—		170			10
Realized losses on liabilities		—		3,142		—			—
Unrealized (losses) on assets		—		—		(555	)		—
Ending balance, December 31, 2011	$	1,473	$	29,350	$	—		$	—

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

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

		FairValue				ValuationTechnique		UnobservableInput		Range (Weighted Average)
FHLB advance		$	2930,~~559~~018			Pricing model		Yield curves		1.9570% - 21.1990% (2.11%)

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

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

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

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

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

Carrying Value at June 30, 2012

Carrying Value at September 30, 2012

Description

CarryingValue

QuotedPrices inActiveMarkets(Level 1)

SignificantOtherObservableInputs(Level 2)

SignificantOtherUnobservableInputs (Level 3)

(Dollars in thousands)

Assets:

Impaired loans, net of valuation allowance

46,~~517~~371

—

46,~~517~~371

—

OREO

43,~~031~~575

—

43,~~031~~575

—

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

Cash, Due from Banks, and Federal Funds Sold

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

Loans Receivable

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

Restricted Stock

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

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

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

Short-Term Borrowings

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

Trust Preferred Capital Notes

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

Off-Balance-Sheet Financial Instruments

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

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

Fair Value of Financial Instruments

	Fair Value Measurements at June 30, 2012, Using:
	Fair Value Measurements at September 30, 2012, Using:
	CarryingValue		Quoted Pricesin ActiveMarkets forIdentical AssetsLevel 1		SignificantOtherObservableInputsLevel 2		SignificantUnobservableInputsLevel 3		Balance
	(Dollars in thousands)
Financial assets:
Cash and due from banks	$	74115,~~777~~515	$	74115,~~777~~515	$	—	$	—	$	74115,~~777~~515
Federal funds sold		2226,~~880~~594		2226,~~880~~594		—		—		2226,~~880~~594
Trading security		~~300~~293		—		~~300~~293		—		~~300~~293
Available-for-sale securities		~~103~~79,~~353~~411		~~5,000~~—		9879,~~353~~411		—		~~103~~79,~~353~~411
Loans, net		~~288~~283,~~416~~115		—		~~284~~278,~~324~~970		—		~~284~~278,~~324~~970
Accrued interest receivable		1,~~665~~548		—		1,~~665~~548		—		1,~~665~~548
Financial liabilities:
Non-interest bearing deposits	$	~~119~~145,~~553~~295	$	—	$	~~119~~145,~~553~~295	$	—	$	~~119~~145,~~553~~295
Interest-bearing deposits		~~262~~268,~~646~~914		—		~~263~~269,~~565~~456		—		~~263~~269,~~565~~456
Short-term borrowings		4022,~~388~~558		—		4022,~~388~~558		—		4022,~~388~~558
FHLB advances		15,000		—		15,000		—		15,000
FHLB advances, at fair value		2930,~~559~~018		—		—		2930,~~559~~018		2930,~~559~~018
Trust Preferred Capital Notes		10,310		—		10,310		—		10,310
Accrued interest payable		1,~~352~~486		—		1,~~352~~486		—		1,~~352~~486


	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

4.	Trading Security

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

	June 30,					December 31,
	September 30,2012					December 31,2011
	2012					2011
	FairValue		Yield			FairValue		Yield
	Fair					Fair
	Value		Yield			Value		Yield
	(Dollars in thousands)
Trading security:
PCMOs	$	300		5.43	%	$	596		5.44	%
PCMO	$	293		5.43	%	$	596		5.44	%
Total trading security	$	~~300~~293		5.43	%	$	596		5.44	%

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

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

5.	Investment Securities

The amortized cost, unrealized gains and losses, and the fair value of available-for-sale investment securities at ~~June~~September 30, 2012 are summarized as follows:

	June 30, 2012
	September 30, 2012
	Amortized		Unrealized					Fair
	AmortizedCost		Unrealized					FairValue
	Cost		Gains		Losses			Value
			Gains		Losses
	(Dollars in thousands)
Available-for-sale securities:
U.S. treasuries		5,000		—		—			5,000
U.S. government corporations and agencies		18,262		307		—			18,569
U.S. government corporations and agencies		18,629		156		—			18,785
U.S. government agency CMOs		41,251		193		(215	)		41,229
U.S. government agency CMOs		49,919		176		(170	)		49,925
U.S. government agency MBS		9,535		233		—			9,768
U.S. government agency MBS		19,540		302		—			19,842
PCMOs		902		30		—			932
PCMOs		943		4		—			947
Municipal securities		8,732		246		(65	)		8,913
Municipal securities		8,732		214		(92	)		8,854
Total available-for-sale securities	$	78,682	$	1,009	$	(280	)	$	79,411
Total available-for-sale securities	$	102,763	$	852	$	(262	)	$	103,353

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


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

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

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

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

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

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

~~Bankshares’~~The ~~investment security~~following ~~portfolio~~tables ispresent ~~primarily comprised of U.S. government and fixed rate bonds, whose prices move inversely with interest rates. At~~ the ~~end~~aggregate amount of ~~any accounting period, the portfolio may have both~~ unrealized ~~gains~~loss ~~and~~in ~~losses.~~investment ~~Unrealized~~securities ~~losses within Bankshares’ portfolio typically occur~~ as ~~market interest rates rise. Such unrealized losses are considered temporary in nature. Under ASC 320-10-35~~of September 30, ~~Debt~~2012 and ~~Equity~~December 31, ~~Securities~~2011. ~~Recognition~~The ~~and~~aggregate ~~Presentation~~amount ~~of Other-Than-Temporary Impairments, an impairment~~ is ~~considered~~determined ~~“other~~by ~~than~~summation ~~temporary” if any~~ of ~~the~~all ~~following conditions are met: Bankshares intends to sell~~ the ~~security,~~related itsecurities ~~is more likely than not~~ that ~~Bankshares~~have ~~will~~a becontinuous ~~required~~loss toat ~~sell~~period ~~the security before recovery of its amortized cost basis~~end, orand ~~Bankshares does not expect to recover~~ the ~~security’s~~length ~~entire~~of ~~amortized~~time ~~cost~~that ~~basis (even if Bankshares does not intend to sell). In~~ the ~~event~~loss ~~that~~has abeen ~~security~~unrealized ~~would~~is ~~suffer~~shown ~~impairment~~by ~~for a reason that was~~terms of “~~other~~less than ~~temporary,~~12 months” ~~Bankshares~~and ~~would~~“12 bemonths ~~expected~~or tomore.” ~~write~~The ~~down the security’s value to its new~~ fair value, ~~and~~is the ~~amount~~approximate ofmarket ~~the~~value ~~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~~period ~~losses to be other-than-temporarily impaired and no impairment charges have been recorded~~end.

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


	September 30, 2012
	Less than 12 months					12 months or more				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(Dollars in thousands)

U.S. government agency CMOs		23,845		(215	)		—		—		23,845		(215	)
Municipal securities		617		(65	)		—		—		617		(65	)


Total temporarily impaired investment securities	$	24,462	$	(280	)	$	—	$	—	$	24,462	$	(280	)

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


	December 31, 2011
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized 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	)

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

There are a total of 15 investment securities with a total fair value of $24.5 million that have an aggregate unrealized loss of $280 thousand and are considered temporarily impaired as of September 30, 2012. Management believes the unrealized losses noted in the table above are a result of current market conditions and interest rates, and do not reflect on the ability of the issuers to repay the obligations. Approximately $23.8 million or 97.1% of the investment securities with an unrealized loss are backed by U.S. government agencies and other forms of underlying collateral.

Bankshares’ investment in FHLB stock totaled $2.6 million at September 30, 2012. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Bankshares does not consider this investment to be other than temporarily impaired as of September 30, 2012 and no impairment has been recognized. FHLB stock is included in restricted stock on the Consolidated Balance Sheets.

Loans

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

	June 30,						December 31,
	September 30,2012						December 31,2011
	2012						2011
	Amount			Percentage			Amount			Percentage
	(Dollars in thousands)
Real estate:
Residential real estate	$	9892,~~219~~443			3332.51	%	$	101,248			33.0	%
Commercial real estate		~~126~~125,~~643~~602			43.16	%		137,610			44.8	%
Construction / land		3841,~~436~~478			1314.14	%		39,176			12.8	%
Total real estate		~~263~~259,~~298~~523			8990.71	%		278,034			90.6	%
Commercial and industrial		2827,~~700~~076			9.84	%		26,820			8.7	%
Consumer		1,~~473~~382			0.5	%		2,022			0.7	%
Gross loans		~~293~~287,~~471~~981			100.0	%		306,876			100.0	%
Less: allowance for loan losses		(54,~~055~~866	)					(5,393	)
Net loans	$	~~288~~283,~~416~~115					$	301,483

As of ~~June~~September 30, 2012 and December 31, 2011, there were $21 thousand and $25 thousand, respectively, in checking account overdrafts that were reclassified on the Consolidated Balance Sheets as loans.

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

	As of June 30, 2012
	(Dollars in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		SpecialMention		Substandard		Doubtful		Loss		TotalLoans
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

	As 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

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


	As of September 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	$	24,083	$	787	$	205	$	2,001		—		—	$	27,076
Commercial real estate
Owner occupied		54,391		871		1,982		3,801		—		—		61,045
Non-owner occupied		56,289		4,736		1,731		1,801		—		—		64,557
Construction/land
Residential construction		16,037		792		—		—		559		—		17,388
Other construction & land		14,823		524		165		8,242		336		—		24,090
Residential real estate
Equity lines		27,031		321		99		150		—		—		27,601
Single family		51,801		2,729		2,684		2,235		—		—		59,449
Multifamily		5,393		—		—		—		—		—		5,393
Consumer - non real estate		1,181		8		181		12		—		—		1,382

Totals	$	251,029	$	10,768	$	7,047	$	18,242	$	895		—	$	287,981


	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

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

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

	Aging and Non-accrual Loans by Class
	As of June 30, 2012
	(Dollars in thousands)
	30-59Days PastDue		60-89 DaysPast Due		90 Days orMore PastDue		Total PastDue		Current		90-daysPast Dueand StillAccruing		Non-accrualLoans
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

	Aging and Non-accrual Loans By Class
	As 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

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

7. Allowance for Loan Losses


	Aging and Non-accrual Loans by Class
	As of September 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	$	1,518	$	28	$	269		1,815	$	25,261		792	$	1,547
Commercial real estate
Owner occupied		355		99		2,475		2,929		58,116		—		2,475
Non-owner occupied		—		1,801		—		1,801		62,756		—		—
Construction/land
Residential construction		—		—		1,351		1,351		16,037		—		559
Other construction & land		165		983		4,866		6,014		18,076		—		5,849
Residential real estate
Equity lines		285		292		150		727		26,874		—		150
Single family		623		1,315		261		2,199		57,250		—		261
Multifamily		—		—		—		—		5,393		—		—
Consumer-non real estate		—		—		12		12		1,370		—		12

Total loans	$	2,946	$	4,518	$	9,384	$	16,848	$	271,133		792	$	10,853

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

	Six MonthsEndedJune 30,2012			YearEndedDecember 31,2011			Six MonthsEndedJune 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 following tables represent the allocation of allowance for loan losses by segment as of the dates indicated:


	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

	June 30, 2012
	(Dollars in thousands)
	Commercialand Industrial			CommercialReal Estate			ConstructionLand		ResidentialReal 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

7.	Allowance for Loan Losses

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


	Nine Months Ended September 30, 2012			Year Ended December 31, 2011			Nine Months Ended September 30, 2011
	(Dollars in thousands)
Allowance for Loan Losses
Balance, beginning of period	$	5,393		$	5,281		$	5,281
Provision for loan losses		228			1,549			1,205
Loans charged off		(894	)		(1,702	)		(1,556	)
Recoveries of loans charged off		139			265			248

Net (charge offs)		(755	)		(1,437	)		(1,308	)

Balance, end of period	$	4,866		$	5,393		$	5,178

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


	September 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		—			—			—		(894	)		—			(894	)
Recoveries		—			—			—		139			—			139
Provision		(56	)		(53	)		68		282			(13	)		228

Ending Balance:	$	154		$	1,455		$	1,876	$	1,353		$	28		$	4,866


Individually evaluated for impairment	$	109		$	—		$	1,520	$	78			4		$	1,711

Collectively evaluated for impairment	$	45		$	1,455		$	356	$	1,275		$	24		$	3,155


Loans:
Ending Balance:	$	27,076		$	125,602		$	41,478	$	92,443		$	1,382		$	287,981


Individually evaluated for impairment	$	1,546		$	2,475		$	6,409	$	971			12		$	11,413

Collectively evaluated for impairment	$	25,530		$	123,127		$	35,069	$	91,472		$	1,370		$	276,568

Allowance for Loan Losses

As of December 31, 2011

(Dollars in thousands)

	CommercialandIndustrial			CommercialReal Estate			ConstructionLand			ResidentialReal Estate			Consumer			Total
	Commercialand Industrial			CommercialReal Estate			ConstructionLand			ResidentialReal 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

2728

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

	June 30,2012		December 31,2011
	September 30,2012		December 31,2011
	(Dollars in thousands)
Impaired loans without a valuation allowance	$	43,~~369~~331	$	4,233
Impaired loans with a valuation allowance		68,~~166~~082		9,031
Total impaired loans	$	1011,~~535~~413	$	13,264
Valuation allowance related to impaired loans	$	1,~~649~~711	$	2,271
Total loans past due 90 days and still accruing	$	—	$	—
Total loans past due 90 days and still accruing, not included in total impaired loans	$	232	$	—
Average investment in impaired loans	$	1112,~~049~~017	$	13,538
Interest income recognized on impaired loans	$	545	$	234
Interest income recognized on a cash basis on impaired loans	$	545	$	234

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

	Specific Allocation for Impaired Loans By Class
	As of June 30, 2012
	As of September 30, 2012
	RecordedInvestment		UnpaidPrincipalBalance		RelatedAllowance		AverageRecordedInvestment		InterestIncomeRecognized
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in thousands)
With no related allowance:
Commercial & Industrial	$	928	$	1,014	$	—	$	1,023	$	—
Commercial & industrial	$	896	$	1,005		—	$	1,018		—
Commercial Real Estate
Commercial real estate
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Construction/land
Residential		—		—		—		—		—
Other construction & land		32,~~292~~285		32,~~386~~293		—		32,~~391~~293
Residential Real Estate		—		—		—		—		—
Residential real estate		—		—		—		—		—
Single family		150		150		—		150		—
With an allowance recorded:
Commercial & Industrial		268		268		48		268		3
Commercial & industrial		650		659		109		675		18
Commercial Real Estate
Commercial real estate
Owner occupied		2,~~492~~475		2,~~638~~634		171		2,~~654~~648		—
Non-owner occupied		—		—		—		—		—
Construction/Land
Construction/land
Residential construction		559		565		285		~~555~~558		—
Other construction & land		23,~~582~~565		23,~~735~~821		1,~~201~~235		23,~~743~~835		—
Residential Real Estate
Residential real estate
Single family		~~264~~821		~~264~~825		9877		~~265~~826		226
Total:	$	10,535	$	11,020	$	1,649	$	11,049	$	5
Consumer		12		12		4		14		1
Total:	$	11,413	$	11,964	$	1,711	$	12,017	$	45

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

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

At ~~June~~ September 30, 2012, there were $~~900~~897 thousand in troubled debt restructured loans. At December 31, 2011, there were $956 thousand in troubled debt restructured loans.

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

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

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8.	Other Real Estate Owned (OREO)

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

	Six MonthsEndedJune 30,2012			Twelve MonthsEndedDecember 31,2011
	Nine MonthsEndedSeptember 30,2012			Twelve MonthsEndedDecember 31,2011
	(Dollars in thousands)
Balance, beginning of period	$	3,748		$	4,627
Properties acquired at foreclosure		963			434
Sales of foreclosed properties		(~~651~~905	)		(959	)
Valuation adjustments		(29231	)		(354	)
Balance, end of period	$	43,~~031~~575		$	3,748

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

	Six MonthsEndedJune 30,2012		Twelve MonthsEndedDecember 31,2011		Six MonthsEndedJune 30,2011
	Nine MonthsSeptember 30,2012		Twelve MonthsDecember 31,2011		Nine MonthsSeptember 30,2011
	(Dollars in thousands)
Loss on sales of OREO	$	3861	$	12	$	1215
Valuation adjustments		29231		354		—
Operating expenses, net of rental income		2848		88		3962
Total OREO expense	$	95340	$	454	$	5177

9.	Federal Home Loan Bank Advances

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

At ~~June~~September 30, 2012 and December 31, 2011, the FHLB advance accounted for on a fair value basis had a value of $2930.60 and $29.4 million, respectively, and matures in 2021. The weighted average interest rate on the long-term FHLB advance accounted for on a fair value basis was 3.985% at ~~June~~September 30, 2012 and December 31, 2011. The par value of the FHLB advance accounted for on a fair value basis was $25.0 million at ~~June~~September 30, 2012 and December 31, 2011.

At ~~June~~September 30, 2012 and December 31, 2011, there was one FHLB advance accounted for on a cost basis. Bankshares renewed this floating rate advance in the first quarter of 2012 for $15.0 million. The advance matures in 2013 and the interest rate at ~~June~~September 30, 2012 was 0.32320% and at December 31, 2011 was 0.379%. The weighted average interest rate for both FHLB advances outstanding is 2.61%.

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10.

Trust Preferred Capital Notes of Subsidiary Trust

On June 30, 2003, Bankshares’ wholly-owned Delaware statutory business trust privately issued $10.0 million face amount of the Trust’s floating rate trust preferred capital securities (Trust Preferred Capital Notes) in a pooled trust preferred capital securities offering. The trust issued $310 thousand in common equity to Bankshares. Simultaneously, the trust used the proceeds of the sale to purchase $10.3 million principal amount of Bankshares’ floating rate junior subordinated debentures due 2033 (Subordinated Debentures). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time. The Subordinated Debentures are an unsecured obligation of Bankshares and are junior in right of payment to all present and future senior indebtedness of Bankshares. The Trust Preferred Capital Notes are guaranteed by Bankshares on a subordinated basis. The Trust Preferred Capital Notes are presented in the Consolidated Balance Sheets of Bankshares under the caption “Trust Preferred Capital Notes.” Bankshares records distributions payable on the Trust Preferred Capital Notes as an interest expense in its Consolidated Statements of Operations. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. Under the indenture governing the Trust Preferred Capital Notes, Bankshares has the right to defer payments of interest for up to twenty consecutive quarterly periods. Beginning with the quarter ended September 30, 2009 and through ~~June~~September 30, 2012, Bankshares elected to defer the interest payments as permitted under the indenture. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. As of ~~June~~September 30, 2012, the total amount of deferred ~~and~~ and compounded interest owed under the indenture is $1.23 million. The base interest rate as of ~~June~~September 30, 2012 was 3.6254% and as of December 31, 2011 was 3.70%. All or a portion of the Trust Preferred Capital Notes may be included in the regulatory computation of capital adequacy as Tier 1 capital. Under the current guidelines, Tier 1 capital may include up to 25% of shareholders’ equity excluding accumulated other comprehensive income (loss) in the form of Trust Preferred Capital Notes. At ~~June~~September 30, 2012 and December 31, 2011, $8.9 million and $9.4 million were considered Tier 1 capital.

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11.

Net Income (Loss) Per Share

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

Three Months Ended June 30,


Three Months Ended September 30,
	2012						2011
	Shares			Per Share Amount			Shares			Per Share Amount
Basic net (loss) per share		5,109,969		($	0.03	)		5,108,969		($	0.10	)

Effect of dilutive securities, stock options		—						—

Diluted net (loss) per share		5,109,969		($	0.03	)		5,108,969		($	0.10	)

Net (loss) utilized in the earnings per share calculations above (in thousands)	$	(170,000	)				$	(503,000	)

Nine Months Ended September 30,
	2012						2011
	Shares			Per ShareAmount			Shares		Per ShareAmount
Basic net income per share		5,109,969			(0.18	)		5,108,821	$	0.08
Basic net income (loss) per share		5,109,969		($	0.30	)		5,108,616	$	0.05
Effect of dilutive securities, stock options		—						2520,~~332~~695
Diluted net income per share		5,109,969			(0.18	)		5,134,153	$	0.08
Diluted net income (loss) per share		5,109,969		($	0.30	)		5,129,311	$	0.05
Net income utilized in the earnings per share calculations above (in thousands)		(919	)				$	394
Net income (loss) utilized in the earnings per share calculations above (in thousands).	$	(1,522,000	)				$	256,000

~~Six~~All ~~Months~~average ~~Ended~~shares ~~June~~have been excluded from the calculation for the nine months ended September 30, 2012. Average shares of 167,306 have been excluded from the calculation for the nine months ended September 30, 2011, because their effects were anti-dilutive.

	2012						2011
	Shares			Per ShareAmount			Shares		Per ShareAmount
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

12.

Supplemental Cash Flow Information

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

	June 30, 2012		June 30, 2011
	September 30, 2012		September 30, 2011
	(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Interest paid during the six months	$	2,237	$	2,849
Interest paid during the nine months	$	3,202	$	4,243
Income taxes paid during the six months	$	—	$	—
Income taxes paid during the nine months		—	$	—
Supplemental Disclosures of Non-cash Activities:
Fair value adjustment for securities	$	~~532~~670	$	~~2,014~~767
Transfer of loans to foreclosed assets	$	963	$	434

3313. Income Taxes

Allocation of federal and state income taxes between current and deferred portions is as follows for the nine months ended September 30, 2012.


	September 30, 2012
	(Dollars in thousands)

Current	$	—
Deferred tax		(227	)

Income tax expense	$	(227	)

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


	September 30, 2012
	(Dollars in thousands)

Computed at the expected statutory rate	$	(595	)
Tax exempt income, net		(54	)
Other		299
Change in valuation allowance		123

Income tax expense	$	(227	)

13Deferred Taxes. ~~Mergers~~In accordance with ASC 740-10, Income Taxes (formerly SFAS No. 109, Accounting for Income Taxes), deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The future realization of the tax benefit generated by net operating losses depends upon the existence of sufficient taxable income within the applicable carryback and ~~Acquisitions~~carry forward periods. Bankshares periodically assesses the need to establish, increase, or decrease a valuation allowance for deferred tax assets.

Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Bankshares’ analyzed and reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it is not considered more likely than not that Bankshares will be able to realize all its deferred tax assets. A valuation allowance of $5.3 million related to the deferred tax assets was recorded at December 31, 2011. The valuation allowance at September 30, 2012 related to the deferred tax assets was $5.5 million.

Bankshares evaluated the DTA related to the fair value adjustment of an FHLB advance separately from other DTAs. As the future taxable income implicit in the recovery of the book basis of the fair value adjustment offsets any potential future deductions underlying the DTA, Bankshares determined that no valuation allowance was necessary for this DTA. Bankshares has the ability and intent to retain the FHLB advance until such time as it recovers in value, which could be maturity.

The components of the net deferred tax assets and liabilities are as follows:


	September 31, 2012
	(Dollars in thousands)
Deferred tax assets:
Bad debt expense	$	1,654
Deferred rent		14
Deferred data processing costs		111
Other real estate owned		1,107
Net operating loss carryforward		2,522
Other		457
Fair value adjustment		1,607

		7,472

Deferred tax liabilities:
Unrealized gain on available-for-sale securities		248
Deferred loan costs, net		128
Depreciation and amortization		34
Other		7

		417

Net deferred tax assets		7,055
Valuation allowance		(5,454	)

Deferred tax assets		1,601

14.

Mergers and Acquisitions

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

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

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

1415. Subsequent Events

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

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

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

Internet Access to Corporate Documents

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

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

Forward-Looking Statements

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

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

•

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

•

Retention of existing employees;

•

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

3539

•

Changing trends in customer profiles and behavior;

•

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

•

Other competitive factors within the financial services industry;

•

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

•

Changes in accounting policies, rules and practices;

•

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

•

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

•

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

•

Fiscal and governmental policies of the United States federal government;

•

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

•

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

•

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

•

Changes in Bankshares’ and the Bank’s risk profile that cause the amount of new capital necessary for compliance with applicable capital adequacy rules to be materially different from Bankshares’ estimate;

•

Changes in the way the FDIC insurance premiums are assessed;

•

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

•

Timing and implementation of certain balance sheet strategies;

•

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

•

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

•

Changes in tax laws and regulations;

•

Bankshares’ ability to recognize future tax benefits;

•

Impacts of implementing various accounting standards;

•

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

•

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

•

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

•

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

•

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

3640

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

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

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

Critical Accounting Policies

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

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

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

3741

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

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

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

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

At December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Its analysis reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was considered more likely than not, that Bankshares will not be able to realize all its deferred tax assets. As of ~~June~~September 30, 2012, the net deferred tax asset was $1.46 million, compared to $1.5 million as of December 31, 2011.

Overview

3842

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

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

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

•

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

•

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

•

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

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

•

Reducing Bankshares’ operating and funding costs.

Additionally, Bankshares and the Bank are parties to a Memorandum of Understanding (the MOU) with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions, which is a regulatory means of seeking correction through informal administrative action from institutions considered to be of supervisory concern, but which have not deteriorated to the point where they warrant formal administrative action. Among the specific concerns cited in the MOU were asset quality, earnings, liquidity, and capital. The MOU imposes restrictions and/or requirements on Bankshares and the Bank, including (i) the requirement to be examined twice yearly by its regulators, (ii) the requirement to provide regular quarterly progress reports to the relevant regulators and (iii) the requirement that Bankshares and the Bank receive regulatory approval to pay dividends, repurchase common stock, and make interest or principal payments on subordinated debt and trust preferred securities. Bankshares has implemented significant improvements in credit policies, loan administration, and liquidity management in its efforts to comply with the terms of the MOU. The MOU also requires Bankshares to maintain a written plan for compliance with the capital adequacy rules applicable to all state member banks under Federal Reserve Board Regulation H (12 CFR Part 208). These rules require all state member banks, including the Bank, to maintain adequate capital consistent with their risk profiles, which takes into account the volume of adversely classified loans, the adequacy of the loan loss reserve, any planned asset growth and the nature and level of asset concentrations, among other things. Given this, it is the policy of federal banking regulators not to specify or confirm that a given capital level will be “adequate” at a future point in time. As a result, federal banking regulators have not, and Bankshares cannot, identify a specific dollar amount of capital required under the MOU. However, Bankshares estimates that it would need $7.5 million to $10 million in new capital to be compliant with applicable capital adequacy rules.

Performance Highlights

• The net loss for the quarter ended ~~June~~September 30, 2012 was $~~919~~170 thousand compared to a net ~~income~~loss of $~~394~~503 thousand for the same period in 2011, aan ~~decrease~~improvement of $~~1.3~~333 ~~million~~thousand. The net loss was $1.45 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to net income of $~~759~~256 thousand for the ~~six~~nine months ended ~~June~~September 30, 2011, a decrease of $2.1.8 million. Loss per common share, basic and diluted, amounted to $0.2630 for the ~~six~~nine months ended ~~June~~September 30, 2012, compared to earnings per share of $0.1505 for the ~~six~~nine months ended ~~June~~September 30, 2011. Earnings for the nine months ended September 30, 2012, were negatively affected by merger related expenses of $~~418~~666 thousand, the negative fair value adjustment on the FHLB advance of $~~209~~668 thousand and a reduction in interest income of $23.79 million, from $1117.71 million for the ~~six~~nine months ended ~~June~~September 30, 2011, to $913.02 million for the ~~six~~nine months ended ~~June~~September 30, 2012,. ~~offset~~Due byto athe ~~reduction~~improvement in the ~~provision~~overall ~~for~~risk profile of the loan ~~losses~~portfolio and the lower level of ~~approximately~~total loans, Alliance released $~~769~~223 thousand ~~resulting~~of ~~primarily~~reserves ~~from~~into income and also did not recognized a provision expense during the ~~collection~~quarter, this has positively affected net income for the period. The reduction in ~~full~~interest income is comprised of a ~~previously~~$1.4 ~~reserved~~million decrease in the loan interest income and a $2.5 million decrease in the interest income from investment securities.

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

• Total ~~loans~~assets were $~~293~~521.59 million at ~~June~~September 30, 2012, aan ~~decrease~~increase of $1315.4 million, orfrom 4total assets of $506.4%5 ~~from~~million ~~the~~at December 31, 2011 ~~balance of $306~~.9 ~~million.~~ The ~~decrease~~increase in total ~~loans~~assets ~~results~~is ~~from~~directly ~~the~~related ~~payoffs~~to of a ~~number~~$69.7 ofmillion ~~loan~~increase ~~relationships,~~in ascash ~~well~~and asdue ~~scheduled~~from ~~principal~~banks, ~~repayments.~~with ~~While~~such ~~new~~increase ~~loan~~being ~~activity~~offset ~~has~~by ~~increased~~$18.9 million decrease in the ~~first~~loan ~~six~~portfolio ~~months~~related ofto ~~2012,~~ the ~~volume~~payoff of ~~originations~~a ~~has~~number ~~not~~of ~~kept~~loan ~~pace~~relationships ~~with~~as ~~repayments.~~well ~~Each~~as ~~loan~~a ~~segment~~$44.1 asmillion areduction ~~percentage~~in ofBankshares’ ~~total~~investment ~~loans~~portfolio. atThe ~~June~~increase ~~30,~~in ~~2012~~cash isrelates ~~nearly~~to ~~unchanged~~the ~~from~~cyclical nature of the ~~percentages~~business atof ~~December~~Bankshares’ ~~31,~~title ~~2011~~and escrow clients.

• ~~Demand~~Total ~~deposits~~loans were $~~119~~288.60 million at ~~June~~September 30, 2012, ora ~~31.3%~~decrease of ~~total deposits~~$18.9 ~~This~~million, ~~compares~~or to6.2% from the December 31, 2011 ~~level~~balance of $~~112~~306.59 million. orThe 29decrease in total loans results from a combination of strategic repositioning of lending activities, normal amortization and payoffs, the total of which offset new loan production during the period.6% Each loan segment as a percentage of total ~~deposits~~loans at September 30, 2012 is nearly unchanged from the percentages at December 31, 2011.

• ~~The~~Demand ~~composition~~deposits ofwere ~~non-performing assets as of June 30, 2012 was~~ $10145.53 million ofat ~~non-accrual~~September ~~loans~~30, ~~$4.0 million of OREO~~2012, ~~and~~or ~~$900~~35.1% ~~thousand~~ of ~~troubled debt restructured loans for a~~ total ~~of $15~~deposits.5 ~~million,~~This ~~compared~~compares to the ~~composition of non-performing assets as of~~ December 31, 2011, ~~which~~level ~~was $13.3 million~~ of ~~non-accrual loans,~~ $3112.~~7 million of OREO and $956 thousand of troubled debt restructured loans for a total of $18.0 million. The non-performing assets balance decreased by $2.~~5 million ~~at June 30~~, ~~2012~~or ~~compared to December 31, 2011~~29.6% ~~The composition~~ of ~~the~~total reduction was as follows: the charge off of six loans, secured by residential real estate, totaling $838 thousand; the foreclosure and purchase into OREO of a residential property valued at $962 thousand; the full repayment of a commercial loan secured by land with a prior balance of $899 thousand; the movement back to accrual status of two loans secured by land totaling $325 thousand; and the receipt of ongoing payments from a borrower with three outstanding loans secured by land and construction equipment totaling $4deposits.~~4 million that are carried in non-accrual status; such payments reduced Bankshares’ carrying balance by $85 thousand during 2012.~~

• The ~~investment~~composition ~~securities~~of ~~portfolio~~non-performing ~~totaled~~assets ~~$103.4~~as ~~million~~of atSeptember ~~June~~ 30, 2012 was primarily comprised of $10.9 ~~This~~million ~~compares~~of tonon-accrual loans, $~~123~~3.56 million of ~~investments~~OREO, $897 thousand of troubled debt restructured loans, compared to the composition of non-performing assets as of December 31, 2011, which was $13.3 million of non-accrual loans, $3.7 million of OREO and $956 thousand of troubled debt restructured loans for a ~~decrease~~total of $2018.10 million. ~~This~~The ~~decrease~~non-performing isassets ~~attributable~~balance todecreased ~~management’s~~by ~~strategy~~$2.0 million at September 30, 2012 compared to ~~reduce~~December 31, 2011. The change resulted from the ~~investment~~following: ~~portfolio~~the ~~and~~charge off of six loans secured by residential real estate, totaling $838 thousand; the ~~maturing~~foreclosure and purchase into OREO of ~~certain~~a ~~investments~~residential inproperty valued at $963 thousand; the ~~first~~full ~~quarter~~repayment of ~~2012.~~a Incommercial ~~addition,~~loan secured by land with a prior balance of $899 thousand; the ~~investment~~movement ~~securities~~back ~~portfolio~~to ~~contains~~accrual ~~mortgage~~status ~~oriented~~of ~~products~~two ~~(CMO,~~loans ~~PCMO,~~secured ~~and~~by ~~MBS)~~land ~~and~~totaling ~~SBA~~$325 ~~securities.~~thousand; ~~When~~and ~~prepayments~~, onthe ~~these~~receipt ~~instruments~~of ~~occur~~ongoing atpayments from a ~~faster~~borrower ~~rate~~with ~~than~~three ~~anticipated,~~outstanding ~~principal~~loans issecured ~~paid~~by ~~down~~land ~~earlier~~and ~~than~~construction ~~expected~~equipment totaling $4.4 ~~During~~million ~~the~~that ~~second~~are ~~quarter~~carried ofin non-accrual status; such payments reduced Bankshares’ carrying balance by $85 thousand during 2012. Since December 31, 2011, six loans totaling $1.1 million have been added to the ~~Bank~~non-accrual ~~experienced~~and ~~greater~~impaired ~~than~~loan ~~expected~~list. ~~prepayments~~Of onthese asix ~~variety~~loans, of95% ~~investment~~are ~~securities~~secured by residential real estate.

• The ~~net~~investment ~~interest~~securities ~~margin~~portfolio ~~for~~totaled ~~the~~$79.4 ~~quarter~~million ~~ended~~at ~~June~~September 30, 2012 ~~was 3~~.~~13%~~ ~~compared~~This compares to 3$123.~~86%~~5 ~~for~~million ~~the~~of ~~same~~investments ~~2011~~as ~~period, a decrease~~ of 73December ~~basis points. For the six months ended June 30~~31, ~~2012~~2011, ~~the~~a ~~net~~decrease ~~interest margin~~ of 3$44.~~08%~~1 ~~was~~million. 74This ~~basis~~decrease ~~points~~is ~~lower~~attributable ~~than~~to ~~the~~management’s ~~net~~strategy ~~interest~~to ~~margin~~reduce ~~of 3.82% for~~ the ~~six~~investment ~~months~~portfolio ~~ended~~by ~~June~~taking ~~30,~~some ~~2011.~~opportunistic ~~The~~gains ~~lower~~to ~~net~~mitigate ~~margin~~some isof ~~attributed to~~ the ~~targeted~~losses ~~efforts~~realized toin ~~strategically~~the ~~restructure~~CMO ~~Bankshares’~~portfolio ~~balance~~and ~~sheet~~to inimprove ~~anticipation of~~ the ~~merger~~overall ~~with Eagle Bancorp, Inc~~yield. ~~(Eagle)~~In ~~during 2011~~addition, ~~which led to shifts in~~ the investment ~~portfolio~~securities ~~mix and the reduced yield in the~~ portfolio. ~~During~~contains ~~the~~mortgage ~~second~~oriented ~~quarter~~products of(CMO, ~~2012~~PCMO, ~~Bankshares~~and ~~also~~MBS) ~~experienced early prepayments on a number of CMO’s~~ and ~~PCMO’s~~SBA securities. When prepayments on these instruments occur at a faster rate than anticipated, ~~premium~~principal ~~amortization~~is ~~increases~~paid ~~which~~down ~~adversely~~earlier ~~impacts~~than expected. During the ~~portfolio~~nine ~~yield~~months ended September 30, 2012, the Bank experienced greater than expected prepayments on a variety of investment securities.

• ~~Deposits~~The ~~were~~net ~~$382.2~~interest ~~million~~margin atfor ~~June~~the quarter ended September 30, 2012 was 3.02% compared to 3.61% for the same 2011 period, ana ~~increase~~decrease of ~~$1.8~~59 ~~million~~basis ~~from~~points. For the ~~December~~nine 31months ended September 30, ~~2011~~2012, ~~balance~~the net interest margin of ~~$380~~3.410% ~~million~~was 64 basis points lower than the net interest margin of 3.74% ~~Savings~~for ~~and~~the ~~NOW~~nine ~~accounts~~months ~~increased~~ended bySeptember 30, 2011.

4044

~~$15.2~~For ~~million~~the ~~from~~nine ~~$51.5~~months ~~million~~ended atSeptember ~~December 31, 2011 to $66.6 million at June~~ 30, 2012 ~~and non-interest bearing deposits increased by $7.1 million~~, ~~from~~Bankshares ~~$112.5~~experienced ~~million~~early atprepayments ~~December~~on ~~31,~~a ~~2011~~number toof ~~$119.6~~CMO’s ~~million~~and atPCMO’s ~~June 30, 2012~~securities. ~~These~~When ~~increases~~prepayments ~~were~~on ~~offset~~these byinstruments ~~decreases~~occur inat ~~money~~a ~~market~~faster ~~deposits~~rate ofthan ~~$5.3 million~~anticipated, ~~from~~premium ~~$23.4~~amortization ~~million~~increases atwhich ~~December~~adversely ~~31,~~impacts ~~2011~~the toportfolio ~~$18.1 million at June 30~~yield, ~~2012,~~the ~~and~~Bank ~~time~~experiences ~~deposits~~greater ofthan ~~$15.2~~expected ~~million,~~prepayments ~~from~~on ~~$193.1~~a ~~million~~variety atof ~~December~~investment ~~31, 2011 to $177~~securities.~~9 million at June 30, 2012.~~

• ~~Non-interest~~Deposits ~~expense~~were ~~for~~$414.2 ~~the~~million ~~three~~at ~~months~~September ~~ended June~~ 30, 2012, ~~amounted~~an toincrease of $333.78 million ~~compared~~from tothe December 31, 2011 balance of $3380.84 million. ~~for~~Strong growth in the ~~same~~title ~~period~~agency-related deposit coupled with a strategic shift of funding from repurchase agreements into deposits, contributed to the increase in overall deposit balance. Savings and NOW accounts increased by $32.6 million from $51.5 million at December 31, 2011 to $84.1 ~~The~~million at September 30, 2012 and non-interest ~~expenses~~bearing ~~include~~deposits ~~merger~~increased ~~related~~by ~~expenses~~$32.8 ofmillion, from $~~410~~112.5 ~~thousand,~~million ~~consultant~~at ~~expenses~~December ~~related~~31, 2011 to ~~contract~~$145.3 ~~employees~~million at September 30, 2012. These increases were offset by decreases in money market deposits of $~~226~~5.3 ~~thousand~~million, from $23.4 million at December 31, 2011 to $18.1 million at September 30, 2012, and ~~OREO~~time ~~expenses~~deposits of $9426.4 ~~thousand~~million, from $193.1 million at December 31, 2011 to $166.7 million at September 30, 2012.

~~Financial~~• ~~Performance~~Non-interest ~~Measures.~~expense ~~Bankshares’ net loss~~ for the three ~~month~~months ~~period~~ ended ~~June~~ September 30, 2012 ~~was~~amounted ~~$919 thousand,~~to ~~a decrease of~~ $1.3 ~~million over the second quarter of 2011 net income of $394 thousand~~.5 ~~The net loss of $919 thousand includes net interest income of $3.3~~ million compared to $4.31 million for the same period ~~last~~in ~~year,~~2011 a ~~decrease~~reduction of $~~1.0 million.~~601 The decrease is due primarily to a decrease in interest income in the amount of $1.3 million attributed to the lower average yield on the investment portfolio and the lower balance on the loan portfolio, which was partially offset by a decrease of $245 thousand ~~in the cost of funds~~. For the ~~three~~nine months ended ~~June~~ September 30, 2012, ~~total~~ non-interest expense ~~was~~amounted to $110.28 million compared to $111.46 million ~~for~~in ~~the three months ended June 30,~~ 2011~~. These results led to $0.18 basic and diluted loss per share for the quarter ended June 30~~, ~~2012,~~a ~~compared~~reduction toof $~~0.08~~800 ~~basic and diluted earnings per share for the quarter ended June 30, 2011~~thousand. ~~Weighted~~The ~~average~~non-interest ~~basic~~expense ~~shares outstanding were 5,109,969~~ for the ~~three~~nine months ended ~~June~~ September 30, 2012 ~~and 5~~,~~108,821~~ ~~for~~include ~~the~~merger ~~three~~related ~~months~~expenses ~~ended~~of ~~June 30~~$666 thousand, ~~2011.~~consultant ~~Weighted~~expenses ~~average~~related ~~diluted~~to ~~shares~~contract ~~outstanding~~employees ~~were~~of ~~5,109,969~~$445 ~~for~~thousand ~~the three months ended June 30, 2012~~ and ~~5,134,153~~OREO ~~for~~expenses ~~the~~including ~~three~~valuation ~~months~~adjustments ~~ended~~of ~~June 30,~~$340 ~~2011~~thousand.

~~For~~45 the six month period ended June 30, 2012, Bankshares had net loss of $1.4 million compared to net income of $759 thousand for the same period in the prior year, a decline of $2.1 million. The net loss of $1.4 million includes net interest income of $6.6 million compared to $8.7 million for the same period last year, a decrease of $2.1 million. The decrease is due primarily to a decrease in interest income in the amount of $2.7 million, from $11.7 million for the six months ended June 30, 2011, to $9.0 million for the same period in 2012, and the lower average yield on the investment portfolio and the lower average balances on the loan portfolio. The decrease was partially offset by a decrease of $530 thousand in the cost of funds. For the six months ended June 30, 2012, total interest expense was $2.4 million compared to $3.0 million for the six months ended June 30, 2011. These results led to a $0.26 basic and diluted loss per share for the six months ended June 30, 2012. The basic and diluted earnings per share for the six months ended June 30, 2011 was $0.15. Weighted average basic shares outstanding were 5,109,969 for the six months ended June 30, 2012 and 5,108,436 for the six months ended June 30, 2011. Weighted average diluted shares outstanding were 5,109,969 and 5,125,151 for the six months ended June 30, 2012 and June 30, 2011, respectively.

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

Financial Performance Measures. Bankshares’ net loss for the three month ~~earning~~period ~~assets~~ended September 30, 2012 was $170 thousand, an improvement of $333 thousand over the third quarter of 2011 net loss of $503 thousand. ~~Targeted~~The ~~efforts~~net loss of $170 thousand for the quarter ended September 30, 2012 includes net interest income of $3.1 million compared to ~~strategically~~$4.0 ~~restructure~~million ~~Bankshares’~~for ~~balance~~the ~~sheet~~same inperiod ~~anticipation~~last year, a decrease of $900 thousand. Results during the quarter ended September 30, 2012 were primarily impacted by reduced interest income, merger-related ~~with~~expenses, ~~Eagle~~OREO expenses ~~during~~and ~~2011~~valuation write-downs, ~~led~~and a negative adjustment to ~~shifts~~the in$25 ~~Bankshares’~~million FHLB advance recorded at fair value, the total of which offset gains on the sale of investment ~~portfolio~~ ~~mix~~securities and favorable reductions in non-interest expenses and interest expenses. Due to the improvement in the overall ~~reduced~~risk ~~balance~~profile of the loan portfolio and ~~yield~~a onlower level of total loans, In addition, Alliance released reserves into income and also did not recognize a provision expense during the ~~portfolio~~quarter. ~~Total~~For the three months ended September 30, 2012, total interest ~~income~~expense ~~reversal~~was ~~relating~~$1.1 million compared to ~~non-accrual~~$1.4 ~~loans~~million for the ~~six~~three months ended ~~June~~September 30, ~~2012~~2011. ~~was~~These factors led to $~~355~~0.03 ~~thousand~~basic and diluted loss per share for the quarter ended September 30, 2012, compared to $~~311~~0.10 ~~thousand~~basic and diluted loss per share for the ~~six~~quarter ended September 30, 2011. Weighted average basic shares outstanding were 5,109,969 for the three months ended September 30, 2012 and 5,108,969 for ~~June~~the three months ended September 30, 2011. Weighted average diluted shares outstanding were 5,109,969 for the three months ended September 30, 2012 and 5,108,969 for the three months ended September 30, 2011.

For the nine month period ended September 30, 2012, Bankshares had a net loss of $1.5 million compared to net income of $256 thousand for the same period in the prior year, a decline of $1.8 million. The net loss of $1.5 million for the nine months ended September 30, 2012 includes net interest income of $9.6 million compared to $12.7 million for the same period last year, a decrease of $3.1 million. The decrease is due primarily to a decrease in interest income in the amount of $3.9 million, from $17.1 million for the nine months ended September 30, 2011, to $13.2 million for the same period in 2012, and the lower average yield on the investment portfolio and the lower average balances on the loan portfolio. The decrease was partially offset by a reduction of $787 thousand in the cost of funds. For the nine months ended September 30, 2012, total interest expense was $3.5 million compared to $4.3 million for the nine months ended September 30, 2011. These factors led to a $0.30 basic and diluted loss per share for the nine months ended September 30, 2012. The basic and diluted earnings per share for the nine months ended September 30, 2011 was $0.05. Weighted average basic shares outstanding were 5,109,969 for the nine months ended September 30, 2012 and 5,108,616 for the nine months ended September 30, 2011. Weighted average diluted shares outstanding were 5,109,969 and 5,129,311 for the nine months ended September 30, 2012 and September 30, 2011, respectively.

The net interest margin decreased to 3.02% for the three months ended September 30, 2012 compared to 3.61% for the three months ended September 30, 2011, a decrease of 59 basis points. The net interest margin was 3.10% for the nine months ended September 30, 2012

compared to 3.74% for the nine months ended September 30, 2011, a decrease of 64 basis points. For the first nine months of 2012 the net interest margin continues to be negatively affected by the decrease in the yield on interest earning assets. Targeted efforts to strategically restructure Bankshares’ balance sheet in anticipation of the merger with Eagle during 2011 led to shifts in Bankshares’ investment portfolio mix and the overall reduced balance and yield on the portfolio, and the unexpected prepayments on the CMO instruments in the portfolio. Yield on the investment portfolio for the nine months ended September 31, 2012 was 1.09% compared to 3.57% for the same period in 2011. Total interest income reversal relating to non-accrual loans for the nine months ended September 30, 2012 was $355 thousand compared to $461 thousand for the nine months ended September 30, 2011.

Results of Operations

Net Interest Income. Net interest income (on a fully tax equivalent basis) for the three months ended ~~June~~ September 30, 2012 was $3.31 million compared to $4.30 million for the same period in 2011. Interest income on earning assets was $1.32 million lower for the three months ended ~~June~~September 30, 2012, compared to the ~~second~~third quarter of 2011, while interest expense decreased $~~245~~257 thousand during the same time period.

Net interest income ~~(on a fully tax equivalent basis)~~ for the ~~six~~nine months ended ~~June~~ September 30, ~~2011~~2012 was $69.6 million compared to $812.7 8 million for the same period in 2011. Interest income on earning assets was $23.79 million lower for the ~~six~~nine months ended ~~June~~September 30, 2012, compared to the first ~~six~~nine months of 2011. Of the $23.79 million decrease in interest income, $~~154~~1.1 ~~thousand~~million is attributable to the $2527.45 million lower average balance in loans. The reduction in the average balance in the investment securities portfolio was $1617.53 million and contributed $~~257~~2.5 million ~~thousand~~ to the reduction in interest income. This was offset by the decrease in interest expense of $~~530~~787 thousand. The average balance of interest bearing deposits decreased by $2018.0 million and contributed $82818 thousand to the reduction in interest expense.

~~The~~47 following table illustrates average balances of total interest-earning and non-interest earning assets as well as total interest-bearing and non-interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted average yields and rates. The average balances used in these tables and other statistical data were calculated using daily average balances.

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

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

	Three Months Ended June 30,
	Three Months Ended September 30,
	2012								2011
	Average			Income /		Yield /			Average			Income /		Yield /
	AverageBalance			Income /Expense		Yield /Rate 1			AverageBalance			Income /Expense		Yield /Rate 1
	Balance			Expense		Rate 1			Balance			Expense		Rate 1
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans (2)	$	~~293~~288,~~553~~421		$	43,~~089~~973		5.5948	%	$	320,~~845~~004		$	4,~~555~~574		5.6967	%
Trading securities		~~430~~276			9		812.4097	%		~~745~~639			12		67.4645	%
Investment securities		~~108~~98,~~359~~950			~~334~~182		10.2473	%		~~119~~117,~~314~~771			~~1,192~~823		42.0177	%
Federal funds sold		1419,~~853~~876			2433		0.6566	%		87,~~866~~674			1210		0.5452	%
Total interest earning assets		~~417~~407,~~195~~523			4,~~456~~197		4.2810	%		~~449~~446,~~770~~088			5,~~771~~419		54.1582	%
Non-interest earning assets:
Cash and due from banks		4061,~~913~~100								2224,~~882~~594
Premises and equipment		1,~~276~~179								1,~~581~~613
Other real estate owned (OREO)		43,~~303~~821								4,~~453~~150
Other assets		78,~~542~~446								1614,~~514~~596
Less: allowance for loan losses		(5,~~167~~162	)							(5,~~386~~655	)
Total non-interest earning assets		4869,~~867~~384								4039,~~044~~298
Total Assets	$	~~466~~476,~~062~~907							$	~~489~~485,~~814~~386
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	4660,~~360~~271		$	29		0.2519	%	$	4240,~~601~~475		$	2825		0.2625	%
Money market deposit accounts		1617,~~664~~649			3234		0.77	%		24,~~173~~612			45		0.7573	%
Savings accounts		4,~~457~~703			1		0.0908	%		23,~~850~~152			21		0.2813	%
Time deposits		~~182~~168,~~712~~722			~~694~~629		1.5248	%		~~201~~197,~~855~~008			~~971~~877		1.9377	%
Total interest-bearing deposits		~~250~~251,~~193~~345			~~756~~693		1.2110	%		~~271~~265,~~479~~247			~~1,046~~948		1.5542	%
FHLB advances(3)		4344,~~895~~564			~~268~~267		2.4538	%		41,~~059~~311			~~256~~261		2.5051	%
Other borrowings		4737,~~997~~210			~~178~~139		1.49	%		4850,~~860~~871			~~145~~147		1.1915	%
Total interest-bearing liabilities		~~342~~333,~~085~~119			1,~~202~~099		1.4131	%		~~361~~357,~~398~~429			1,~~447~~356		1.6151	%
Non-interest-bearing liabilities:
Demand deposits		93113,~~548~~770								9189,~~033~~101
Other liabilities		2,~~518~~775								2,~~802~~571
Total liabilities		~~438~~449,~~151~~664								~~455~~449,~~233~~101
Shareholders’ Equity		27,~~911~~243								3436,~~581~~285
Total Liabilities and Shareholders’ Equity	$	~~466~~476,~~062~~907							$	~~489~~485,~~814~~386
Interest Spread (4)							2.8779	%							3.5431	%
Net Interest Margin (5)				$	3,~~254~~098		3.1302	%				$	4,~~324~~063		3.8661	%

⁽¹⁾

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

(2) The Bank had average non-accrual loans of $11.04 million and $10.8 million in the ~~second~~third quarter of 2012 and 2011. The 2012 and 2011 interest income on non-accrual loans excluded from the loans above was $~~165~~171 thousand and $~~117~~150 thousand, respectively.

(3) The Bank had two FHLB advances during the periods presented: a $15.0 million floating rate advance accounted for on a cost basis and a $25.0 million par value fixed rate advance accounted for on a fair value basis. The average fair value of the fixed rate FHLB advance for the second quarter of 2012 and 2011 was $2830.90 million and $2629.13 million, respectively. As of ~~June~~September 30, 2012, the fair value of the fixed rate FHLB advance was $2930.60 million.

⁽⁴⁾

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

⁽⁵⁾

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

4348

Average loan balances were $~~293~~288.64 million for the three months ended ~~June~~September 30, 2012 compared to $320.80 million for the same period in 2011. The ~~decrease~~$31.6 inmillion ~~average~~decline ~~loans~~ is ~~primarily~~average ~~due~~loan tobalances ~~several large payoffs. Bankshares longer-term strategy~~ is toconcentrated ~~grow~~in ~~small~~a ~~business~~$10 ~~commercial~~million ~~loans~~decline ~~and~~in ~~owner~~C&I ~~occupied~~loan ~~commercial~~balances ~~real~~centered ~~estate, and focus on Bankshares’ geographical area. The related interest income from loans was $4.1 million~~ in the ~~three~~loss ~~months~~of ~~ended~~two ~~June 30,~~large ~~2012~~lines ~~compared~~of tocredit; $49.65 million inreduction ~~the same period~~ in ~~2011. The average yield on loans of 5.59% during the~~ ~~three~~Owner-occupied ~~months~~Commercial ~~ended~~Mortgages ~~June 30,~~where ~~2012~~borrowers ~~was~~refinanced 10with ~~basis~~other ~~points~~lenders ~~lower~~and ~~than~~a ~~the~~$9 ~~yield~~million ofdecline ~~5.69%~~ in ~~the~~Residential ~~second~~Investment ~~quarter~~Mortgage ofLoans, ~~2011.~~primarily ~~Interest~~due ~~rates~~to ~~are~~reduced ~~established~~activity ~~for~~with ~~classes~~our oflarger ~~loans~~Residential ~~that~~Flippers ~~include~~who ~~variable~~buy ~~rates~~and ~~based~~sell ~~on Wall Street Journal Prime or other~~properties ~~identifiable~~within ~~bases~~a ~~while~~12 ~~others~~month ~~carry~~time ~~fixed rates with terms out to 15 years~~frame.” ~~Most new variable rate originations include minimum start rates and/or floors.~~

~~For~~Bankshares ~~the~~longer-term ~~three~~strategy ~~months~~is ~~ended~~to ~~June 30,~~grow ~~2012,~~small ~~Bankshares~~business ~~held~~commercial ~~one~~loans ~~security~~and inowner ~~its~~occupied ~~trading~~commercial real ~~portfolio~~estate, ~~with~~and anfocus ~~average~~on ~~balance~~Bankshares’ ofgeographical ~~$430~~area. ~~thousand,~~The ~~compared~~related tointerest income from loans was $~~745~~4.0 ~~thousand~~million ~~for~~in the three months ended ~~June~~ September 30, 2012 compared to $4.6 million in the same period in 2011. The ~~trading~~average ~~security~~yield ~~interest~~on ~~income~~loans of ~~for~~5.48% during the three months ended ~~June~~September 30, 2012 was $919 ~~thousand~~basis ~~compared~~points tolower ~~$12~~than ~~thousand~~the ~~for~~yield ~~the~~of ~~three~~5.67% ~~months~~in ~~ended~~the ~~June 30,~~third quarter of 2011. ~~The~~Interest ~~reduction~~rates inare ~~average~~established ~~trading~~for ~~securities~~classes ~~reflects management’s~~of ~~business~~loans ~~strategy~~that toinclude ~~eliminate~~variable ~~the~~rates ~~trading~~based ~~securities~~on ~~portfolio~~Wall asStreet Journal ~~Bankshares~~Prime ~~repositioned~~or ~~the~~other ~~balance~~identifiable ~~sheet~~bases ~~and~~while ~~led~~others tocarry ~~the~~fixed ~~reduction~~rates inwith ~~the~~terms ~~associated~~out ~~interest~~to ~~income~~15 years. AtMost ~~June 30,~~new ~~2012,~~variable ~~the~~rate ~~carrying~~originations ~~value~~include ofminimum ~~the~~start ~~security~~rates ~~was $300~~and/or ~~thousand~~floors.

~~Investment~~For ~~securities averaged $108.4 million for~~ the ~~quarter~~three months ended ~~June~~September 30, 2012, ~~compared~~Bankshares toheld ~~$119.3 million~~one ~~for~~security ~~the same quarter~~ in ~~2011.~~its ~~Investment~~trading ~~securities~~portfolio ~~income~~with ~~(on~~an aaverage ~~fully~~balance ~~tax~~of ~~equivalent basis) was~~ $~~334~~ 276 thousand ~~for the three months ended June 30~~, ~~2011~~ compared to $~~1.2~~639 ~~million~~thousand for the three months ended ~~June~~September 30, 2011. The ~~tax equivalent~~trading ~~average~~security ~~yield~~interest onincome ~~investment securities~~ for the three months ended ~~June~~September 30, 2012, was ~~1.24%~~$9 thousand compared to ~~4.01%~~$12 thousand for the three months ended ~~June~~ September 30, 2011. ~~The~~At reduction in the average balance of the investment securities portfolio reflects management’s targeted efforts to strategically restructure our balance sheet in anticipation of the merger during 2011 that led to shifts in our investment portfolio mixSeptember 30, ~~the reduction in the portfolio and the reduction in the overall yield. During the second quarter of~~ 2012, the ~~Bank~~carrying ~~experienced~~value ~~greater than expected prepayments on a variety~~ of ~~investment securities which impacted~~ the ~~yield~~security onwas ~~the~~$293 ~~portfolio~~thousand. ~~When repayments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield.~~

~~Short-term~~Investment securities ~~investments~~averaged in$99.0 ~~federal~~million ~~funds~~for ~~sold~~the ~~contributed $24~~quarter ~~thousand~~ended September 30, 2012 compared to ~~interest~~$117.8 ~~income~~million for the same quarter in 2011. Investment securities income (on a fully tax equivalent basis) was $182 thousand for the three ~~month~~months ~~period~~ ended ~~June~~ September 30, 2012, compared to $12823 thousand for the ~~same~~three ~~period~~months inended September 30, 2011. The tax equivalent average ~~balance~~yield on investment securities for the three months ended ~~June~~September 30, 2012, was ~~$14~~0.973% ~~million,~~compared ato $62.077% ~~million~~for ~~increase~~the ~~from~~three ~~the~~months ~~prior~~ended ~~year~~September 30, 2011. The reduction in the average balance of $8the investment securities portfolio reflects management’s targeted efforts to strategically restructure Bankshares’ balance sheet in anticipation of the merger during 2011 that led to shifts in Bankshares’ investment portfolio mix, the reduction in the portfolio and the reduction in the overall yield.9 ~~million~~During the second quarter and continuing into the third quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities which impacted the yield on the portfolio. When repayments occur at a faster rate than anticipated, premium amortization increases and adversely impact the portfolio yield.

~~The~~Short-term ~~average~~investments ~~balance~~in offederal ~~cash~~funds ~~and~~sold ~~due~~contributed ~~from~~$33 ~~banks~~thousand ~~was~~to ~~$40.9~~interest ~~million~~income ~~and~~in the three month period ended September 30, 2012, compared to $2210 thousand for the same period in 2011.9 ~~million~~The average balance for the three months ended ~~June~~September 30, 2012 ~~and~~was ~~2011~~$19.9 million, ~~respectively~~a $12.2 million increase from the prior year average balance of $7.7 million. The increase in federal funds sold is due to the increase in the Title and Escrow businesses accounts during the quarter.

~~Total~~49 average interest earning assets yielded 4.28% for the three months ended June 30, 2012 compared to the yield of 5.15% for the same period in 2011. Total interest income (on a fully tax equivalent basis) was $4.5 million for the three months ended June 30, 2012 compared

toThe ~~$5.8~~average ~~million~~balance ~~for~~of ~~the~~cash ~~three~~and ~~months~~due ~~ended~~from ~~June 30,~~banks ~~2011~~was $61.1 Asmillion ~~discussed~~and ~~above,~~$24.6 ~~interest~~million ~~income~~for ~~decreased in~~ the three ~~second~~months ~~quarter~~ended ofSeptember 30, 2012 ~~compared to the second quarter of 2011 due to the smaller average loans~~ and ~~securities balances~~2011, ~~which are a product of Bankshares’ strategy to reposition its balance sheet, and lower yields generated by Bankshares’ interest-earning assets in the low interest rate environment~~respectively.

Total average interest~~-bearing~~ ~~liabilities~~earning ~~were~~assets ~~$342~~yielded 4.110% ~~million in~~ for the ~~second~~three ~~quarter~~months ofended ~~2012~~September 30, or2012 ~~$19.3~~compared ~~million~~to ~~lower than~~ the ~~second quarter~~yield of ~~2011 level of $361.~~4 ~~million~~.82% Afor ~~key driver of~~ the ~~decline~~same ~~was~~period ~~the decrease~~ in ~~average time deposits. The average balance of time deposits for the second quarter of 2012 was $182.7 million compared to the second quarter of~~ 2011 ~~average balance of $201~~.9 ~~million,~~Total ~~a decrease of $19.2 million. Interest expense for all~~ interest~~-bearing~~ ~~liabilities~~income ~~amounted~~was to $14.2 million for the three months ended ~~June~~September 30, 2012 compared to $15.4 million for the three months ended ~~June~~ September 30, ~~2011,~~ ~~or a decrease of $245 thousand~~2011. ~~The~~As ~~average~~discussed ~~cost~~above, of interest~~-bearing~~ ~~liabilities~~income ~~for~~decreased in the ~~second~~third quarter of 2012 ~~was~~compared ~~1.41%~~to ~~or 20 basis points lower than~~ the ~~second~~third quarter of 2011 ~~level~~due ofto ~~1.61%.~~the ~~The~~smaller ~~lower~~average ~~interest~~loans ~~rate~~and ~~environment~~securities ~~allowed~~balances, ~~for competitive~~which ~~repricing~~are ofa ~~interest~~product ~~bearing~~of ~~demand~~Bankshares’ ~~accounts,~~strategies ~~money~~to reposition ~~market~~its ~~accounts~~balance sheet, ~~savings accounts~~ and ~~title~~lower ~~client~~yields ~~based~~generated ~~time~~by ~~deposits.~~Bankshares’ ~~The~~interest-earning ~~benefits~~assets ~~of the repricing are seen~~ in the ~~lower~~low ~~time~~interest ~~deposit~~rate ~~cost~~environment, ofcoupled ~~1.52%~~with ~~during~~ the ~~second~~unexpected ~~quarter~~prepayments ofon ~~2012 compared~~the toCMO ~~1.93%~~instruments ~~during~~in the ~~same~~investment ~~period of 2011~~portfolio.

AsTotal ofaverage ~~June 30,~~interest-bearing liabilities were $333.1 million in the third quarter of 2012, or $24.3 million lower than the ~~brokered~~third quarter ~~certificate~~of 2011 level of ~~deposit~~$357.4 ~~portfolio carried~~million. anA key driver of the decline was the decrease in average ~~coupon~~time ~~rate~~deposits. The average balance of 1time deposits for the third quarter of 2012 was $168.~~22%~~7 million compared to anthe third quarter of 2011 average balance ~~coupon~~of ~~rate~~$197.0 million, a decrease of $28.3 million. Interest expense for all interest-bearing liabilities amounted to $1.~~93%~~1 atmillion ~~June~~for the three months ended September 30, 2012 compared to $1.4 million for the three months ended September 30, 2011, or a decrease of $257 thousand. ~~When~~The ~~maturing~~average ~~wholesale~~cost ~~deposits~~of ~~mature~~interest-bearing ~~and~~liabilities ~~are~~for ~~replaced~~the third quarter of 2012 was 1.31% or 20 basis points lower than the third quarter of 2011 level of 1.51%. The lower interest rate environment allowed for competitive repricing of interest bearing demand accounts, ~~Bankshares~~money ismarket ~~able~~accounts, tosavings ~~secure~~accounts ~~new~~and ~~brokered~~title client based time deposits. atThe benefits of the repricing are seen in the lower ~~rates~~time deposit cost of 1.48% during the third quarter of 2012 compared to 1.77% during the same period of 2011.

~~Non-interest~~For ~~bearing~~the ~~demand~~three ~~deposits~~months ~~averaged~~ended ~~$93.5~~September 30, 2012, ~~million for~~ the ~~second~~brokered ~~quarter~~certificate of ~~2012,~~deposit ~~$2.5~~portfolio ~~million~~carried ~~more~~an ~~than~~average ~~the~~coupon ~~second~~rate ~~quarter~~ of ~~2011~~ ~~level~~1.24% compared to an average coupon rate of ~~$91~~1.071% ~~million~~at September 30, 2011. ~~This~~When ~~increase~~maturing iswholesale ~~due~~deposits tomature ~~the~~and ~~cyclical~~are ~~fluctuation~~replaced, inBankshares ~~the~~is ~~title~~able ~~and~~to secure ~~escrow~~new ~~customer~~brokered ~~business~~deposits at lower rates.

45Non-interest bearing demand deposits averaged $113.8 million for the third quarter of 2012, $24.7 million more than the third quarter of 2011 level of $89.1 million. This increase is due to the cyclical fluctuation in the title and escrow customer business and the growth in the title agency-related deposits, coupled with a strategic shift of funding from repurchase agreements into deposits.

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

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2012								2011
	Average			Income /		Yield /			Average			Income /		Yield /
	AverageBalance			Income /Expense		Yield /Rate 1			AverageBalance			Income /Expense		Yield /Rate 1
	Balance			Expense		Rate 1			Balance			Expense		Rate 1
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans (2)	$	~~297~~294,~~570~~498		$	812,~~272~~245		5.5755	%	$	~~322~~321,~~986~~981		$	913,~~100~~674		5.68	%
Trading securities		~~499~~424			1827		78.2351	%		1,~~283~~066			4557		7.0715	%
Investment securities		~~113~~108,~~473~~597			~~660~~888		1.1709	%		~~129~~125,~~970~~859			23,~~542~~365		3.9457	%
Federal funds sold		1513,~~065~~751			3972		0.5270	%		78,~~723~~641			2232		0.5750	%
Total interest earning assets		~~426~~417,~~607~~270			813,~~989~~232		4.2324	%		~~461~~457,~~962~~547			1117,~~709~~128		5.1100	%
Non-interest earning assets:
Cash and due from banks		2943,~~784~~409								21,~~099~~343
Premises and equipment		1,~~325~~276								1,~~592~~599
Other real estate owned (OREO)		43,~~084~~995								4,~~477~~367
Other assets		109,~~417~~576								1716,~~540~~548
Less: allowance for loan losses		(5,~~117~~132	)							(5,~~432~~507	)
Total non-interest earning assets		4053,~~493~~124								3938,~~276~~350
Total Assets	$	~~467~~470,~~100~~394							$	~~501~~495,~~238~~897
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	4349,~~722~~278		$	5786		0.2623	%	$	4241,~~242~~646		$	5883		0.2827	%
Money market deposit accounts		16,~~206~~690			6195		0.7576	%		24,~~849~~769			94139		0.7675	%
Savings accounts		4,~~210~~376			23		0.1009	%		34,~~332~~238			45		0.2416	%
Time deposits		~~186~~180,~~216~~343			12,~~441~~070		1.5553	%		~~199~~197,~~960~~999			12,~~968~~845		1.9892	%
Total interest-bearing deposits		250,~~354~~687			12,~~561~~254		1.2520	%		~~270~~268,~~383~~652			23,~~124~~072		1.5853	%
FHLB advances(3)		4544,~~219~~999			~~536~~803		2.38	%		41,~~132~~192			~~515~~776		2.52	%
Other borrowings		4844,~~312~~584			~~337~~476		1.4043	%		6359,~~572~~292			~~325~~472		1.0306	%
Total interest-bearing liabilities		~~343~~340,~~885~~270			23,~~434~~533		1.4239	%		~~375~~369,~~087~~136			24,~~964~~320		1.5956	%
Non-interest bearing liabilities:
Demand deposits		9098,~~085~~038								89,~~505~~369
Other liabilities		2,~~420~~540								2,~~544~~553
Total liabilities		~~436~~440,~~390~~848								~~467~~461,~~136~~058
Shareholders’ Equity		3029,~~710~~546								34,~~102~~839
Total Liabilities and Shareholders’ Equity	$	~~467~~470,~~100~~394							$	~~501~~495,~~238~~897
Interest Spread (4)							2.8185	%							3.5244	%
Net Interest Margin (5)				$	69,~~555~~699		3.0810	%				$	812,~~745~~808		3.8274	%

⁽¹⁾

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

(2) The Bank had average non-accrual loans of $11.04 million and $811.20 million for the first ~~six~~nine months of 2012 and 2011, respectively. The 2012 and 2011 interest income on non-accrual loans excluded from the loans above was $355 thousand and $311 thousand, respectively.

(3) The Bank had two FHLB advances during the periods presented: a $15.0 million floating rate advance accounted for on a cost basis and a $25.0 million par value fixed rate advance accounted for a fair value basis. The average fair value of the fixed rate FHLB advance for the first ~~six~~nine months of 2012 and 2011 was $ 29.13 million and $26.12 million, respectively. As of ~~June~~September 30, 2012, the fair value of the fixed rate FHLB advance was $2930.60 million.

⁽⁴⁾

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

⁽⁵⁾

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

4651

For the ~~six~~nine months ended ~~June~~September 30, 2012, average loan balances were $~~297~~294.65 million compared to $~~323~~322.0 million for the same period in 2011, a decrease of $2527.45 million. Interest income from loans was $812.32 million in the first ~~six~~nine months of 2012 compared to $913.17 million in the same period of 2011, with the average yield ~~decreasing~~ decreasing to 5.5755% from 5.68%. The lower average balance contributed $~~154~~1.1 thousand and lower rates contributed $~~674~~302 thousand to the $~~828~~1.4 ~~thousand~~million decrease in interest income on loans.

For the ~~six~~nine months ended ~~June~~September 30, 2012, Bankshares held one security in its trading portfolio with an average balance of $~~499~~ 424 thousand, compared to $1.31 million for the ~~six~~nine months ended ~~June~~September 30, 2011. The trading security interest income for the ~~six~~nine months ended ~~June~~September 30, 2012 was $1827 thousand compared to $4557 thousand for the ~~six~~nine months ended ~~June~~ September 30, ~~2012~~2011. The reduction in average trading securities reflects management’s business strategy to eliminate the trading securities portfolio as Bankshares repositions the balance sheet and led to the reduction in associated interest income. At ~~June~~September 30, 2012, the carrying value of the security was $~~300~~293 thousand.

Investment securities averaged $~~113~~108.56 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to $~~130~~125.09 million for the same period in 2011. Investment securities income was $~~660~~888 thousand for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to $23.5 4 million for the ~~six~~nine months ended ~~June~~September 30, 2011. The average tax equivalent yields on investment securities for the ~~six~~ nine months ended ~~June~~September 30, 2012 and 2011 were 1.1709% and 3.9457% respectively. The reduction in average investment securities reflects management’s targeted efforts to strategically restructure our balance sheet in anticipation of the merger during 2011 which led to shifts in the portfolio mix and reduction the investment portfolio’s balance. During the second quarter and continuing into the third quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities which impacted the yield on the portfolio. When repayments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield.

Short-term investments in federal funds sold contributed $3972 thousand to interest income in the ~~six~~nine month period ended ~~June~~September 30, 2012 compared to $2232 thousand in the ~~six~~nine month period ended ~~June~~ September 30, 2011.

The average balance of cash and due from banks was $2943.84 million and $21.13 million for the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 respectively.

Total average earning assets yielded 4.2324% for the ~~six~~nine months ended ~~June~~ September 30, 2012 or 8876 basis points lower than the yield of 5.1100% for the same period in 2011. Total interest income (on a fully tax equivalent basis) was $913.02 million for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to $1117.71 million for the ~~six~~ nine months ended ~~June~~ September 30, 2011.

Total average interest-bearing liabilities were $~~343~~340.93 million in the first ~~six~~nine months of 2012 or $3128.28 million less than the first ~~six~~nine months of 2011 level of $~~375~~369.1 million. The average balance of time deposits was $1317.7 million lower than the same period last year. For the ~~six~~nine months ended ~~June~~September 30, 2012, interest expense was $23.4 5 million compared to $34.03 million for the ~~six~~nine months ended ~~June~~September 30, 2011. The average cost of interest-bearing liabilities for the first six months of 2012 was 1.42% or 17 basis points lower than the 2011 level of 1.59%. Many of the larger wholesale deposits have matured and new brokered deposits were issued at lower interest rates.

4752

As liabilities offor ~~June 30,~~the first nine months of 2012, ~~the~~was ~~brokered~~1.39% ~~certificate~~or of17 ~~deposit~~basis ~~portfolio~~points ~~carried~~lower anthan ~~average coupon~~the ~~rate~~2011 level of 1.2256%. ~~compared~~Many toof anthe ~~average~~larger ~~coupon~~wholesale ~~rate~~deposits ofhave ~~1.72%~~matured and new brokered deposits were issued at ~~June 30,~~lower ~~2011~~interest rates.

~~Non-interest~~For ~~bearing~~the ~~demand~~nine ~~deposits averaged~~months ~~$90.1~~ended, ~~million~~September 30, ~~for~~2012, the ~~first~~brokered ~~six~~certificate ~~months~~ of ~~2012,~~deposit portfolio orcarried ~~$580~~an ~~thousand~~average ~~more~~coupon ~~than~~rate ~~the~~of ~~first~~1.48% ~~six~~compared ~~months~~to ofan ~~2011~~average ~~level~~coupon rate of ~~$89~~1.585% ~~million.~~at ~~These~~September 30, ~~balances are subject to seasonal changes~~2011.

Non-interest bearing demand deposits averaged $98.0 million for the first nine months of 2012, or $8.6 thousand more than the first nine months of 2011 level of $89.4 million. These balances are subject to seasonal changes.

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

	Volume and Rate Analysis
	Volume and Rate AnalysisNine Months Ended September 30,2012 compared to 2011
	Six Months Ended June 30,
	2012 compared to 2011
	Change Due To:
	(Decrease)			Volume			Rate
	(Dollars in thousands)
Interest Earning Assets:
Loans	$	(~~828~~1,429	)	$	(~~154~~1,127	)	$	(~~674~~302	)
Trading securities		(2730	)		(1944	)		(814	)
Investment securities		(12,~~882~~477	)		(~~165~~396	)		(12,~~717~~081	)
Federal funds sold		1740			2924			~~(12~~16	)
Total (decrease) in interest income		(23,~~720~~896	)		(~~309~~1,543	)		(2,~~411~~353	)
Interest-Bearing Liabilities:
Interest-bearing deposits		(~~563~~818	)		(82266	)		(~~481~~552	)
Borrowed funds		3331			158			32(27	)
Total (decrease) in interest expense		(~~530~~787	)		(81208	)		(~~449~~579	)
(Decrease) in net interest income	$	(23,~~190~~109	)	$	(~~228~~1,335	)	$	(1,~~962~~774	)

~~Non-interest~~For ~~Income~~the ~~(Other~~nine ~~Income).~~months ~~Non-interest~~ended, ~~income~~September 30, ~~amounted~~2012, due to aimprovement ~~negative~~in ~~$692 thousand~~the ~~during~~overall ~~the~~risk ~~three~~profile ~~months~~of ~~ended~~the loan ~~June 30,~~portfolio ~~2012,~~and a ~~decrease~~lower level of ~~$1.5~~total ~~million~~loans, ~~from~~the Company released reserves into income of $~~819~~223 thousand, ofand ~~non-interest~~did ~~income~~not ~~for~~recognize ~~the~~a ~~same~~provision ~~period~~expense offor ~~2011~~the period.

~~Fair~~Non-interest ~~value~~Income ~~adjustments~~(Other onIncome). ~~the~~Non-interest ~~FHLB~~income ~~advance~~amounted ~~and~~to ~~the~~a ~~trading~~loss ~~security~~of ~~recorded~~$153 ~~for~~thousand during the three months ended ~~June~~September 30, 2012, ~~resulted~~an inincrease ~~a net loss~~ of $~~772~~498 thousand, from ~~compared to~~ a ~~net~~ loss of $~~130~~651 thousand ~~for~~ ~~the same period in 2011, an increase~~ of ~~$642~~non-interest ~~thousand.~~income ~~The net loss of $772 thousand~~ for the ~~three~~same ~~months~~period ~~ended June 30, 2012 is primarily driven by a negative fair value adjustment~~ of ~~$672 thousand on the FHLB advance~~2011.

~~Non-interest~~Fair ~~Expense.~~value ~~During~~adjustments on the ~~three~~FHLB advance and ~~six~~the trading security recorded for the three months ended ~~June~~September 30, 2012, ~~Bankshares~~resulted ~~continued~~in a net loss of $401 thousand, compared to ~~make progress~~a ~~toward~~net ~~its~~loss ~~strategic~~of ~~goal~~$2.8 million for the same period in 2011, a decrease of ~~optimizing~~$2.4 ~~profitability~~million. The net loss of $170 thousand for the three months ended September 30, 2012 is primarily driven by ~~decreasing~~a ~~its~~negative ~~non-interest~~fair ~~expenses.~~value adjustment of $459 thousand on the FHLB advance, and gains of $171 thousand on the sale of investment securities

4853

Non-interest Expense. Non-interest expense for the three months ended ~~June~~ September 30, 2012, amounted to $3.75 million compared to $34.81 million for the same period in 2011, a decrease of $57600 thousand. The key components of non-interest expenses are salary and employee benefits, merger related expenses, occupancy expenses and professional fees. Salary and employee benefits expenses for the quarter ended ~~June~~September 30, 2012 were $~~1.2~~956 million, compared to the ~~second~~third quarter of 2011 level of $1.42 million, a decrease of $~~256~~241 thousand. Professional fees for the quarter ended ~~June~~September 30, 2012 were $~~608~~465 thousand, compared to the ~~second~~ third quarter of 2011 level of $~~473~~398 thousand, an increase of $~~135~~67 thousand, which is due to the use of contract employees in the Human Resources, Information Technology and Accounting departments. Merger expenses were $~~410~~248 thousand for the three months ended ~~June~~September 30, 2012, ~~with~~compared noto ~~such~~$619 ~~expense~~thousand for the same period in 2011. Occupancy expenses and equipment expenses collectively totaled $~~668~~ 702 thousand for the quarter ended ~~June~~September 30, 2012 compared to the 2011 level of $~~719~~741 thousand, a decrease of $5139 thousand.

For the nine ~~six~~ months ended ~~June~~September 30, 2012, non-interest expense was $710.38 million compared to $711.56 million for the 2011 period, a decrease of $~~189~~800 thousand. Salaries and employee benefits expenses decreased by $~~475~~716 ~~million~~thousand, occupancy and equipment expenses decreased by $5594 thousand, merger related expenses increased by $47 thousand, and professional fees increased by $~~282~~319 thousand. This increase in professional fees is due to the use of contract employees to fill open positions in the Human Resources, Information Technology, and Accounting departments. OREO expenses for the nine months ended excluding valuation allowance was $109 thousand and $77 thousand for the nine months ended September 30, 2012 and 2011 respectively. FDIC assessments decreased by $227 thousand, and there was a decrease of $382 thousand in other operating expenses. There were also merger related expenses of $666 thousand.

~~OREO~~Income ~~expense was~~Taxes. Bankshares recorded an income tax benefit of $95156 thousand and $51227 thousand related to the FHLB fair value adjustment for the ~~six~~three and nine months ended ~~June~~ September 30, 2012 and 2011 respectively. ~~FDIC~~This ~~assessments~~income ~~decreased~~tax bybenefit ~~$209 thousand, and there~~ was aan ~~minimal~~ increase of $88297 thousand inover ~~other~~the ~~operating~~nine ~~expenses.~~months ~~There~~ended, ~~were~~September 30, ~~merger~~2011 ~~related expenses~~and a decrease of $~~418~~333 thousand for three months ended September 30, 2011.

~~Income~~At ~~Taxes.~~December 31, 2011, Bankshares ~~recorded~~performed an ~~income~~analysis to determine if a valuation allowance for deferred tax ~~benefit~~assets was necessary. Its analysis reviewed various forms of ~~$71~~positive ~~thousand~~and ~~for~~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 ~~six~~potential ~~months~~realization ~~ended~~of ~~June~~net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was considered more likely than not, that Bankshares will not be able to realize all of its deferred tax assets. As of September 30, 2012., ~~This~~the ~~income~~net deferred tax ~~benefit~~asset was an$1.6 ~~increase~~million, ofcompared to $~~444~~1.5 ~~thousand~~million ~~over~~as ~~the~~of ~~same~~December 31, ~~period~~2011. The change in ~~2011~~the net asset is due to fair value changes relating to the FHLB advance.

At54 December 31, 2011, Bankshares performed an analysis to determine if a valuation allowance for deferred tax assets was necessary. Its analysis reviewed various forms of positive and negative evidence in determining whether a valuation allowance is necessary and if so to what degree a valuation allowance is warranted. The three year cumulative loss position of Bankshares is considered negative evidence when determining if a valuation allowance is necessary. Bankshares considered positive evidence such as previous earnings patterns, multiyear business projections and the potential realization of net operating loss (NOL) carry forwards within the prescribed time periods. In addition, Bankshares considered tax planning strategies that would impact the timing and extent of taxable income. Based on the analysis and the guidance in the relevant accounting literature, it was considered more likely than not, that Bankshares will not be able to realize all its deferred tax assets. As of June 30, 2012, the net deferred tax asset was $1.4 million, compared to $1.5 million as of December 31, 2011. The change in the net asset is due to changes relating to the FHLB advance and Available for sale securities.

Analysis of Financial Condition

Trading Security. At ~~June~~September 30, 2012 and December 31, 2011, the trading portfolio consisted of one PCMO ~~security~~ security with a fair value of $~~300~~293 thousand and $596 thousand respectively. The current effective portfolio yield is 5.43%.

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

ALLIANCE BANKSHARES CORPORATION

Consolidated Statistical Information

Trading Asset Summary

	Trading Security
	June 30,					December 31,
	September 30,2012					December 31,2011
	2012					2011
	FairValue		Yield			FairValue		Yield
	Fair					Fair
	Value		Yield			Value		Yield
	(Dollars in thousands)
PCMO (1)	$	~~300~~293		5.43	%	$	596		5.44	%
Totals	$	~~300~~293		5.43	%	$	596		5.44	%

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

~~Investment~~The ~~Securities~~instrument -is ~~Available~~paying ~~for~~as ~~Sale~~agreed.

~~Bankshares~~Investment ~~actively~~Securities ~~manages its portfolio duration and composition with changing market conditions and changes in balance sheet risk~~- management needs. Additionally, the securities are pledged as collateral for certain borrowing transactions and repurchase agreements. The total amount of the investment securities accounted for under availableAvailable-for-~~sale accounting was $103~~Sale.~~3 million~~ June 30, 2012 compared to $123.5 million at December 31, 2011. Targeted efforts to strategically restructure the balance sheet in anticipation of the merger with Eagle during 2011 led to shifts in the investment portfolio mix and reduced the investment securities portfolio’s balance at June 30, 2012.

OnBankshares ~~June 30,~~actively ~~2012, the~~manages ~~investment~~its portfolio ~~contained~~duration ~~callable~~and composition with changing market conditions and ~~non-callable~~changes Uin balance sheet risk management needs.S. ~~treasuries~~Additionally, ~~U.S.~~the ~~government~~securities ~~corporations~~are pledged as collateral for certain borrowing transactions and ~~agencies~~repurchase agreements. The total amount of the investment securities accounted for under available-for-sale accounting was $79.4 million September 30, U2012 compared to $123.S5 million ~~Treasury~~at ~~securities~~December 31, U2011.S. ~~government~~Targeted ~~collateralized~~efforts ~~mortgage~~to ~~obligations~~strategically ~~(CMOs),~~restructure ~~U.S.~~the ~~government~~balance ~~mortgage~~sheet ~~backed securities~~in ~~(MBS),~~2011 ~~PCMOs,~~led to shifts in the investment portfolio mix and ~~municipal~~reduced the investment securities portfolio balance at September 30, 2012.

On ~~June~~September 30, 2012, ~~U.S.~~the investment ~~treasuries~~portfolio contained callable and non-callable U.S. government corporations and agencies ~~were~~securities, ~~$23~~U.~~8 million or 23~~S.0% ofgovernment ~~the~~collateralized ~~portfolio,~~mortgage ~~PCMOs,~~obligations (CMOs), ~~and MBS were $70~~U.7S. ~~million,~~government ormortgage ~~68.4%~~backed ofsecurities ~~the~~(MBS), ~~portfolio~~PCMOs, and municipal securities ~~were $8~~.9 ~~million, or 8.6% of the portfolio.~~

~~The~~55 ~~yield on the investment securities portfolio as of June 30, 2012 was 2.28%. During the second quarter of 2012, the Bank earned $334 thousand on the investment securities portfolio~~

orOn anSeptember 30, ~~effective~~2012, ~~tax equivalent yield of 1~~U.~~24%~~S. ~~The~~corporations ~~investment~~and ~~securities~~agencies ~~portfolio~~were ~~contains~~$18.6 million ~~mortgage~~or ~~oriented~~23.4% of ~~products~~the ~~(CMO~~portfolio, ~~PCMO~~PCMOs, CMOs and MBS) ~~and~~were ~~SBA securities~~$51.9 ~~When prepayments on these instruments occur at a faster rate than anticipated~~million, ~~premium~~or ~~amortization increases which adversely impacts the portfolio yield~~65.4% ~~During~~of the ~~second quarter of 2012~~portfolio, ~~the~~and ~~Bank~~municipal ~~experienced~~securities ~~greater~~were ~~than expected prepayments on a variety of investment securities~~$8.9 ~~The~~million, U.or S11.2% ~~treasuries~~of ~~matured during~~ the ~~first quarter and were re-invested in higher yielding securities~~portfolio.

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

The yield on the investment securities portfolio as of September 30, 2012 was 2.53%. During the third quarter of 2012, the Bank earned $182 thousand on the investment securities portfolio or an effective tax equivalent yield of 0.73%. The investment securities portfolio contains mortgage oriented products (CMO, PCMO, and MBS) and SBA securities. Bankshares is experiencing lower yields on the portfolio in 2012 on a number of instruments. When prepayments on these instruments occur at a faster rate than anticipated, premium amortization increases which adversely impacts the portfolio yield. During the second quarter and continuing into the third quarter of 2012, the Bank experienced greater than expected prepayments on a variety of investment securities. The U. S. treasuries matured during the first nine months of 2012 and were re-invested in higher yielding securities.

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


	Investment Securities- Available-for-Sale
	September 30, 2012								December 31, 2011
	Fair Value		Yield			% of Total			Fair Value		Yield			% of Total
	(Dollars in thousands)

U.S. treasuries	$	—		—			—		$	71,115		0.01	%		57.6	%
U.S. government corporations and agencies		18,569		2.37	%		23.4	%		9,751		2.63	%		7.9	%
U.S. government agency CMOs		41,229		2.26	%		51.9	%		31,038		2.16	%		25.1	%
U.S. government agency MBS		9,768		2.14	%		12.3	%		7,698		2.01	%		6.2	%
PCMOs		932		2.87	%		1.2	%		950		2.82	%		0.8	%
Municipal securities		8,913		4.47	%		11.2	%		2,911		5.06	%		2.4	%

Total Investment Securities Available-for-Sale	$	79,411		2.53	%		100.0	%	$	123,463		1.02	%		100.0	%

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

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


	Contractual Maturities of Investment Securities September 30, 2012
	(Dollars in thousands)
	Within One Year					After One Year but Within Five Years					After Five Years but Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Total ^(4,5)
Available-For-Sale Securities
U.S. government corporations and agencies		—		0.00	%		—		0.00	%		—		0.00	%		18,262		2.36	%		18,262
U.S. government agency CMOs ⁽¹⁾		—		0.00	%		—		0.00	%		2,744		1.95	%		38,507		2.26	%		41,251
U.S. government agency MBS ⁽¹⁾		—		0.00	%		—		0.00	%		—		0.00	%		9,535		2.15	%		9,535
PCMOs⁽¹⁾		—		0.00	%		—		0.00	%		—		0.00	%		902		2.87	%		902
Municipal securities ⁽²⁾		—		0.00	%		—		0.00	%		3,771		3.30	%		4,961		4.79	%		8,732

	$	—		0.00	%	$	—		0.00	%	$	6,515		2.73	%	$	72,167		2.45	%	$	78,682

Total Available-For-Sale Securities⁽³⁾

(1)

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

(2)

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

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

(4) Total above is amortized cost and does not include unrealized ~~gain~~gains of $~~590~~729 thousand.

(5) The fair value of the contractual maturities listed in the total above amounts to $~~103~~79.4 million.

Restricted Securities.

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

	Restricted Stock
	June 30,		December 31,
	September 30,2012		December 31,2011
	2012		2011
	(Dollars in thousands)
Federal Reserve Bank Stock	$	1,201	$	1,201
FHLB stock		2,~~743~~565		3,365
CBB		206		206
CBB stock		206		206
Total Restricted Stock	$	43,~~150~~972	$	4,772

Loan Portfolio.

In its lending activities, Bankshares seeks to develop substantial relationships with clients whose business and individual banking needs will grow with the Bank. Bankshares has made significant efforts to be responsive to the lending needs in the markets served, while maintaining sound asset quality and credit practices. Bankshares grants credit to commercial business, commercial real estate, real estate construction, residential real estate and consumer borrowers in the normal course of business. The loan portfolio net of discounts and fees was $~~293~~288.50 million as of ~~June~~September 30, 2012, or $1318.49 million lower than the December 31, 2011 level of $306.9 million.

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

	June 30, 2012					December 31, 2011
	Loan Portfolio
	September 30, 2012					December 31, 2011
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Residential real estate	$	9892,~~219~~443		3332.1	%	$	101,248		33.0	%
Commercial real estate		~~126~~125,~~643~~602		43.6	%		137,610		4544.8	%
Construction/land		3841,~~436~~478		1314.4	%		39,176		1312.8	%
Commercial and industrial		2827,~~700~~076		109.5	%		26,820		98.7	%
Consumer - non real estate		1,~~473~~382		10.5	%		2,022		10.7	%
Total Loans	$	~~293~~287,~~471~~981		100	%	$	306,876		100	%

Substantially all loans are initially underwritten based on identifiable cash flows and supported by appropriate advance rates on collateral, which is independently valued. Commercial loans are generally secured by accounts receivable, equipment and business assets. Commercial real estate is secured by owner-occupied or non-owner occupied commercial properties of all types. Real estate construction loans are supported by projects which generally require an appropriate level of pre-sales or pre-leasing. Generally, all commercial and real estate loans have full recourse to the owners and/or sponsors. Residential real estate is secured by first or second trusts on both owner-occupied and investor-owned residential properties.

52As noted in the table above, loans secured by various types of real estate constitute a significant portion of total loans. Commercial real estate loans represent the largest dollar exposure. Substantially all of these loans are secured by properties in the Metropolitan Washington, D.C. area with the heaviest concentration in Northern Virginia and Fairfax County in particular. Risk is managed through diversification by sub-market, property type, and loan size. Risk is further managed by seeking investment property loans with multiple tenants and by emphasizing owner-occupied loans. The average loan size in this portfolio is $582 thousand as of September 30, 2012.

The table also shows a modest increase in the construction/land portion of the portfolio, which represented 14.4% of the portfolio at September 30, 2012 and 12.8% of the portfolio at December 31, 2011. The current levels of construction/land loans are a product of management’s efforts to moderate this type of lending in recent years. New originations in this

~~Commercial~~segment ~~real~~are ~~estate~~being isunderwritten ~~secured~~in bythe ~~owner-occupied~~context orof ~~non-owner~~current ~~occupied~~market ~~commercial~~conditions ~~properties~~and ofare ~~all~~particularly ~~types.~~focused ~~Real~~in ~~estate~~sub-markets ~~construction~~which ~~loans~~appear ~~are~~to ~~supported~~be bythe ~~projects~~strongest ~~which~~in ~~generally~~the ~~require~~region. Legacy anloans, ~~appropriate~~particularly ~~level~~in ofthe ~~pre-sales~~land orportion ~~pre-leasing.~~of ~~Generally~~this portfolio, ~~all~~have ~~commercial~~been ~~and~~largely ~~real~~converted ~~estate~~to amortizing loans ~~have~~with ~~full~~regular ~~recourse~~principal toand ~~the~~interest ~~owners~~payments. Bankshares ~~and/or~~expects ~~sponsors.~~to ~~Residential~~see ~~real~~further ~~estate~~reductions isin ~~secured~~its land exposure offset by ~~first~~potential orincreases ~~second~~in certain ~~trusts~~residential onconstruction ~~both~~activities ~~owner-occupied~~as ~~and~~market ~~investor-owned residential~~conditions ~~properties~~improve.

AsLoans ~~noted~~secured inby ~~the~~residential ~~table~~real ~~above~~estate have declined 8.7% since December 31, ~~loans~~2011, ~~secured~~with byreductions ~~various~~across ~~types~~most ofrelevant ~~real~~loan ~~estate~~classes ~~constitute~~to ainclude ~~significant portion~~both ofowner-occupied ~~total~~and ~~loans~~investment residential categories. ~~Commercial~~All ~~real~~loans ~~estate~~in ~~loans~~these categories represent ~~the~~loans ~~largest~~underwritten ~~dollar~~by ~~exposure. Substantially~~Bankshares, (Bankshares ~~all~~does ofnot ~~these~~purchase loans ~~are~~in ~~secured~~this byportfolio) ~~properties~~to customers with whom it has had direct contact in the ~~Metropolitan~~local ~~Washington,~~communities Dit serves.C. Bankshares ~~area~~believes ~~with~~that ~~the~~its ~~heaviest~~underwriting ~~concentration~~criteria inreflect ~~Northern~~current market conditions. The portfolio ~~Virginia~~of ~~and~~first ~~Fairfax~~mortgage ~~County~~loans inhad ~~particular.~~an ~~Risk~~average issize ~~managed~~per housing ~~through~~unit of ~~diversification~~$331 bythousand ~~sub-market~~as of September 30, 2012. Bankshares’ subordinate trust loans averaged $99 thousand per property ~~type~~as of September 30, ~~and~~2012. While Bankshares ~~loan~~recognizes ~~size~~that the Metropolitan Washington, D.C. ~~Risk~~residential isreal ~~further~~estate ~~managed~~market bycontinues ~~seeking~~to ~~investment~~be ~~property~~a ~~loans~~nascent ~~with~~recovery, ~~multiple~~Bankshares ~~tenants~~believes ~~and~~that byits ~~emphasizing~~current ~~owner~~underwriting standards, its emphasis on serving the sub-~~occupied loans. The~~markets ~~average~~it ~~loan~~knows, ~~size~~the granularity inof ~~this~~its portfolio, isand ~~$582~~the ~~thousand~~continued asreduction of ~~June 30,~~its ~~2012~~subordinate trust portfolio represent the appropriate risk management strategies for this portfolio.

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

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


	As of September 30, 2012
	One Year or Less		After One Year Through Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial and industrial	$	18,483	$	7,795	$	799	$	27,076
Construction/land		23,138		14,562		3,778		41,478


Total	$	41,620	$	22,357	$	4,577	$	68,554


Loans with:
Fixed rates	$	62,448	$	77,093	$	70,515	$	210,056
Variable rates		31,814		41,665		4,446		77,925

Total	$	94,262	$	118,758	$	74,961	$	287,981

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

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

Asset Quality

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

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

the existing loans, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that the borrower will maintain this type of payment history. Routinely, acceptable personal guarantors support these loans.

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

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

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

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

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

~~The~~60 ~~table below represents Bankshares’ loan portfolio by risk rating, classification, and loan portfolio segment as of June 30, 2012.~~

	Credit Quality Asset By Class As of June 30, 2012
	(Dollars in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		SpecialMention		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

The table below represents Bankshares’ loan portfolio by risk rating, classification, and loan portfolio segment as of September 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	$	24,083	$	787	$	205	$	2,001	$	—	$	—	$	27,076
Commercial real estate
Owner occupied		54,391		871		1,982		3,801		—		—		61,045
Non-owner occupied		56,289		4,736		1,731		1,801		—		—		64,557
Construction/land
Residential construction		16,037		792		—		—		559		—		17,388
Other construction & land		14,823		524		165		8,242		336		—		24,090
Residential real estate
Equity lines		27,031		321		99		150		—		—		27,601
Single family		51,801		2,729		2,684		2,235		—		—		59,449
Multifamily		5,393		—		—		—		—		—		5,393
Consumer - non real estate		1,181		8		181		12		—		—		1,382

Totals	$	251,029	$	10,768	$	7,047	$	18,242	$	895	$	—	$	287,981

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

When payments are 90 days or more in arrears or when Bankshares determines that it is no longer prudent to recognize current interest income on a loan, Bankshares classifies the loan as non-accrual. The decrease in non-accrual loans from $13.63 million at December 2011 to $10.59 million at ~~June~~ September 30, 2012 is attributed to the following factors: Six non-accrual/impaired loans totaling $838 thousand secured by residential real estate were charged off during the period, one loan for $963 thousand was secured by a residential property in Fairfax County, Virginia which was foreclosed into Bankshares’ OREO; and a commercial loan totaling $899 thousand secured by land in Fairfax County, Virginia was paid in full. Four other non-accrual loans continue to receive ongoing payments which are applied to reduce Bankshares’ carrying value for these loans.

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~~loans~~The ~~totaling~~following ~~$838~~table ~~thousand~~sets ~~secured~~forth ~~by residential real estate were charged off during~~ the ~~period,~~aging ~~one loan for $962 thousand was secured by a residential property in Fairfax County, Virginia which was foreclosed into Bankshares’ OREO;~~ and ~~a commercial loan totaling $899 thousand secured by land in Fairfax County, Virginia was paid in full. Four other~~ non-accrual loans ~~continue~~by toclass, ~~receive~~as ~~ongoing payments which are applied to~~of ~~reduce~~September 30, ~~Bankshares’~~2012: ~~carrying value for these loans.~~

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


	Aging and Non-accrual Loans By Class As of September 30, 2012
	(Dollars in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current ¹		90-days Past Due and Still Accruing		Nonaccrual Loans

Commercial and industrial	$	1,518	$	28	$	269	$	1,815	$	25,261	$	792	$	1,547
Commercial real estate
Owner occupied		355		99		2,475		2,929		58,116		—		2,475
Non-owner occupied		—		1,801		—		1,801		62,756		—		—
Construction/land
Residential construction		—		—		1,351		1,351		16,037		—		559
Other construction & land		165		983		4,866		6,014		18,076		—		5,849
Residential real estate
Equity lines		285		292		150		727		26,874		—		150
Single family		623		1,315		261		2,199		57,250		—		261
Multifamily		—		—		—		—		5,393		—		—
Consumer -non real estate		—		—		12		12		1,370		—		12

Total loans	$	2,946	$	4,518	$	9,384	$	16,848	$	271,133	$	792	$	10,853

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

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

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

Allowance for Loan Losses

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

The allowance for loan losses was $54.19 million at ~~June~~September 30, 2012, or 1.7269 % of loans outstanding, compared to $5.4 million or 1.76% of loans outstanding, at December 31, 2011. Bankshares has allocated $1.67 million at ~~June~~September 30, 2012 compared to $2.3 million at December 31, 2011 for specific non-performing loans. For the first ~~six~~nine months of 2012, Bankshares had net charge-offs of $~~788~~755 thousand compared to net charge-offs of $~~746~~1.3 ~~thousand~~million in the same period of 2011.

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

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

~~The~~Over ~~allowance~~the ~~for~~past ~~loan~~several ~~losses~~quarters, ~~model~~we ishave experienced ~~reviewed~~a ~~and~~reduction ~~evaluated~~in ~~each~~our ~~quarter~~loan byportfolio ~~Bankshares management to insure its adequacy~~ and ~~applicability~~ in ~~relation to Bankshares’ past and future experience with~~ the ~~loan~~losses ~~portfolio,~~we ~~from~~have apreviously ~~credit quality perspective~~experienced. ~~Due~~ toNet ~~the~~loans ~~extended~~outstanding ~~nature~~decreased of$5.5 ~~the~~million ~~current~~from ~~economic cycle~~June 30, it2012 ~~was~~to ~~determined for the quarter ended June~~September 30, 2012, ~~that~~due ~~the~~to ~~Loss History component of~~ the ~~model~~payoffs ~~[one~~from ofseveral ~~seven~~large ~~Factors considered~~commercial borrowers, bycoupled ~~Loan~~with ~~Class,~~a reduction in ~~determining~~activities ~~the~~from ~~appropriate~~our ~~value~~residential ~~for~~real ~~ASC~~estate ~~450-10-05,~~investors. ~~Contingencies~~Due ~~which~~to ~~require~~these ~~that~~events ~~losses~~coupled bewith ~~accrued~~the ~~when~~improvement ~~they~~in ~~are~~our ~~probable~~risk profile of ~~occurring~~the ~~and estimable,~~loan ~~also~~portfolio ~~referred~~reflected toin as the ~~general allowance] for loans secured by junior liens on owner~~ASC450-~~occupied~~10-05 ~~residential~~portion ~~properties~~of ~~should~~the beAllowance ~~extended~~for ~~from twelve (12) trailing quarters to twenty (20) trailing quarters. This change would~~Loan ~~more~~Losses ~~accurately~~model, ~~reflect: (a) the past~~ and ~~recurring~~lower ~~loss~~level ~~experience~~of inloans, ~~these~~Alliance ~~specific~~released ~~loan~~$222 ~~classes,~~thousand ~~(b) the length~~ of ~~the~~previous ~~current~~recorded ~~economic~~reserves ~~cycle~~into ~~and~~income ~~its impact on these borrowers~~ and, ~~(c) the~~did ~~payment~~not ~~performance~~recognized wea ~~can~~provision ~~expect~~expense ~~from these~~during ~~specific~~the ~~loan~~quarter ~~classes~~ended ~~until~~September 30, an2012. ~~economic~~

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

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

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

	Six MonthsEnded June 30,2012			Twelve MonthsEnded December 31,2011			Six MonthsEnded June 30,2011
	Nine MonthsEnded September 30,2012			Twelve MonthsEnded December 31,2011			Nine MonthsEnded September 30,2011
	(Dollars in thousands)
Balance, beginning of period	$	5,393		$	5,281		$	5,281
Provision for loan losses		~~450~~228			1,549			1,~~075~~205
Chargeoffs:
Commercial and industrial		—			(10	)		(10	)
Construction/land		—			(404	)		(404	)
Residential real estate		(~~821~~894	)		(1,044	)		(~~414~~898	)
Commercial real estate		—			(173	)		(~~158~~173	)
Consumer - non real estate		—			(71	)		—(71	)
Total chargeoffs		(~~821~~894	)		(1,702	)		(~~986~~1,556	)
Recoveries:
Commercial and industrial		—			116			116
Construction/land		—			—			—
Residential real estate		33139			134			~~114~~118
Commercial real estate		—			9			89
Consumer - non real estate		—			6			25
Total recoveries		33139			265			~~240~~248
Net (chargeoffs)		(~~788~~755	)		(1,437	)		(~~746~~1,308	)
Balance, end of period	$	54,~~055~~866		$	5,393		$	5,~~610~~178
Allowance for loan losses to total loans		1.7269	%		1.76	%		1.7562	%
Allowance for loan losses to nonaccrual loans		0.4845X	x		0.4141X	X		0.5349X	X
Allowance for loan losses to non-performing assets		3230.6863	%		29.58	%		350.0834X	%
Non-performing assets to total assets		3.0504	%		3.55	%		2.9885X	%
Net chargeoffs to average loans		0.2826	%		0.45	%		0.4654	%

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

	Allowance for Loan LossesAs of June 30, 2012
	Allowance for Loan Losses
	As of September 30, 2012
	(Dollars in thousands)
	Commercialand Industrial			CommercialReal Estate			ConstructionLand		ResidentialReal Estate			Consumer			Total
Allowance for Loan Losses:
Beginning Balance	$	210		$	1,508		$	1,808	$	1,826		$	41		$	5,393
Charge-offs		—			—			—		(~~821~~894	)		—		$	(~~821~~894	)
Recoveries		—			—			—		33139			—		$	33139
Provision		(56	)		(53	)		~~515~~68		57282			(13	)	$	~~450~~228
Ending Balance:	$	154		$	1,455		$	21,~~323~~876	$	1,~~095~~353		$	28		$	54,~~055~~866
Individually evaluated for impairment	$	48109		$	17—		$	1,~~486~~520	$	9878		$	—4		$	1,~~649~~711
Collectively evaluated for impairment	$	~~106~~45		$	1,~~438~~455		$	~~837~~356	$	~~997~~1,275		$	2824		$	3,~~406~~155
Loans:
Ending Balance:	$	2827,~~700~~076		$	~~126~~125,~~643~~602		$	3841,~~436~~478	$	9892,~~219~~443		$	1,~~473~~382		$	~~293~~287,~~471~~981
Individually evaluated for impairment	$	1,~~196~~546		$	2,~~492~~475		$	6,~~433~~409	$	~~414~~971		$	—12		$	1011,~~535~~413
Collectively evaluated for impairment	$	2725,~~504~~530		$	~~124~~123,~~151~~127		$	3235,~~003~~069	$	9791,~~805~~472		$	1,~~473~~370		$	~~282~~276,~~936~~568

Non-performing Assets

~~Impaired~~Non-accrual Loans. ~~(Loans~~A loan may be placed on non-accrual status when the loan is specifically determined to be impaired or when principal or interest is delinquent 90 days or more. Bankshares closely monitors individual loans, and relationship officers are charged with working with customers to resolve potential credit issues in a ~~Specific~~timely ~~Allowance~~manner ~~Allocation)~~with minimum exposure to Bankshares. AsBankshares maintains a policy of ~~June 30~~adding an appropriate amount to the allowance for loan losses to ensure an adequate reserve based on the portfolio composition, ~~2012~~specific credit extended by the Bank, ~~there~~general ~~were~~economic noconditions ~~loans~~and ~~with~~other ~~impairment~~factors ~~allocations~~and ~~that~~external ~~were~~circumstances ~~not~~identified ~~also~~during the process of estimating probable losses in ~~non-accrual~~the ~~status~~Company’s loan portfolio.

~~Non-accrual~~On ~~Loans.~~September 30, A2012, ~~loan~~there ~~may~~was be$10.9 ~~placed~~million in loans on non-accrual status ~~when~~compared ~~the loan is specifically determined~~ to ~~be impaired~~$13.3 ormillion ~~when~~at ~~principal~~December 31, or2011. ~~interest~~The is$10.9 ~~delinquent~~million 90non-accrual ~~days~~loan orbalance ~~more.~~consists ~~Bankshares~~mostly ~~closely~~of ~~monitors individual~~ loans, ~~and~~secured ~~relationship~~by ~~officers~~residential ~~are~~and ~~charged~~commercial ~~with~~real ~~working~~estate ~~with customers to resolve potential credit issues~~ in athe ~~timely~~Northern ~~manner~~Virginia ~~with minimum exposure to Bankshares~~area. ~~Bankshares~~The ~~maintains~~specific ~~a policy of adding an appropriate amount to the~~ allowance for ~~loan~~impaired ~~losses~~loans toas ~~ensure~~of anSeptember 30, ~~adequate~~2012 ~~reserve~~is ~~based~~$1.7 onmillion. ~~the portfolio composition,~~

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~~specific~~Non-accruals ~~credit~~for ~~extended~~the bynine ~~the~~months ~~Bank~~ended September 30, ~~general~~2012 ~~economic~~were ~~conditions~~$10.9 ~~and~~million, ~~other~~compared to ~~factors~~$10.7 ~~and~~for ~~external~~the ~~circumstances~~same ~~identified~~period ~~during~~in ~~the~~2011. ~~process~~Non-accrual ofloans ~~estimating~~continue ~~probable~~to ~~losses~~represent transactions originated in ~~the~~2006 ~~Company’s loan~~and ~~portfolio~~prior.

OnTotal ~~June~~Non-performing Assets. As of September 30, 2012, ~~there~~Bankshares ~~was~~had $1015.59 million inof ~~loans~~non-performing assets on ~~non-accrual~~the balance ~~status~~sheet compared to $1318.30 million at as of December 31, 2011., ~~The~~a decrease of $102.51 million. ~~non-accrual~~This ~~loan~~decrease ~~balance~~is ~~consists~~primarily ~~mostly~~comprised of the charge off of six loans, secured by residential real estate, totaling $838 thousand; the foreclosure and purchase into OREO of a residential property valued at $963 thousand; the full repayment of a commercial ~~real~~loan ~~estate~~secured inby land with a prior balance of $899 thousand; the ~~Northern~~movement ~~Virginia~~back ~~area~~to accrual status of two loans secured by land totaling $325 thousand. ~~The~~Since ~~specific~~December 31, ~~allowance~~2011, ~~for~~six loans totaling $1.1 million have been added to the non-accrual and impaired loan list. Of these six loans, 95% are secured by residential real estate. The ratio of non-performing assets to total assets decreased to 3.04% as of ~~June~~September 30, 2012 isfrom $13.~~6 million~~55% as of December 31, 2011, a 51 basis points decrease.

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

Total Non-performing Assets. As of June 30, 2012, Bankshares had $15.5 million of non-performing assets on the balance sheet compared to $18.0 million as of December 31, 2011,

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