10-Q 1 a32914e10vq.htm FORM 10-Q Alliance Bancshares California
 

 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-33455
ALLIANCE BANCSHARES CALIFORNIA
(Exact name of Registrant as specified in its charter)
     
California   91-2124567
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification Number)
     
100 Corporate Pointe    
Culver City, California   90230
(Address of principal executive offices)   (Zip Code)
(310) 410-9281
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed, since last year)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES þ       NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
6,166,879 shares of Common Stock as of July 31, 2007
 
 

 


 

ALLIANCE BANCSHARES CALIFORNIA
QUARTERLY REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED JUNE 30, 2007
TABLE OF CONTENTS
             
        Page No.  
       
 
           
  Financial Statements        
 
           
 
  Consolidated Statements of Financial Condition at June 30, 2007 and December 31, 2006     3  
 
           
 
  Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006     4  
 
           
 
  Consolidated Statements of Cash Flows for the three and six months ended June 30, 2007 and 2006     5  
 
           
 
  Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2007 and 2006     6  
 
           
 
  Notes to Consolidated Financial Statements     7  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     31  
 
           
  Controls and Procedures     32  
 
           
       
 
           
  Legal Proceedings     33  
 
           
  Risk Factors     33  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     33  
 
           
  Defaults Upon Senior Securities     33  
 
           
  Submission of Matters to a Vote of Security Holders     33  
 
           
  Other Information     33  
 
           
  Exhibits     34  
 
           
Signatures     35  

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                 
    June 30,     December 31,  
    2007     2006  
    (Unaudited)          
    (Dollars in thousands)  
Assets
               
Cash and due from banks
  $ 18,697     $ 18,732  
Federal funds sold
    17,155       28,810  
 
           
Total cash and cash equivalents
    35,852       47,542  
Time deposits with other financial institutions
    1,207       2,556  
Securities held to maturity, fair market value $100,190 at June 30, 2007; $104,153 at December 31, 2006
    100,617       104,627  
Loans held for sale
    51,589       305  
Loans, net of the allowance for loan losses of $11,242 at June 30, 2007; $9,195 at December 31, 2006
    775,069       700,189  
Equipment and leasehold improvements, net
    4,635       4,286  
Accrued interest receivable and other assets
    16,314       16,257  
 
           
Total assets
  $ 985,283     $ 875,762  
 
           
 
               
Liabilities, Redeemable Preferred Stock and Shareholders’ Equity
               
Deposits:
               
Non-interest bearing demand
  $ 153,878     $ 157,265  
Interest bearing:
               
Demand
    17,803       12,817  
Savings and money market
    205,503       183,692  
Certificates of deposit
    425,484       363,094  
 
           
Total deposits
    802,668       716,868  
Accrued interest payable and other liabilities
    5,623       7,774  
Securities sold under agreements to repurchase
    22,099       20,000  
FHLB advances
    70,000       50,000  
Junior subordinated debentures
    27,837       27,837  
 
           
Total liabilities
    928,227       822,479  
 
           
Commitments and contingencies
           
Redeemable Preferred Stock:
               
Serial preferred stock, no par value:
               
Authorized – 20,000,000 shares
               
7% Series A Non-Cumulative Convertible Non-Voting:
               
Authorized and outstanding – 733,050 shares at June 30, 2007 and December 31, 2006
    7,697       7,697  
6.82% Series B Non-Cumulative Convertible Non-Voting:
               
Authorized and outstanding – 667,096 shares at June 30, 2007 and December 31, 2006
    11,319       11,319  
 
           
Total redeemable preferred stock
    19,016       19,016  
 
           
Shareholders’ Equity:
               
Common stock, no par value:
               
Authorized - 20,000,000 shares Outstanding – 6,166,879 shares at June 30, 2007 and 6,151,679 shares at December 31, 2006
    6,679       6,600  
Additional Paid in Capital
    818       502  
Undivided profits
    30,543       27,165  
 
           
Total shareholders’ equity
    38,040       34,267  
 
           
Total liabilities, redeemable preferred stock and shareholders’ equity
  $ 985,283     $ 875,762  
 
           
The accompanying notes are an integral part of these statements.

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Part I. Item 1. (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2007     2006     2007     2006  
    (Dollars in thousands except earnings per share)  
Interest Income:
                               
Interest and fees on loans
  $ 18,240     $ 14,192     $ 35,745     $ 27,020  
Interest on time deposits with other financial institutions
    20       57       39       131  
Interest on securities held to maturity
    1,246       1,081       2,489       1,905  
Interest on federal funds sold
    759       406       1,167       642  
 
                       
Total interest income
    20,265       15,736       39,440       29,698  
 
                       
 
                               
Interest Expense:
                               
Interest on deposits
    7,642       5,382       14,629       9,825  
Interest on FHLB advances
    679       453       1,357       815  
Interest on securities sold under repurchase agreements
    253       344       473       626  
Interest on junior subordinated debentures
    512       378       1,020       678  
 
                       
Total interest expense
    9,086       6,557       17,479       11,944  
 
                       
Net interest income
    11,179       9,179       21,961       17,754  
Provision for Loan Losses
    1,074       973       2,139       1,723  
 
                       
Net interest income after provision for loan losses
    10,105       8,206       19,822       16,031  
 
                       
 
                               
Non-Interest Income
    774       702       1,395       1,340  
 
                       
Non-Interest Expense:
                               
Salaries and related benefits
    4,239       3,046       8,412       6,045  
Occupancy and equipment expenses
    935       696       1,880       1,405  
Professional fees
    419       443       707       720  
Data processing
    220       238       431       450  
Other operating expense
    1,473       1,272       2,886       2,527  
 
                       
Total non-interest expense
    7,286       5,695       14,316       11,147  
 
                       
Earnings Before Income Tax Expense
    3,593       3,213       6,901       6,224  
Income tax expense
    1,428       1,270       2,867       2,489  
 
                       
Net Earnings
  $ 2,165     $ 1,943     $ 4,034     $ 3,735  
 
                       
 
                               
Earnings per Common Share:
                               
Basic earnings per share
  $ 0.30     $ 0.27     $ 0.55     $ 0.51  
Diluted earnings per share
  $ 0.28     $ 0.25     $ 0.53     $ 0.49  
The accompanying notes are an integral part of these statements.

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Part I. Item 1. (continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended June 30,  
    2007     2006  
    (Dollars in thousands)  
Cash Flows from Operating Activities:
               
Net earnings
  $ 4,034     $ 3,735  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
               
Net amortization of discounts and premiums on securities held to maturity
    60       131  
Depreciation and amortization
    692       551  
Provision for loan losses
    2,139       1,723  
Compensation expense on stock options
    207       164  
Excess tax benefit from share based payment arrangements
    (109 )     (36 )
Net gains on sales of loans held for sale
    (236 )     (188 )
Proceeds from sales of loans held for sale
    8,168       13,433  
Originations of loans held for sale
    (6,504 )     (13,200 )
(Increase) decrease in accrued interest receivable and other assets
    443       (2,812 )
(Increase) decrease in accrued interest payable and other liabilities
    (2,151 )     2,480  
 
           
Net cash provided by (used in) operating activities
    6,743       5,981  
 
           
 
               
Cash Flows from Investing Activities:
               
Net (increase) decrease in:
               
Time deposits with other financial institutions
    1,349       4,258  
Loans
    (129,731 )     (77,224 )
Purchase of equipment and leasehold improvements
    (1,041 )     (617 )
Redemption of FHLB stock
    237       643  
Purchase of FHLB stock
    (628 )      
Purchase of securities held to maturity
    (33,208 )     (31,798 )
Proceeds from maturities of securities held to maturity
    37,158       8,912  
Investment in statutory trust
          (310 )
 
           
Net cash used in investing activities
    (125,864 )     (96,136 )
 
           
 
               
Cash Flows from Financing Activities:
               
Net increase (decrease) in:
               
Demand deposits
    (3,387 )     15,095  
Interest bearing demand deposits
    4,986       1,815  
Savings and money market deposits
    21,811       30,369  
Certificates of deposit
    62,390       68,695  
Excess tax benefit from share based payment arrangements
    109       36  
Proceeds from issuance of junior subordinated debentures
          10,310  
Increase in FHLB Advances
    20,000        
Increase in securities sold under agreements to repurchase
    2,099       9,858  
Proceeds from stock options exercised
    79       8  
Dividends paid on preferred stock
    (656 )     (656 )
 
           
Net cash provided by financing activities
    107,431       135,530  
 
           
Net Increase (decrease) in Cash and Cash Equivalents
    (11,690 )     45,375  
Cash and Cash Equivalents, Beginning of Period
    47,542       30,149  
 
           
Cash and Cash Equivalents, End of Period
  $ 35,852     $ 75,524  
 
           
 
               
Supplemental Schedule of Noncash Investing and Financing Activities
               
Transfer from loans to loans held for sale
  $ 45,150        
 
               
Supplemental Disclosure of Cash Flow Information
               
Cash paid during the period for:
               
Interest
  $ 17,103     $ 11,515  
Income taxes
    3,117       2,141  
The accompanying notes are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
For the Six months Ended June 30, 2007 and 2006
                                         
    Common Stock                    
                    Additional              
    Number of             Paid In     Undivided        
    Shares     Amount     Capital     Profits     Total  
    (Dollars and shares in thousands)  
Balance, December 31, 2005
    6,066     $ 6,407           $ 20,470     $ 26,877  
Stock options exercised
    2       8                   8  
Dividends paid on preferred stock
                      (656 )     (656 )
Compensation expense on stock options
                      164       164  
Net earnings
                      3,735       3,735  
 
                             
Balance, June 30, 2006
    6,068     $ 6,415           $ 23,713     $ 30,128  
 
                             
                                         
    Common Stock                    
                    Additional              
    Number of             Paid In     Undivided        
    Shares     Amount     Capital     Profits     Total  
    (Dollars and shares in thousands)  
Balance, December 31, 2006
    6,152     $ 6,600     $ 502     $ 27,165     $ 34,267  
Stock options exercised
    15       79                     79  
Dividends paid on preferred stock
                        (656 )     (656 )
Tax benefit on non-qualified stock options
                109             109  
Compensation expense on stock options
                207             207  
Net earnings
                      4,034       4,034  
 
                             
Balance, June 30, 2007
    6,167     $ 6,679     $ 818     $ 30,543     $ 38,040  
 
                             

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Part I. Item 1. (continued)
ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
1. Nature of Business and Significant Accounting Policies
     Organization
     The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and changes in cash flows in conformity with accounting principles generally accepted in the United States of America. However, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of the management, are necessary for a fair presentation of the results for the interim periods presented. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a basis consistent with, and should be read in conjunction with, the Company’s audited financial statements as of and for the year ended December 31, 2006 and the notes thereto included in the Company’s annual Form 10-K for the year ended December 31, 2006.
     The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2007.
     The consolidated financial statements include the accounts of Alliance Bancshares California (“Bancshares”), its wholly owned subsidiary Alliance Bank (the “Bank”) and Lexib Realcorp, an inactive wholly owned subsidiary of the Bank. Bancshares is a bank holding company which was incorporated in February 2000 in the State of California. The Bank is a California-chartered bank that commenced operations in 1980. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation up to the maximum amount and under the terms allowed by federal regulations. References in these Notes to the “Company” refer to Bancshares and its consolidated subsidiaries. Bancshares has three other wholly owned subsidiaries, Alliance Bancshares California Capital Trust I, Alliance Bancshares California Capital Trust II and Alliance Bancshares California Capital Trust III (the “Trusts”), which it formed in 2002, 2005 and 2006, respectively, to issue trust preferred securities. FIN 46 and FASB interpretation No. 46R do not allow the consolidation of the Trusts into the Company’s consolidated financial statements. As a result, the accompanying consolidated statements of financial condition include the investment in the Trusts of $837,000 in other assets.
     Use of Estimates
     The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
     Income Taxes
     Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
     The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, as of January 1, 2007. The Company has two tax jurisdictions: The U.S. Government and the State of California. As of January 1, the Company has no unrecognized tax benefits. There are no accrued interest and penalties as of January 1, 2007. The total amount of unrecognized tax benefits is not expected to significantly increase within the next twelve months. The Company still has the tax years of 2001 through 2006 subject to examination by the Internal Revenue

- 7 -


 

Service and 2002 through 2006 by the Franchise Tax Board of the State of California. The Company will classify any interest required to be paid on an underpayment of income taxes as interest expense. Any penalties assessed by a taxing authority will be classified as other expense.
Equity Compensation Plans
     The Company has two stock-based equity compensation plans, which are described more fully in Note 4.
     Prior to January 1, 2006, the Company accounted for stock-based awards to employees and directors using the intrinsic value method, in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation expense was recognized in the consolidated financial statements for employee and director stock based awards for the periods prior to January 1, 2006 as all awards (consisting only of stock options) granted under the Plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123-R, Share-Based Payment (“SFAS 123-R”), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the six months ended June 30, 2007 and 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006. Results for prior periods have not been restated.
     Prior to the adoption of SFAS 123-R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123-R requires the cash flows related to the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The Company had excess tax benefits of $109,000 resulting from exercise of non-qualified stock options or from disqualifying dispositions of shares acquired upon exercise of incentive stock options for the six months ended June 30, 2007.
     The following table summarizes the stock option activity under the plans for the six months ended June 30, 2007:
                                 
                    Weighted Average    
            Weighted Average   Remaining   Aggregate Intrinsic
    Shares   Exercise Price   Contractual Life   Value
    (Dollars in thousands except per share amounts)
2007
                               
Outstanding at December 31, 2006
    425,000     $ 9.72                  
Granted
    97,000       16.67                  
Exercised
    15,200       5.24                  
Forfeited
    8,200       9.69                  
 
                               
Outstanding at June 30, 2007
    498,600       11.21       6.97     $ 2,640  
 
                               
Vested or expected to vest at June 30, 2007
    479,000       9.69       6.28       2,585  
 
                               
Options exercisable at June 30, 2007
    180,400     $ 6.79       5.10     $ 1,743  
 
                               
The total intrinsic value of options exercised during the six months ended June 30, 2007 and 2006 was $182,300 and $33,300, respectively.

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2. Allowance for Loan Losses
     The following table presents an analysis of changes in the allowance for loan losses during the periods indicated:
CHANGES IN ALLOWANCES FOR LOAN LOSSES
                 
    Six Months Ended June 30,  
    2007     2006  
    (Dollars in thousands)  
Balance at beginning of period
  $ 9,195     $ 6,051  
Charge-offs
    (282 )     (1,229 )
Recoveries
    128       357  
 
           
Net charge-offs
    (154 )     (872 )
Additional provisions
    2,139       1,723  
Other adjustments
    62       23  
 
           
Balance at end of period
  $ 11,242     $ 6,925  
 
           
3. Earnings per Share
     Basic and diluted earnings per share for the periods indicated are computed as follows:
                         
                    Per Share  
Three Months Ended June 30, 2007   Net Earnings     Shares     Amount  
    (Dollars in thousands)                  
Basic earnings per share:
                       
Net earnings
  $ 2,165                  
Cash dividends on preferred stock
    (328 )                
 
                     
Net earnings available to common shareholders
    1,837       6,166,538     $ 0.30  
Preferred stock dividend
    328                  
Effect of exercise of options and warrants
          68,923          
Effect of conversion of Series A preferred stock
          733,050          
Effect of conversion of Series B preferred stock
          667,096          
 
                   
Diluted earnings per share:
                       
Net earnings available to common shareholders
  $ 2,165       7,635,607     $ 0.28  
 
                   
                         
                    Per Share  
Three Months Ended June 30, 2006   Net Earnings     Shares     Amount  
    (Dollars in thousands)                  
Basic earnings per share:
                       
Net earnings
  $ 1,943                  
Cash dividends on preferred stock
    (328 )                
 
                     
Net earnings available to common shareholders
    1,615       6,066,781     $ 0.27  
Preferred stock dividend
    328                  
Effect of exercise of options and warrants
          162,569          
Effect of conversion of Series A preferred stock
          733,050          
Effect of conversion of Series B preferred stock
          667,096          
 
                   
Diluted earnings per share:
                       
Net earnings available to common shareholders
  $ 1,943       7,629,496     $ 0.25  
 
                   
     The diluted EPS computation does not include the anti-dilutive effect of options to purchase 17,500 shares and 58,500 shares for the quarters ended June 30, 2007 and 2006, respectively.

- 9 -


 

                         
                    Per Share  
Six Months Ended June 30, 2007   Net Earnings     Shares     Amount  
    (Dollars in thousands)                  
Basic earnings per share:
                       
Net earnings
  $ 4,034                  
Cash dividends on preferred stock
    (656 )                
 
                     
Net earnings available to common shareholders
    3,378       6,160,664     $ 0.55  
Preferred stock dividend
    656                  
Effect of exercise of options and warrants
          70,080          
Effect of conversion of Series A preferred stock
          733,050          
Effect of conversion of Series B preferred stock
          667,096          
 
                   
Diluted earnings per share:
                     
Net earnings available to common shareholders
  $ 4,034       7,630,890     $ 0.53  
 
                   
                         
                    Per Share  
Six Months Ended June 30, 2006   Net Earnings     Shares     Amount  
    (Dollars in thousands)                  
Basic earnings per share:
                       
Net earnings
  $ 3,735                  
Cash dividends on preferred stock
    (656 )                
 
                     
Net earnings available to common shareholders
    3,079       6,066,264     $ 0.51  
Preferred stock dividend
    656                  
Effect of exercise of options and warrants
          173,848          
Effect of conversion of Series A preferred stock
          733,050          
Effect of conversion of Series B preferred stock
          667,096          
 
                   
Diluted earnings per share:
                       
Net earnings available to common shareholders
  $ 3,735       7,640,258     $ 0.49  
 
                   
4. Stock Options
     The Company’s 1996 Combined Incentive and Non-Qualified Stock Option Plan (“1996 Plan”) provides for the issuance of up to 800,000 shares of the Company’s common stock upon exercise of incentive and non-qualified options. The 2005 Equity Incentive Plan (the “2005 Plan”) provides for the issuance of up to 450,000 shares of the Company’s common stock upon the exercise of the incentive and non-qualified options, as restricted stock grants, or upon exercise of stock appreciation rights. To date, no restricted stock grants or stock appreciation rights have been issued under the 2005 Plan.
     Both Plans provide that each option must have an exercise price not less than the fair market value of the stock at the date of grant and have a term not to exceed ten years (five years with respect to options granted to employees holding 10% or more of the voting stock of the Company). Options vest in various increments of not less frequently than 20% per year. The 1996 Plan expired in February 2006, although options remain outstanding under that Plan.
     At June 30, 2007, compensation expense related to non-vested stock option grants aggregated to $1.8 million and is expected to be recognized as follows:
         
    Stock Option  
    Compensation  
    Expense  
    (Dollars in thousands)  
Remainder of 2007
  $ 260  
2008
    506  
2009
    462  
2010
    341  
2011
    191  
2012
    56  
 
     
Total
  $ 1,816  
 
     

- 10 -


 

     The Company uses the Black-Scholes option valuation model to determine the fair value of options. The Company utilizes assumptions on expected life, risk-free rate, expected volatility, and dividend yield to determine such values. If grants were to occur, the Company would estimate the life of the options by calculating the average of the vesting period and the contractual life. The risk-free rate would be based on treasury instruments in effect at the time of grant whose terms are consistent with the expected life of the Company’s stock options. Expected volatility would be based on historical volatility of the Company’s stock. The dividend yield would be based on historical experience and expected future changes. The Company has not historically paid dividends on its common stock.
     The following table summarizes the assumptions used for stock options granted for the periods presented:
         
    Six Months Ended June 30,
    2007   2006
Risk-free rate
  4.8%   5.0%
Expected term
  4 to 7 years   5 to 10 years
Expected volatility
  36.04%   42.5%
5. Operation Segments
     SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way that public businesses report information about operating segments in annual and interim financial statements and establishes standards for related disclosures about an enterprise’s products and services, geographic areas, and major customers.
     In accordance with the provisions of SFAS No. 131, reportable segments have been determined based upon the Company’s internal management and profitability reporting system, which is organized based on lines of business. The reportable segments for the Company are the Regional Banking Centers, the Real Estate Industries Division, the Small Business Administration (SBA), and Other. The Regional Banking Centers segment is comprised of the Bank’s five regional banking centers which provide a wide range of credit products and banking services primarily to small to medium sized businesses, executives and professionals. The Real Estate Industries Division is comprised of real estate lending, including construction loans for commercial buildings, condominium and apartment projects, multifamily properties, and single-family subdivisions as well as commercial real estate loans. The SBA segment provides credit products that are in part guaranteed by the U.S. government and are made to qualified small business owners for the purpose of accessing capital for operations, acquisitions, and inventory or debt management. The segment entitled “Other” incorporates all remaining business units such as the Company’s corporate office, administrative and treasury functions, as well as other types of products and services such as asset-based lending, investment securities, money desk certificates of deposit and brokered deposits.
     The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions.
     The Company does not allocate provisions for loan losses, general and administrative expenses, or income taxes to the business segments. In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.
     The following table shows interest income and interest expense, which include the effect of internal funds transfer pricing, and non-interest income, non-interest expense, and net contribution to earnings before income tax expense, for each of these segments as shown in the following table for the three and six months ended June 30, 2007 and 2006. The following table also shows the assets allocated to each of these segments as of June 30, 2007 and December 31, 2006.

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    Regional     Real Estate                    
    Banking     Industries                    
Three Months Ended June 30   Centers     Division     SBA     Other     Total  
    (Dollars in thousands)  
2007
                                       
Interest income
  $ 7,828     $ 8,486     $ 1,047     $ 2,904     $ 20,265  
Credit for funds provided
    6,746       412       41       (7,199 )      
 
                             
Total interest income
    14,574       8,898       1,088       (4,295 )     20,265  
 
                             
Interest expense
    3,739             1       5,346       9,086  
Charge for funds used
    4,781       4,479       426       (9,686 )      
 
                             
Total interest expense
    8,520       4,479       427       (4,340 )     9,086  
 
                             
Net interest income
    6,054       4,419       661       45       11,179  
Provision for loan losses
                      1,074       1,074  
 
                             
Net interest income after provision for loan losses
    6,054       4,419       661       (1,029 )     10,105  
 
                             
Non-interest income
    239       113       236       186       774  
Non-interest expense
    2,373       652       378       3,883       7,286  
 
                             
Net contribution to earnings before tax expense
  $ 3,920     $ 3,880     $ 519     $ (4,726 )   $ 3,593  
 
                             
                                         
    Regional     Real Estate                    
    Banking     Industries                    
Three Months Ended June 30   Centers     Division     SBA     Other     Total  
    (Dollars in thousands)  
2006
                                       
Interest income
  $ 5,119     $ 7,565     $ 1,044     $ 2,008     $ 15,736  
Credit for funds provided
    4,802       351       45       (5,198 )      
 
                             
Total interest income
    9,921       7,916       1,089       (3,190 )     15,736  
 
                             
Interest expense
    2,851       1       1       3,704       6,557  
Charge for funds used
    3,162       3,555       390       (7,107 )      
 
                             
Total interest expense
    6,013       3,556       391       (3,403 )     6,557  
 
                             
Net interest income
    3,908       4,360       698       213       9,179  
Provision for loan losses
                      973       973  
 
                             
Net interest income after provision for loan losses
    3,908       4,360       698       (760 )     8,206  
 
                             
Non-interest income
    299       30       198       175       702  
Non-interest expense
    1,708       468       414       3,105       5,695  
 
                             
Net contribution to earnings before tax expense
  $ 2,499     $ 3,922     $ 482     $ (3,690 )   $ 3,213  
 
                             

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    Regional     Real Estate                    
    Banking     Industries                    
Six Months Ended June 30   Centers     Division     SBA     Other     Total  
    (Dollars in thousands)  
2007
                                       
Interest income
  $ 14,788     $ 17,712     $ 2,055     $ 4,885     $ 39,440  
Credit for funds provided
    12,954       840       81       (13,875 )      
 
                             
Total interest income
    27,742       18,552       2,136       (8,990 )     39,440  
 
                             
Interest expense
    7,263             1       10,215       17,479  
Charge for funds used
    9,083       8,904       835       (18,822 )      
 
                             
Total interest expense
    16,346       8,904       836       (8,607 )     17,479  
 
                             
Net interest income
    11,396       9,648       1,300       (383 )     21,961  
Provision for loan losses
                      2,139       2,139  
 
                             
Net interest income after provision for loan losses
    11,396       9,648       1,300       (2,522 )     19,822  
 
                             
Non-interest income
    523       157       360       355       1,395  
Non-interest expense
    4,771       1,240       780       7,525       14,316  
 
                             
Net contribution to earnings before tax expense
  $ 7,148     $ 8,565     $ 880     $ (9,692 )   $ 6,901  
 
                             
                                         
    Regional     Real Estate                    
    Banking     Industries                    
Six Months Ended June 30   Centers     Division     SBA     Other     Total  
    (Dollars in thousands)  
2006
                                       
Interest income
  $ 9,844     $ 14,170     $ 1,976     $ 3,708     $ 29,698  
Credit for funds provided
    9,018       659       86       (9,763 )      
 
                             
Total interest income
    18,862       14,829       2,062       (6,055 )     29,698  
 
                             
Interest expense
    5,291       3       2       6,648       11,944  
Charge for funds used
    5,893       6,660       743       (13,296 )      
 
                             
Total interest expense
    11,184       6,663       745       (6,648 )     11,944  
 
                             
Net interest income
    7,678       8,166       1,317       593       17,754  
Provision for loan losses
                      1,723       1,723  
 
                             
Net interest income after provision for loan losses
    7,678       8,166       1,317       (1,130 )     16,031  
 
                             
Non-interest income
    617       100       350       273       1,340  
Non-interest expense
    3,386       968       811       5,982       11,147  
 
                             
Net contribution to earnings before tax expense
  $ 4,909     $ 7,298     $ 856     $ (6,839 )   $ 6,224  
 
                             
Segment assets as of:
                                       
June 30, 2007
    421,855       363,536       33,898       165,994       985,283  
 
                             
December 31, 2006
    322,610       337,548       34,345       181,259       875,762  
 
                             
     Note: Overhead expenses are not allocated for costs from administration departments to operating segments.

- 13 -


 

6. Recent Accounting Pronouncements
     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS 115.” SFAS 159 permits an entity to choose to measure financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are elective; however, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available for sale or trading securities. For financial instruments elected to be accounted for at fair value, an entity will report the unrealized gains and losses in earnings. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have an effect on the Company’s consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources. Substantially all of our operations are conducted by the Bank and the Bank accounts for substantially all of our revenues and expenses. This information should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, contained elsewhere in this Report.
     References in this report to the “Company,” “we” or “us” refer to Alliance Bancshares California (“Bancshares”) and its consolidated subsidiaries, including Alliance Bank (“Bank”).
Forward-Looking Information
     The statements contained herein that are not historical facts are forward-looking statements based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. These forward-looking statements involve risks and uncertainties, including the risks and uncertainties described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2006. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management, and actual results may differ from those projected in the forward-looking statements. Statements regarding policies and procedures are not intended, and should not be interpreted to mean, that such policies and procedures will not be amended, modified or repealed at any time in the future.
Overview
     We recorded net earnings of $2.2 million ($0.30 basic and $0.28 diluted earnings per share) for the second quarter of 2007 as compared to $1.9 million ($0.27 basic and $0.25 diluted earnings per share) for the second quarter of 2006. The increase in net earnings was primarily due to a $2.0 million increase in net interest income before provision for loan losses offset by a $1.6 million increase in non-interest expenses.
     For the six months ended June 30, 2007, we generated net earnings of $4.0 million ($0.55 basic and $0.53 diluted earnings per share) as compared to $3.7 million ($0.51 basic and $0.49 diluted earnings per share) for the same period of 2006. The improvement in earnings in 2007 was due primarily to a $4.2 million increase in net interest income before provision for loan loss offset by a $3.2 million increase in non-interest expenses and a $0.4 million increase in the provision for loan losses.
     Although net earnings increased during the three and six months ended June 30, 2007 as compared to the prior year, our impaired loans have increased from $6.1 million at December 31, 2006 to $26.0 million at June 30, 2007. We continue to observe slower levels of home and condominium sales and downward pressure on prices on a number of residential construction projects we have financed. Although we have not experienced further increases in impaired loans subsequent to June 30, 2007, given current market conditions, we may report elevated levels of non-accrual loans and impaired loans in future quarters.

- 14 -


 

     We continued to grow, with total assets increasing from $875.8 million at December 31, 2006 to $985.3 million at June 30, 2007. Net loans, including loans held for sale, grew from $700.5 million at December 31, 2006 to $826.7 million at June 30, 2007. Deposits grew from $716.9 million at December 31, 2006 to $802.7 million at June 30, 2007.
     Set forth below are certain key financial performance ratios for the periods indicated:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2007   2006   2007   2006
Return on average assets (1)
    0.89 %     1.01 %     0.87 %     1.03 %
Return on average shareholders’ equity (1)
    23.6 %     26.6 %     22.5 %     26.4 %
Net yield on average interest earning assets (1).
    4.74 %     4.96 %     4.86 %     5.10 %
 
(1)   Annualized
     The following table sets forth information regarding the net interest income before provision for loan losses, the provision for loan losses, non-interest expense, net earnings and net earnings per share for the periods indicated:
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
                    Percent                   Percent
    2007   2006   Change   2007   2006   Change
    (Unaudited)
    (Dollars in thousands except per share amounts and percentages        
Net interest income before provision for loan losses
  $ 11,179     $ 9,179       21.8 %   $ 21,961     $ 17,754       23.7 %
Provision for loan losses
    1,074       973       10.4 %     2,139       1,723       24.1 %
Non-interest expense
    7,286       5,695       27.9 %     14,316       11,147       28.4 %
Net earnings
    2,165       1,943       11.4 %     4,034       3,735       8.0 %
Earnings per common share:
                                               
Basic earnings per share
  $ 0.30     $ 0.27       11.1 %   $ 0.55     $ 0.51       7.8 %
Diluted earnings per share
  $ 0.28     $ 0.25       12.0 %   $ 0.53     $ 0.49       8.2 %
     The increase in net interest income before provision for loan losses in the three months and six months ended June 30, 2007, as compared to the corresponding period of 2006 occurred notwithstanding a decrease in the net interest rate spread from 4.23% and 4.37% in the three and six months of 2006 to 3.68% and 3.83% in the corresponding period of 2007. The decrease in the interest rate spread resulted from an increase in the volume of our interest bearing deposits primarily certificates of deposit. The interest rate spread was also negatively impacted by the higher rates paid on these deposits. Interest rates paid on certificates of deposits increased from 4.51% for the six months ended June 2006 to 5.15% for the six months ended June 2007. The increase in our impaired loan portfolio also impacted the interest rate spread as our yield on our loan portfolio decreased from 9.37% during the quarter ended June 2006 to 9.22% for the quarter ended June 2007. The yield on loans remained static for the six months ended June 2007 as compared to the corresponding period of 2006. The impact of the decreased interest rate spread for the six months ended June 30, 2007 was mitigated to some extent by a substantial increase in our net average interest-earning assets of $68.4 million, resulting in our net interest margin declining only 24 basis points from 5.10% for the six months ended 2006 to 4.86% for the six months ended 2007.
     The provision for loan losses increased by $0.4 million or 24.1% to $2.1 million in the first six months of 2007 as compared to the corresponding period of 2006 due to a $25.2 million increase in impaired loans and a 33.1% increase in net loans.
     Non-interest expense increased by $1.6 million, or 27.9%, to $7.3 million primarily due to increased salaries and related benefits expense and occupancy and equipment expense. Salaries and related benefits expense increased due to an increase in the number of employees in most locations and departments due to our growth. Occupancy expense increased primarily due to increased rent expense, amortization of leasehold improvements and depreciation of office furniture and equipment at most locations including the new Documentation Servicing, Central Operations and Loan Servicing Departments.

- 15 -


 

RESULTS OF OPERATIONS – Three months and six months ended June 30, 2007 and 2006
Net Interest Income
     The following table sets forth interest income, interest expense, net interest income before provision for loan losses and net interest margin for the periods presented:
                                                 
    Three Months Ended June 30,   Six Months Ended June 30,
                    Percent                   Percent
    2007   2006   Change   2007   2006   Change
    (Unaudited)
    (Dollars in thousands except per share amounts and percentages        
Interest income
  $ 20,265     $ 15,736       28.8 %   $ 39,440     $ 29,698       32.8 %
Interest expense
    9,086       6,557       38.6 %     17,479       11,944       46.3 %
Net interest income before provision for loan losses
    11,179       9,179       21.8 %     21,961       17,754       23.7 %
Net interest margin
    4.74 %     4.96 %     (4.4 )%     4.86 %     5.10 %     (4.7 )%
     Our earnings depend largely upon our net interest income, which is the difference between the income we earn on loans and other interest earning assets and the interest we pay on deposits and borrowed funds. Net interest income is related to the rates earned and paid on and the relative amounts of interest earning assets and interest bearing liabilities. Our inability to maintain strong asset quality, capital or liquidity may adversely affect (i) our ability to accommodate desirable borrowing customers, thereby impacting growth in quality, higher-yielding earning assets; (ii) our ability to attract comparatively stable, lower-cost deposits; and (iii) the costs of wholesale funding sources.
     Net interest income is related to our interest rate spread and net interest margin. The interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average rate paid on interest bearing liabilities. Net interest margin (also called the net yield on interest earning assets) is net interest income expressed as a percentage of average total interest earning assets. Our net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes, and changes in the relative amounts of interest earning assets and interest bearing liabilities. Interest rates earned and paid are affected principally by our competition, general economic conditions and other factors beyond our control such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and actions of the Federal Reserve Board (“FRB”).
     We recorded interest income of $20.3 million and $39.4 million for the three and six months ended June 30, 2007 as compared to $15.7 million and $29.7 million for the three and six months ended June 30, 2006. Interest expense totaled $9.1 million and $17.5 million for the three and six months ended June 30, 2007 as compared to $6.6 million and $11.9 million for the three and six months ended June 30, 2006. The increase in interest income was due to $203.8 million and $208.4 million increase in average interest earning assets in conjunction with a 0.09% and a 0.20% increase in the weighted average yield on interest earning assets for the three and six months ended June 30, 2007. The increase in interest expense was due to a $126.4 million and $140.1 million increase in average interest bearing liabilities in addition to a 0.64% and 0.74% increase in the weighted average rates paid on interest bearing liabilities for the three and six months ended June 30, 2007. The yield on loans for the three months ended June 30, 2007 was negatively impacted by 0.20% due to the reversal of $0.4 million in interest income on an $11.5 million of loans which were placed on non-accrual status during the second quarter of 2007.
     The increase in average interest earning assets and average interest bearing liabilities is a result of the Company’s continued efforts to expand all of the Bank’s Regional Banking Centers, the continued growth of all categories of loans and investments. Average loans increased 30.6% and 32.2%, respectively, to $793.5 million and $768.4 million for the three and six months ended June 30, 2007 from $607.7 million and $581.1 million for the three and six months ended June 30, 2006, with the increase occurring in all major loan categories. Average interest bearing liabilities increased 20.5% and 24.2%, respectively to $742.1 million and $718.9 million for the three and six months ended June 30, 2007 compared to $615.7 million and $578.8 million for the three and six months ended June 30, 2006.
     Our interest rate spread decreased from 4.23% during the second quarter of 2006 to 3.68% during the second quarter of 2007, and our net interest margin decreased from 4.96% during the second quarter of 2006 to 4.74% during the second quarter of 2007. The decrease in interest rate spread was due principally to the increased rate paid

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on our certificates of deposits (our highest costing deposits) increasing from 4.60% for the second quarter of 2006 to 5.19% for the second quarter of 2007. Average certificates of deposit grew by 35.8% to $424.5 million during the second quarter of 2007 from $312.5 million for the second quarter of 2006. Our FHLB advances also impacted our interest rate spread as average advances increased from $35.0 million during the second quarter of 2006 to $50.6 million during the second quarter of 2007. The yield on these advances also negatively impacted our interest rate spread as the average rate paid increased from 5.19% for the second quarter of 2006 to 5.39% for the second quarter of 2007. Our net interest margin continues to remain high in comparison with our interest rate spread because a significant portion of our interest earning assets are funded by non-interest bearing liabilities, preferred stock and shareholders’ equity. The decrease in our interest rate spread was mitigated to some extent by a substantial increase in our net average interest-earning assets (average interest-earning assets minus average interest-bearing deposits), which increased $77.5 million due to an increase in non-interest bearing deposits. As a result, our net interest margin decreased only from 4.96% to 4.74% in the 2007 quarter.
     The following tables present the weighted average yield on each specified category of interest earning assets, the weighted average rate paid on each specified category of interest bearing liabilities, and the resulting interest rate spread and net interest margin for the periods indicated.

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ANALYSIS OF NET INTEREST INCOME
                                                 
    Quarter ended June 30,  
    2007     2006  
                    Weighted                     Weighted  
                    Average                     Average  
    Average     Interest     Rates     Average     Interest     Rates  
    Balance     Inc./Exp. (1)     Earned/Paid (3)     Balance     Inc./Exp.(1)     Earned/Paid(3)  
                    (Dollars in thousands)                  
Interest earning assets:
                                               
Federal funds sold
  $ 57,510     $ 759       5.29 %   $ 32,096     $ 406       5.07 %
Time deposits
    1,972       20       4.07 %     5,273       57       4.34 %
Securities
    93,083       1,246       5.37 %     97,231       1,081       4.46 %
Loans (2)
    793,548       18,240       9.22 %     607,682       14,192       9.37 %
 
                                       
Total interest earning assets
    946,113       20,265       8.59 %     742,282       15,736       8.50 %
 
                                           
Non-interest earning assets
    29,210                       30,396                  
 
                                           
Total assets
  $ 975,323                     $ 772,678                  
 
                                           
Interest bearing liabilities:
                                               
Interest bearing demand deposits
  $ 16,452       63       1.54 %   $ 10,700       45       1.68 %
Savings and money market deposits
    200,330       2,090       4.18 %     184,592       1,755       3.81 %
Certificates of deposit
    424,501       5,489       5.19 %     312,492       3,582       4.60 %
FHLB advances:
                                               
Short-term
                            5,000       62       5.01 %
Long-term
    50,566       679       5.39 %     30,000       391       5.23 %
Securities sold under repurchase agreements
    22,386       253       4.53 %     50,227       344       2.75 %
Junior subordinated debentures
    27,837       512       7.38 %     22,682       378       6.68 %
 
                                       
Total interest bearing liabilities
    742,072       9,086       4.91 %     615,693       6,557       4.27 %
 
                                           
Non-interest bearing liabilities
    177,379                       108,665                  
 
                                           
Total liabilities
    919,451                       724,358                  
Redeemable preferred stock and shareholders’ equity
    55,872                       48,320                  
 
                                           
Total liabilities and shareholders’ equity
  $ 975,323                     $ 772,678                  
 
                                           
Net interest income
          $ 11,179                     $ 9,179          
 
                                           
Interest rate spread
                    3.68 %                     4.23 %
Net interest margin
                    4.74 %                     4.96 %
 
(1)   Interest income on loans includes loan fees of $1.2 million in 2007 and $0.9 million in 2006.
 
(2)   Loans include nonaccrual loans.
 
(3)   Annualized

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    Six Months Ended June 30,  
    2007     2006  
                    Weighted                     Weighted  
                    Average                     Average  
    Average     Interest     Rates     Average     Interest     Rates  
    Balance     Inc./Exp. (1)     Earned/Paid (3)     Balance     Inc./Exp. (1)     Earned/Paid (3)  
    (Dollars in thousands)  
Interest earning assets:
                                               
Federal funds sold
  $ 45,198     $ 1,167       5.21 %   $ 26,731     $ 642       4.85 %
Time deposits
    2,019       39       3.90 %     6,549       131       4.04 %
Securities
    94,886       2,489       5.29 %     87,719       1,905       4.38 %
Loans (2)
    768,416       35,745       9.38 %     581,078       27,020       9.38 %
 
                                       
Total interest earning assets
    910,519       39,440       8.73 %     702,077       29,698       8.53 %
 
                                           
Non-interest earning assets
    29,828                       29,700                  
 
                                           
Total assets
  $ 940,347                     $ 731,777                  
 
                                           
Interest bearing liabilities:
                                               
Interest bearing demand deposits
  $ 15,276       117       1.54 %   $ 9,908       83       1.68 %
Savings and money market deposits
    198,162       4,141       4.21 %     176,926       3,296       3.76 %
Certificates of deposit
    406,020       10,371       5.15 %     288,298       6,446       4.51 %
FHLB advances:
                                               
Short-term
                      5,000       118       4.75 %
Long-term
    50,292       1,357       5.44 %     29,881       697       4.71 %
Securities sold under repurchase agreements
    21,320       473       4.47 %     48,728       626       2.59 %
Junior subordinated debentures
    27,837       1,020       7.39 %     20,104       678       6.80 %
 
                                       
Total interest bearing liabilities
    718,907       17,479       4.90 %     578,845       11,944       4.16 %
 
                                           
Non-interest bearing liabilities
    166,192                       105,408                  
 
                                           
Total liabilities
    885,099                       684,253                  
Redeemable preferred stock and shareholders’ equity
    55,248                       47,524                  
 
                                           
Total liabilities and shareholders’ equity
  $ 940,347                     $ 731,777                  
 
                                           
Net interest income
          $ 21,961                     $ 17,754          
 
                                           
Interest rate spread
                    3.83 %                     4.37 %
Net interest margin
                    4.86 %                     5.10 %
 
(1)   Interest income on loans includes loan fees of $2.5 million in 2007 and $2.1 million in 2006.
 
(2)   Loans include nonaccrual loans.
 
(3)   Annualized

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     The following tables present information concerning the change in interest income and interest expense attributable to changes in average volume and average rate during the periods indicated.
ANALYSIS OF CHANGE IN INTEREST INCOME
                                                 
    Three Months Ended June 30, 2007     Six Months Ended June 30, 2007  
    Increase (Decrease)             Increase (Decrease)        
    Due To Change In             Due To Change In        
    Volume     Rate     Net Change     Volume     Rate     Net Change  
                    (Dollars in thousands)                  
Interest income:
                                               
Federal funds sold
  $ 335     $ 18     $ 353     $ 474     $ 51     $ 525  
Time deposits
    (34 )     (3 )     (37 )     (89 )     (3 )     (92 )
Securities
    (48 )     213       165       165       419       584  
Loans
    4,276       (228 )     4,048       8,715       10       8,725  
 
                                   
Total interest earning assets
    4,529             4,529       9,265       477       9,742  
 
                                   
Interest expense:
                                               
Interest bearing demand
    22       (4 )     18       42       (8 )     34  
Savings and money market
    156       178       334       420       425       845  
Certificates of deposit
    1,405       503       1,908       2,910       1,015       3,925  
FHLB advances:
                                               
Short-term
    (62 )           (62 )     (118 )           (118 )
Long-term
    276       12       288       537       123       660  
Securities sold under agreements to repurchase
    (247 )     156       (91 )     (464 )     311       (153 )
Junior subordinated debentures
    91       43       134       279       63       342  
 
                                   
Total interest bearing liabilities
    1,641       888       2,529       3,606       1,929       5,535  
 
                                   
Net interest income
  $ 2,888     $ (888 )   $ 2,000     $ 5,659     $ (1,452 )   $ 4,207  
 
                                   
Provision for Loan Losses
     We made provisions for loan losses of $1.1 million and $2.1 million, respectively, for the three and six months ended June 30, 2007 as compared to provisions of $1.0 million and $1.7 million for the comparable period of 2006. These increases were attributable to an 33.1% increase in net loans and a $25.2 million increase in impaired loans for the six months ended June 30, 2007 as compared to the same period in 2006. We continue to observe slower levels of home and condominium sales and downward pressure on prices on a number of residential construction projects we have financed. Although we have not experienced further increases in impaired loans subsequent to June 30, 2007, given current market conditions, we may report elevated levels of impaired loans for the next several quarters.
     We assess the adequacy of the Allowance each calendar quarter. Classified loans (loans assigned point values of 7 – 10) are assigned specific reserve percentages based on point value. Loans that are not classified (loans assigned risk point values of less than 7) are subdivided into pools of similar loans by loan type and are assigned reserve percentages based on the loan type. We determine the reserve percentage by first examining actual loss history for each type of loan, then adjust that percentage by several factors including changes in lending policies; changes in national and local economic conditions; changes in experience, ability and depth of lending management and staff; changes in trends of past due and classified loans; changes in external factors such as competition and legal and regulatory requirements; and other relevant factors. Reserve estimates are totaled and any shortage is charged to current period operations and credited to the Allowance.
     The credit quality of our loans will be influenced by underlying trends in the economic cycle, particularly in Southern California, and other factors, which are ostensibly beyond management’s control. Accordingly, no assurance can be given that we will not sustain loan losses that in any particular period will be sizable in relation to the Allowance. Although we believe that we employ an appropriate approach to downgrading credits that are experiencing slower than projected sales and/or increases in loan to value ratios, subsequent evaluation of the loan portfolio by us and by our regulators, in light of factors then prevailing, may require increases in the Allowance through changes to the provision for loan losses.

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Non-Interest Income
     Non-interest income primarily includes service charges on deposit accounts, net gains on sales of loans and loan broker fees for referring loans to other lenders. Non-interest income increased by 10.3% for the quarter ended June 30, 2007 as compared to the same period in 2006 primarily due to an increase in net gains on sales of loans. Non-interest income remained relatively unchanged for the six months ended June 30, 2007. Although net gains on sales of loans increased by 25.5% for the six months ended June 30, 2007, this increase was offset by a decrease in loan broker fee income of 35.5%. The amount of gains from sales of loans and loan broker fees in any period is dependent upon the number of loans we can originate, which in turn depends upon market conditions, interest rates, borrower and investor demand, and the availability SBA loan programs. Thus, these gains and fees can vary substantially from period to period, and gains and fees in any period are not indicative of gains and fees to be expected in any subsequent period.
     The following table identifies the components of and the percentage changes for the periods indicated:
NON-INTEREST INCOME
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
                    Percent                     Percent  
    2007     2006     Change     2007     2006     Change  
    (Dollars in thousands except per share amounts and percentages
Service charges
  $ 281     $ 267       5.2 %   $ 567     $ 548       3.5 %
Gain on sale of loans, net
    184       101       82.2 %     236       188       25.5 %
Loan broker fee income
    47       122       (61.5 )%     129       200       (35.5 )%
Other
    262       212       23.6 %     463       404       14.6 %
 
                                       
Total
  $ 774     $ 702       10.3 %   $ 1,395     $ 1,340       4.1 %
 
                                       
Non-Interest Expense
     The components of non-interest expense were as follows for the periods indicated:
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
                    Percent                     Percent  
    2007     2006     Change     2007     2006     Change  
    (Dollars in thousands except per share amounts and percentages
Salaries and related benefits
  $ 4,239     $ 3,046       39.2 %   $ 8,412     $ 6,045       39.2 %
Occupancy and equipment
    935       696       34.3 %     1,880       1,405       33.8 %
Professional fees
    419       443       (5.4 )%     707       720       (1.8 )%
Data processing
    220       238       (7.6 )%     431       450       (4.2 )%
Other
    1,473       1,272       15.8 %     2,886       2,527       14.2 %
 
                                       
Total
  $ 7,286     $ 5,695       27.9 %   $ 14,316     $ 11,147       28.4 %
 
                                       
     Salaries and related benefits expense increased by 39.2% for the three and six months ended June 30, 2007. This increase was due primarily to an increase in the number of employees due to growth. The increase in the size and profitability of the Company also resulted in an increase in incentive accruals. At June 30, 2007, we employed 148 full-time employees, compared with 115 full-time employees at June 30, 2006.
     Occupancy and equipment expenses increased by 34.3% and 33.8% for the three and six months ended June 30, 2007. This increase was due to increased rent expense and the depreciation of office furniture and equipment at all locations including the new Documentation Servicing, Central Operations and Loan Servicing Departments.
     Other non-interest expense increased by 15.8% and 14.2% for the three months and six months ended June 30, 2007 due to an increase in business and entertainment expense and other personnel costs. The increase in these expenses was primarily due to the growth of the Company.

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FINANCIAL CONDITION
Regulatory Capital
     At June 30, 2007, Bancshares’ and the Bank’s Tier 1 capital, which is comprised of shareholders’ equity as modified by certain regulatory adjustments, was $84.6 million and $83.7 million, respectively. Our regulatory capital increased since December 31, 2006 as a result of net earnings. At June 30, 2007, Bancshares and the Bank met all applicable regulatory capital requirements and the Bank was “well capitalized” as defined under applicable regulations.
     The following table sets forth the regulatory standards for well capitalized and adequately capitalized institutions and the capital ratios for Bancshares and the Bank as of the date indicated.
REGULATORY CAPITAL
June 30, 2007
                                                 
                    To Be Adequately   To Be Well
    Actual   Capitalized   Capitalized
    Amount   Ratio   Amount   Ratio   Amount   Ratio
                    (Dollars in thousands)                
Bancshares
                                               
Total Capital (to risk-weighted assets)
  $ 95,736       10.78 %   $ 71,080       >=8.0 %     N/A       N/A  
Tier 1 Capital (to risk-weighted assets)
  $ 84,645       9.53 %   $ 35,540       >=4.0 %     N/A       N/A  
Tier 1 Capital (to average assets)
  $ 84,645       8.69 %   $ 38,973       >=4.0 %     N/A       N/A  
Bank
                                               
Total Capital (to risk-weighted assets)
  $ 94,762       10.68 %   $ 70,971       >=8.0 %   $ 88,714       >=10.0 %
Tier 1 Capital (to risk-weighted assets)
  $ 83,671       9.43 %   $ 35,486       >=4.0 %   $ 53,229       >=6.0 %
Tier 1 Capital (to average assets)
  $ 83,671       8.59 %   $ 38,973       >=4.0 %   $ 48,716       >=5.0 %
Liquidity and Cash Flow
     Our objective in managing our liquidity is to maintain cash flow adequate to fund our operations and meet obligations and other commitments on a timely and cost effective basis. We manage this objective through the selection of asset and liability maturity mixes. Our liquidity position is enhanced by our ability to raise additional funds as needed through available borrowings or accessing deposits nationwide through our money desk.
     Deposits provide most of our funds. This relatively stable and low-cost source of funds has, along with preferred stock and shareholders’ equity, provided 83% and 84%, respectively, of our funding as a percentage of average total assets during the six months ended June 30, 2007 and 2006.
     Secondary sources of liquidity include borrowing arrangements with the Federal Reserve Board (“FRB”) and the Federal Home Loan Bank (“FHLB”). Borrowings from the FRB are short-term and must be collateralized by pledged securities or loans. As a member of the FHLB system, the Bank may obtain advances from the FHLB pursuant to various credit programs offered from time to time. Credit limitations are based on the assessment by the FHLB of the Bank’s creditworthiness, including an adequate level of net worth, reasonable prospects of future earnings, sources of funds sufficient to meet the scheduled interest payments, lack of financial or managerial deficiencies and other factors. Such advances may be obtained pursuant to several different credit programs, and each program has its own rate, commitment fees and range of maturities. Funds borrowed from the FHLB must be collateralized either by pledged securities or by assignment of notes and may be for terms of one day to several years. As of June 30, 2007, we had $70.0 million outstanding FHLB advances and had no outstanding borrowings from the FRB.

- 22 -


 

     We also have liquidity as a net seller of overnight funds. During the six months ended June 30, 2007, we had an average balance of $45.2 million in overnight funds sold representing 5% of total average assets.
     In November 2006, we entered into a repurchase agreement in the amount of $20.0 million. This agreement is collateralized by various collateral mortgage obligations and mortgage-backed securities with an amortized cost of $22.3 million. Interest is payable on a quarterly basis and adjusts quarterly at the rate of the three-month LIBOR minus 1.00% (the rate was 4.36% at June 30, 2007) until November 2008 at which time it converts to a fixed rate of 4.54%. The agreement has a maturity date of November 2016 and is callable by the holder at any time after November 7, 2008.
     Cash Flow from Operating Activities
     Net cash provided by operating activities for the six months ended June 30, 2007 increased by $0.8 million as compared to the same period in 2006 primarily due to an increase in the origination of loans held for sale in the period.
     Cash Flow from Investing Activities
     Net cash used in investing activities for the six months ended June 30, 2007 increased by $29.7 million as compared to the same period in 2006 primarily due to an increase in the proceeds from the maturities of investment securities offset somewhat by an increase in the purchase of investment securities.
     Cash Flows from Financing Activities
     Net cash provided by financing activities for the six months ended June 30, 2007 decreased by $28.1 million as compared to the same period in 2006 primarily due to a decrease in demand deposits and other deposit accounts increasing at a lower rate compared to 2006.
Investments in Time Deposits and Securities
     The following table provides certain information regarding our investments in time deposits with other financial institutions at the dates indicated:
TIME DEPOSIT INVESTMENTS
                                 
    June 30, 2007     December 31, 2006  
            Weighted             Weighted  
            Average             Average  
    Book Value     Yield     Book Value     Yield  
            (Dollars in thousands)          
Time deposits maturing:
                               
Within one year
    909       3.77 %     2,262       4.35 %
After one year but within five years
    298       5.73 %     294       4.41 %
 
                           
Total time deposits
  $ 1,207       4.26 %   $ 2,556       4.36 %
 
                           
     The following table provides certain information regarding our investment securities at the dates indicated. Expected maturities will differ from contractual maturities, particularly with respect to collateralized mortgage obligations and mortgage backed securities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. We had no tax-exempt securities during the quarters ended June 30, 2007 or 2006.

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INVESTMENT SECURITIES
                                 
    June 30, 2007     December 31, 2006  
            Weighted             Weighted  
            Average             Average  
    Book Value     Yield     Book Value     Yield  
    (Dollars in thousands)  
Investment securities maturing:
                               
Within one year
  $ 4,020       4.20 %   $ 16,018       3.99 %
After one year but within five years
    29,464       5.46 %     31,484       5.37 %
After five years
                       
Collateralized mortgage obligations and mortgage-backed securities
    67,133       5.26 %     57,125       4.94 %
 
                           
Total investment securities
  $ 100,617       5.27 %   $ 104,627       4.92 %
 
                           
     Our present strategy is to stagger the maturities of our time deposit investments and investment securities to meet our overall liquidity requirements. At June 30, 2007, we classified all our investment securities as held to maturity as we intend to hold the securities to maturity.
     At June 30, 2007, securities with an amortized cost of $40.0 million were pledged to secure structured repurchase agreements, a letter of credit and various FHLB advances and a discount line at the FRB. At June 30, 2006, securities with an amortized cost of $64.4 million were pledged to secure repurchase agreements with one of the Bank’s depositors and to secure a discount line at the Federal Reserve.
     The amortized cost and estimated fair values of securities held to maturity at the date indicated are as follows:
FAIR VALUE OF INVESTMENT SECURITIES
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated Fair  
    Amortized Cost     Gains     Losses     Value  
    (Dollars in thousands)  
June 30, 2007
                               
U.S. Agency securities
  $ 25,449     $     $ (65 )   $ 25,384  
Corporate bonds
    8,035             (108 )     7,927  
Collateralized mortgage obligations and mortgage-backed securities:
    67,133       268       (522 )     66,879  
 
                       
 
  $ 100,617     $ 268     $ (695 )   $ 100,190  
 
                       
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated Fair  
    Amortized Cost     Gains     Losses     Value  
    (Dollars in thousands)  
December 31, 2006
                               
U.S. Agency securities
  $ 37,927     $ 16     $ (88 )   $ 37,855  
Corporate bonds
    9,575             (186 )     9,389  
Collateralized mortgage obligations and mortgage-backed securities
    57,125       206       (422 )     56,909  
 
                       
 
  $ 104,627     $ 222     $ (696 )   $ 104,153  
 
                       
     Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2007 are summarized as follows:

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UNREALIZED LOSSES ON INVESTMENT SECURITIES
                                                 
    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. Agency securities
  $ 18,407     $ 46     $ 1,977     $ 19     $ 20,384     $ 65  
Corporate bonds
                7,927       108       7,927       108  
Collateralized mortgage obligations and mortgage-backed securities
    31,911       196       15,359       326       47,270       522  
 
                                   
 
  $ 50,318     $ 242     $ 25,263     $ 453     $ 75,581     $ 695  
 
                                   
     Our analysis of these securities and the unrealized losses was based on the following factors: i) the length of the time and the extent to which the market value has been less than cost; ii) the financial condition and near-term prospects of the issuer; iii) our intent and ability to retain the investment in a security for a period of time sufficient to allow for any anticipated recovery in market value; and iv) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads.
     Our corporate bonds consist primarily of securities issued by General Motors Acceptance Corporation and Ford Motor Credit Company. These securities were rated as less than investment grade at June 30, 2007. Because these securities mature within the next two years, we believe that we will fully recover our principal investment and do not consider these investments to be other than temporarily impaired at June 30, 2007 or 2006.
     Additionally, at June 30, 2007, approximately 50% of our collateral mortgage obligations and mortgage backed securities were issued by U.S. government agencies that guarantee payment of principal and interest of the underlying mortgage and we believe we will fully recover the principal investment on these securities. The remaining collateral mortgage obligations and mortgage backed securities were rated “AAA” by either Standard & Poor’s or Moody’s, as of June 30, 2007 and, therefore, we do not consider these investments to be other than temporarily impaired.
Loans
     Our present lending strategy is to attract small-to mid-sized business borrowers by offering a variety of commercial and real estate loan products and a full range of other banking services coupled with highly personalized service. We offer secured and unsecured commercial term loans and lines of credit, construction loans for individual and tract single family homes and for commercial and multifamily properties, accounts receivable and equipment loans, SBA loans and home equity lines of credit. We often tailor our loan products to meet the specific needs of our borrowers. Our primary lending area includes six Southern California counties: Los Angeles, Orange, Riverside, San Diego, San Bernardino, and Ventura.
     The following table sets forth the composition of our loan portfolio at the dates indicated (excluding loans held for sale):
LOAN PORTFOLIO COMPOSITION
                                 
    June 30, 2007     December 31, 2006  
    Amount     Percent of     Amount     Percent of  
    Outstanding     Total     Outstanding     Total  
    (Dollars in thousands)  
Commercial loans
  $ 226,440       28.7 %   $ 203,984       28.6 %
Construction loans
    283,656       36.0       260,805       36.6  
Real estate loans
    268,472       34.0       241,734       33.9  
Other loans
    10,029       1.3       6,062       0.9  
 
                       
 
    788,597       100.0 %     712,585       100.0 %
 
                           
Less – Deferred loan fees, net
    (2,286 )             (3,201 )        
Less – Allowance for loan losses
    (11,242 )             (9,195 )        
 
                           
Net loans
  $ 775,069             $ 700,189          
 
                           

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     At June 30, 2007, we had outstanding construction loans to developers for tract projects and single homes for sale to unidentified buyers totaling $163.4 million, representing 20.7% of our loan portfolio, and additional commitments for these projects in the amount of $59.4 million. These types of loans generally have greater risks than loans on completed homes, multifamily and commercial properties.
     At June 30, 2007 and December 31, 2006, qualifying loans with an outstanding balance of $324.5 and $228.4 million, respectively, were pledged to secure advances and a letter of credit at the FHLB.
     The following table sets forth the maturity distribution of our loan portfolio at June 30, 2007 excluding loans held for sale:
LOAN MATURITIES
                                 
    At June 30, 2007  
            After One Year              
    One Year or     Through Five              
    Less     Years     After Five Years     Total  
    (Dollars in thousands)  
Commercial loans
  $ 128,998     $ 79,163     $ 18,279     $ 226,440  
Construction loans
    251,672       31,984             283,656  
Real estate loans
    38,236       101,278       128,958       268,472  
Other loans
    3,894       6,093       42       10,029  
 
                       
 
  $ 422,800     $ 218,518     $ 147,279     $ 788,597  
 
                       
Non-Performing Assets
     Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are (i) loans which have been placed on non-accrual status; (ii) loans which are contractually past due 90 days or more with respect to principal or interest, and have not been restructured or placed on non-accrual status, and are accruing interest as described below; and (iii) troubled debt restructurings (“TDRs”). Other real estate owned consists of real properties securing loans on which we have taken title in partial or complete satisfaction of the loan.
     The following table sets forth information about non-performing assets at the dates indicated:
NON-PERFORMING ASSETS
                 
    June 30,     December 31,  
    2007     2006  
    (Dollars in thousands)  
Non-accrual loans
  $ 22,930     $ 5,864  
Accruing loans past due 90 days or more
    3,037       241  
Troubled debt restructuring
           
Other real estate owned
           
 
           
Balance at end of period
  $ 25,967     $ 6,105  
 
           
     Nonperforming assets increased from $6.1 million at December 31, 2006 to $26.0 million at June 30, 2007. The non-accrual loans at June 30, 2007 primarily represent an $8.3 million construction loan for eleven single family homes in Nevada, a $4.4 million secured revolving line of credit, a $2.6 million land loan in Southern California and a $2.2 million construction loan for a single family residence in Southern California. The $8.3 construction loan is six months past due at June 30, 2007 due to slow home sales in this market. The $4.4 million revolving line of credit is 60 days past due at June 30, 2007. The $2.6 million land loan is 90 days past due at June 30, 2007 due to slow home sales in this market. The $2.2 million construction loan is also 90 days past due because of various construction issues. The accruing loans past due 90 days or more primarily represents a construction loan $2.9 million to a borrower for the construction of a nine unit condominium in Southern California. This loan was paid off subsequent to June 30, 2007.

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     We continue to observe slower levels of home and condominium sales and downward pressure on prices on a number of residential construction projects we have financed. Although we have not experienced further increases in impaired loans subsequent to June 30, 2007, given current market conditions, we may report elevated levels of impaired loans for the next several quarters. We will closely monitor these loans and the related collateral. In addition, we believe that we employ an appropriate approach to downgrading credits that are experiencing slower than projected sales and/or increases in loan to value ratios. A severe deterioration in home prices could have an adverse impact on our portfolio and result in significant changes to the loan loss reserve.
     Cash collections on non-performing loans totaled $1.9 million during the six months ended June 30, 2007 of which $1.8 million was applied to principal and $0.1 million was recorded as interest income. Interest payments received on non-accrual loans are applied to principal unless there is no doubt as to ultimate full repayment of principal, in which case, the interest payment is recognized as interest income. The additional interest income that would have been recorded from non-accrual loans, if the loans had not been on non-accrual status, was $1,193,900 and $76,700 for the six months ended June 30, 2007 and 2006, respectively.
Impaired Loans
     An impaired loan is a loan which management determines is probable that we will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Impaired loans can include non-performing loans, although not all impaired loans will be non-performing loans.
     We determine impaired loans by a periodic evaluation on an individual loan basis. At June 30, 2007 and December 31, 2006, we had classified $25.8 million and $6.1 million, respectively, of our loans as impaired for which a reserve of $3.3 million and $0.6 million, respectively, were assigned. Impaired loans at June 30, 2007 include all of the aforementioned nonaccrual construction loans and the secured revolving line of credit discussed under “Non-performing Assets.”
Changes in Allowance for Loan Losses
     See “Changes in Allowance for Loan Losses” in the Notes to the Consolidated Financial Statements for discussion regarding changes in the Allowance for Loan Losses.
Off-Balance Sheet Credit Commitments and Contingent Obligations
     Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition in the loan contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since we expect some commitments to expire without being drawn upon, the total commitment amounts do not necessarily represent future loans. At June 30, 2007, we had undisbursed loan commitments of $245.2 million.
     Standby letters of credit and financial guarantees are conditional commitments issued to secure the financial performance of a customer to a third party. These are issued primarily to support public and private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer is essentially the same as that involved in extending a loan to that customer. We hold certificates of deposit and other collateral of at least 100% of the notional amount as support for letters of credit for which we deem collateral to be necessary. At June 30, 2007, we had outstanding standby letters of credit with a potential $80.6 million of obligations maturing at various dates through 2013.
Deposits
     Total deposits increased from $716.9 million at December 31, 2006 to $802.7 million at June 30, 2007. This increase was primarily due to a $21.8 million increase in savings and money market deposits and a $62.4 million increase in certificates of deposit. These increases in deposits resulted from additional emphasis on core deposits as well as a Company-wide incentive compensation program for deposit growth, which we used to fund the increase in our loan portfolio and to increase our liquidity.

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     The following table sets forth information concerning the amount of deposits from various sources at the dates indicated:
SOURCE OF DEPOSITS
                                 
    June 30, 2007     December 31, 2006  
            Percent of             Percent of  
    Amount     Total     Amount     Total  
            (Dollars in thousands)          
Regional Bank Centers
  $ 499,809       62.3 %   $ 443,725       61.9 %
Money desk
    98,343       12.3       74,802       10.4  
Brokered
    163,047       20.3       162,449       22.7  
Internet
    41,469       5.1       35,892       5.0  
 
                       
Total
  $ 802,668       100.0 %   $ 716,868       100.0 %
 
                       
     Our money desk attracts primarily certificates of deposit from institutional investors nationwide by telephone. We also engage brokers to place certificates of deposit for their customers. During 2007, the certificates of deposit obtained through our money desk or deposit brokers generally had maturities ranging from six months to five years. We limit the amount of money desk and broker deposits that are scheduled to mature in any one calendar month. In addition, we have historically maintained an appropriate level of liquidity specifically to counter any concurrent deposit reduction that might occur.
     We have established relationships with several brokers that will place certificates of deposit for us. When we desire to use these brokers to place certificates of deposit, we generally advise all of them of the amount and maturities of the certificates of deposit we want to place, and place the certificates of deposit through the broker offering the lowest interest rates. Notwithstanding this procedure, all except $10.0 million of our brokered deposits at June 30, 2007 were obtained through one broker. We believe that should our business discontinue with this broker, we could continue to obtain the certificates of deposit we desire through other brokers. However, we could be adversely affected because the certificates of deposit through other brokers may bear relatively higher interest rates. Further, the deposits obtained through this broker as of June 30, 2007 mature at various times through September 2011, and thus such discontinuation would not likely result in the immediate withdrawal of such deposits. We intend to continue our efforts to increase our levels of core deposits in an effort to decrease our reliance on money desk and brokered deposits.
     For more than the past year, one individual has represented a number of entities that have provided a significant amount of funds to us. At June 30, 2007, these entities had provided us an aggregate of $42.0 million of deposits; and during 2007 the maximum average amount of funds provided by these entities at any date was $48.0 million. We provide additional collateral to this customer for the deposits in excess of the FDIC insurance limit through a $75 million letter of credit from the FHLB of San Francisco. We monitor this relationship closely, and while we have no reason to believe the customer presently intends to significantly reduce or terminate the relationship, we have adequate liquidity to fund any consequential withdrawals. If we had to replace these deposits, the new deposits or borrowings might be more costly which would adversely affect our net interest income.
     In recent years, the interest rates on certificates of deposit obtained through deposit brokers generally have been lower than the interest rates then offered to local customers for certificates of deposit with comparable maturities. We believe this is due to the highly competitive nature of Southern California market for deposits and, in particular, the difficulty some smaller banks have in competing for deposits with larger banks, savings associations and credit unions with multiple offices.
     Banks that are not “well capitalized” under the FDIC prompt corrective action rules may not accept brokered deposits without the prior approval of the FDIC. In addition, we believe that if the Bank is not “well capitalized”, we will have greater difficulty obtaining certificates of deposit through our money desk and may have to pay higher interest rates to continue to attract those deposits. Accordingly, the failure of the Bank to remain “well capitalized” could have a material adverse affect on us.

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     The aggregate amount of the certificates of deposit in denominations of $100,000 or more at June 30, 2007 was approximately $269.9 million. Interest expense on such deposits was approximately $6.6 million for the six months ended June 30, 2007.
     The approximate scheduled maturities of certificates of deposit at June 30, 2007 was as follows:
MATURITIES OF CERTIFICATES OF DEPOSIT
         
Maturities   Amount(1)  
    (Dollars in thousands)  
Six months or less
  $ 35,414  
Over three and through twelve months
    139,573  
Over twelve months
    226,559  
 
     
Total
  $ 401,546  
 
     
 
(1)   Excludes time deposits included in IRA accounts.
Borrowed Funds
     FHLB Advances. At June 30, 2006, we had $50.0 million of long-term debt and $20.0 million of short-term advances from the FHLB which, along with the aforementioned $75 million letter of credit, were collateralized by certain qualifying loans with a carrying value of $324.5 million. These advances bear interest at the rates noted below. Interest is payable monthly, quarterly or semi-annually with principal and any accrued interest due at maturity. At June 30, 2007, we had $45.3 million of borrowing availability at the FHLB.
     The table below sets forth the amounts, interest rates, and the maturity dates of FHLB advances as of June 30, 2007:
FHLB ADVANCES
                 
    Principal Amount     Interest rate   Maturity date
    (Dollars in thousands)          
 
  $ 10,000             Fixed at 5.48%   July 2007
 
    10,000             Fixed at 5.35%   July 2007
 
    10,000             Fixed at 5.31%   August 2008
 
    10,000     Prime minus 2.87%   December 2008
 
    10,000     Prime minus 2.83%   January 2009
 
    10,000     Prime minus 2.80%   December 2009
 
    10,000     Prime minus 2.74%   January 2010
 
             
 
  $ 70,000          
 
             
     Junior Subordinated Debentures. In October 2002, Bancshares issued $7,217,000 of junior subordinated debentures to Alliance Bancshares California Capital Trust I, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities to provide additional regulatory capital. This capital has a relatively low cost as interest payments on the debentures are deductible for income tax purposes. The Trust purchased the debentures with the proceeds of the sale of its common trust securities to Bancshares for $217,000 and trust preferred securities in a private placement for $7,000,000. The debentures and trust preferred securities have generally identical terms, including that they mature in 2032, are redeemable at Bancshare’s option commencing October 2007 at par, and require quarterly distributions/interest payments at a rate which adjusts quarterly at the three-month LIBOR rate plus 3.45% (the rate was 8.81% at June 30, 2007).
     In February 2005, Bancshares issued $10,310,000 of junior subordinated debentures to Alliance Bancshares California Capital Trust II, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities to provide additional regulatory capital. The Trust purchased the debentures with the proceeds of the sale of its common trust securities to Bancshares for $310,000 and trust preferred securities in a private placement for $10,000,000. The debentures and trust preferred securities have generally identical terms, including that they mature in 2034, are redeemable at Bancshare’s option commencing December 2009 at par, and require quarterly distributions/interest payments at a rate which adjusts quarterly at the three-month LIBOR rate plus 1.90% (the rate was 7.26% at June 30, 2007).

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     In May 2006, Bancshares issued $10,310,000 of junior subordinated debentures to Alliance Bancshares California Capital Trust III, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities to provide additional regulatory capital. The Trust purchased the debentures with the proceeds of the sale of its common trust securities to Bancshares for $310,000 and trust preferred securities in a private placement for $10,000,000. The subordinated debentures and trust preferred securities have generally identical terms, including that they mature in 2036, are redeemable at Bancshare’s option commencing June 2011 at par, and require quarterly distributions/interest payments at a rate which adjusts quarterly at the three-month LIBOR rate plus 1.50% (the rate was 6.86% at June 30, 2007).
     Bancshares has unconditionally guaranteed distributions on, and payments on liquidation and redemption of, both issues of the trust preferred securities.
     Securities Sold Under Agreements to Repurchase. In November 2006, we entered into a repurchase agreement in the amount of $20.0 million. This agreement is collateralized by various collateral mortgage obligations and mortgage-backed securities with an amortized cost of $22.3 million. Interest is payable on a quarterly basis and adjusts quarterly at the rate of the three-month LIBOR minus 1.00% (the rate was 4.36% at June 30, 2007) until November 2008 at which time it converts to a fixed rate of 4.54%. The agreement has a maturity date of November 2016 and is callable by the holder at any time after November 7, 2008.
     Subsequent event. In July 2007, we entered into an agreement with General Electric Capital Corporation (G.E. Capital) whereby we sold a 99% participation ownership interest in various real estate loans with an aggregate principal amount of $52.1 million. We will continue to service these loans and will receive a monthly servicing fee. Any losses with respect to these loans will be shared between us and G.E. Capital based on our pro-rata interest in the loans. The Bank recorded a pre-tax gain of $0.7 million related to the sale of these loans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Based on our business, market risk is primarily limited to interest rate risk which is the impact that changes in interest rates would have on future earnings. Our Asset Liability Committee manages interest rate risk, including interest rate sensitivity and the repricing characteristics of assets and liabilities. The principal objective of our asset/liability management is to maximize net interest income within acceptable levels of risk established by policy. Interest rate risk is measured using financial modeling techniques, including stress tests, to measure the impact of changes in interest rates on future earnings. Net interest income, the primary source of earnings, is affected by interest rate movements. Changes in interest rates have lesser impact the more that assets and liabilities reprice in approximately equivalent amounts at basically the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest sensitivity gaps, which is the difference between interest sensitive assets and interest sensitive liabilities. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures.
     An asset sensitive gap means an excess of interest sensitive assets over interest sensitive liabilities, whereas a liability sensitive gap means an excess of interest sensitive liabilities over interest sensitive assets. In a changing rate environment, a mismatched gap position generally indicates that changes in the income from interest earning assets will not be completely proportionate to changes in the cost of interest bearing liabilities, resulting in net interest income volatility. This risk can be reduced by various strategies, including the administration of liability costs and the reinvestment of asset maturities.

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     The following table sets forth the distribution of rate-sensitive assets and liabilities at the date indicated:
RATE SENSITIVITY
June 30, 2007
                                         
            Over Three     Over One              
    Three     Through     Year     Over        
    Months     Twelve     Through     Five        
    Or Less     Months     Five Years     Years     Total  
            (Dollars in thousands)                  
Assets
                                       
Federal funds sold
  $ 17,155     $     $     $     $ 17,155  
Time deposits with other financial institutions
    806       103       298             1,207  
Securities held to maturity
    2,006       7,002       24,476       67,133       100,617  
Loans, gross
    489,050       70,265       215,734       62,851       837,900  
 
                             
Total rate-sensitive assets
  $ 509,017     $ 77,370     $ 240,508     $ 129,984     $ 956,879  
 
                             
 
                                       
Liabilities:
                                       
Interest bearing demand deposits
  $ 17,803     $     $     $     $ 17,803  
Savings and money market
    205,503                         205,503  
Certificates of deposit
    60,762       139,573       225,149             425,484  
FHLB advances
    60,000             10,000             70,000  
Restructured repurchase agreement
    22,099                         22,099  
Junior subordinated debentures
    27,837                         27,837  
 
                             
Total rate sensitive liabilities
  $ 394,004     $ 139,573     $ 235,149     $     $ 768,726  
 
                             
 
                                       
Interval Gaps:
                                       
Interest rate sensitivity gap
  $ 115,013     $ (62,203 )   $ 5,359     $ 129,984     $ 188,153  
 
                             
Rate sensitive assets to rate sensitive liabilities
    129.2 %     55.4 %     102.3 %     N/A       124.5 %
 
                             
 
                                       
Cumulative Gaps:
                                       
Cumulative interest rate sensitivity gap
  $ 115,013     $ 52,810     $ 58,169     $ 188,153     $ 188,153  
 
                             
Rate sensitive assets to rate sensitive liabilities
    129.2 %     109.9 %     107.6 %     124.5 %     124.5 %
 
                             
 
                                       
% of rate sensitive assets in period
    53.2 %     61.3 %     86.4 %     100.0 %     N/A  
 
                             
ITEM 4. CONTROLS AND PROCEDURES
     The Company maintains disclosure controls and procedures (as defined in Exchange Act Rule 13a—15(e)) that are designed to assure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
     In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide reasonable assurance only of achieving the desired control objectives, and management necessarily is required to apply its judgment in weighting the costs and benefits of possible new or different controls and procedures. Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud within the company have been detected.
     As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date.
     There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarters that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     As of June 30, 2007, we were not involved in any litigation other than routine litigation incidental to our business.
ITEM 1A. RISK FACTORS
     There were no material changes in our risk factors from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     There were no unregistered sales of equity securities for the quarter ended June 30, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     There were no defaults upon senior securities as of June 30, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
          Our Annual Meeting of Shareholders was held on May 25, 2007. Set forth below are the matters voted on by shareholders at the Annual Meeting and the results of the voting.
  (1)   Election of Directors. Set forth below is the name of each Director that was nominated and elected at the Annual Meeting and the respective numbers of votes cast for their election and the respective number of votes withheld. As the election was uncontested, there were no broker non-votes.
                 
Name   Votes For   Withheld
Michael L. Abrams
    5,744,119       26,504  
Robert H. Bothner
    5,732,719       37,904  
Lyn S. Caron
    5,744,119       26,504  
Blair A. Contratto
    5,744,119       26,504  
Willie D. Davis
    5,744,119       26,504  
Daniel T. Jackson
    5,744,119       26,504  
Curtis S. Reis
    5,744,119       26,504  
D. Gregory Scott
    5,744,119       26,504  
Andrew A. Talley
    5,744,119       26,504  
Robert H. Thompson
    5,744,119       26,504  
  (2)   Ratification of Independent Public Accountants. The shareholders ratified the selection of McGladrey & Pullen, LLP as the Company’s independent public accountants for fiscal 2007 by the following vote
                 
Votes For   Votes Against   Abstain
5,659,372
    368       110,883  
ITEM 5. OTHER INFORMATION
     There was no other information to report as of June 30, 2007.

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ITEM 6. EXHIBITS
  31.1   Section 302 CEO Certification
 
  31.2   Section 302 CFO Certification
 
  32.1   Certificate by Curtis S. Reis, Chairman and Chief Executive Officer of the Company dated August 10, 2007 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
 
  32.2   Certificate by Daniel L. Erickson, Executive Vice President and Chief Financial Officer of the Company dated August 10, 2007 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
DATE: August 10, 2007  ALLIANCE BANCSHARES CALIFORNIA
 
 
  By:   /s/ Daniel L. Erickson    
    Daniel L. Erickson   
    Executive Vice President and Chief
Financial Officer 
 

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EXHIBIT INDEX
     
EXHIBITS   DESCRIPTION
 
   
31.1
  Section 302 CEO Certification
 
   
31.2
  Section 302 CFO Certification
 
   
32.1
  Certificate by Curtis S. Reis, Chairman and Chief Executive Officer of the Company dated August 10, 2007 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certificate by Daniel L. Erickson, Executive Vice President and Chief Financial Officer of the Company dated August 10, 2007 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

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