e10vq

UNITED STATES 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, 2008


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		90230
Culver City, California		(Zip Code)
(Address of principal executive offices)

(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, a non-accelerated filer or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company 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.

6,177,979 shares of Common Stock as of July 31, 2008

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	*June 30, 2008*		*December 31, 2007*
	(Unaudited)
	(Dollars in thousands)
*Assets*
Cash and due from banks	$	23,822	$	17,325
Federal funds sold		39,460		26,925

Total cash and cash equivalents		63,282		44,250
Time deposits with other financial institutions		2,015		1,251
Securities held to maturity, fair market value $117,251 at June 30, 2008; $106,282 at December 31, 2007		117,516		105,946
Loans held for sale		2,983		—
Loans, net of the allowance for loan losses of $18,491 at June 30, 2008; $15,284 at December 31, 2007		899,145		887,652
Equipment and leasehold improvements, net		4,510		4,795
Accrued interest receivable and other assets		30,337		22,709

Total assets	$	1,119,788	$	1,066,603


*Liabilities, Redeemable Preferred Stock and Shareholders’ Equity*
Deposits:
Non-interest bearing demand	$	150,578	$	147,242
Interest bearing:
Demand		8,619		9,834
Savings and money market		191,554		197,076
Certificates of deposit		553,774		506,180

Total deposits		904,525		860,332
Accrued interest payable and other liabilities		4,833		6,271
Securities sold under agreements to repurchase		70,908		35,364
FHLB advances		70,000		80,000
Junior subordinated debentures		27,837		27,837

Total liabilities		1,078,103		1,009,804

Commitments and contingencies		—		—
Redeemable Preferred Stock (Note 8)		—		19,016

Shareholders’ Equity:
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, 2008		7,697
6.82% Series B Non-Cumulative Convertible Non-Voting: Authorized and outstanding - 667,096 shares at June 30, 2008		11,319
Common stock, no par value:
Authorized - 20,000,000 shares; Outstanding - 6,177,979 shares at June 30, 2008 and December 31, 2007		6,722		6,722
Additional Paid in Capital		1,369		1,110
Undivided profits		14,578		29,951

Total shareholders’ equity		41,685		37,783

Total liabilities, redeemable preferred stock and shareholders’ equity	$	1,119,788	$	1,066,603

The accompanying notes are an integral part of these statements.

- 3 -

Part I. Item 1. (continued)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	*Three Months Ended June 30,*					*Six Months Ended June 30,*
	*2008*			*2007*		*2008*			*2007*
	(Dollars in thousands except earnings per share)
Interest Income:
Interest and fees on loans	$	14,454		$	18,240	$	31,646		$	35,745
Interest on time deposits with other financial institutions		17			20		33			39
Interest on securities held to maturity		1,547			1,246		2,992			2,489
Interest on federal funds sold		216			759		534			1,167

Total interest income		16,234			20,265		35,205			39,440


Interest Expense:
Interest on deposits		7,616			7,642		15,641			14,629
Interest on FHLB advances		574			679		1,262			1,357
Interest on securities sold under repurchase agreements		336			253		746			473
Interest on junior subordinated debentures		339			512		792			1,020

Total interest expense		8,865			9,086		18,441			17,479

Net interest income before provision for loan losses		7,369			11,179		16,764			21,961
Provision for Loan Losses		27,800			1,074		29,610			2,139

Net interest income (expense)		(20,431	)		10,105		(12,846	)		19,822


Non-Interest Income		1,122			774		1,742			1,395

Non-Interest Expense:
Salaries and related benefits		3,546			4,239		7,702			8,412
Occupancy and equipment expenses		1,055			935		2,136			1,880
Professional fees		476			419		840			707
Data processing		248			220		475			431
Other operating expense		1,348			1,473		2,651			2,886

Total non-interest expense		6,673			7,286		13,804			14,316

Earnings (Losses) Before Income Tax Expense (benefit)		(25,982	)		3,593		(24,908	)		6,901
Income tax expense (benefit)		(10,692	)		1,428		(10,191	)		2,867

Net Earnings (Loss)	$	(15,290	)	$	2,165	$	(14,717	)	$	4,034


Earnings (loss) per Common Share:
Basic earnings (loss) per share	$	(2.53	)	$	0.30	$	(2.49	)	$	0.55
Diluted earnings (loss) per share	$	(2.53	)	$	0.28	$	(2.49	)	$	0.53

The accompanying notes are an integral part of these statements.

- 4 -

Part I. Item 1. (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	*Six Months Ended June 30,*
	*2008*			*2007*
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net earnings (loss)	$	(14,717	)	$	4,034
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Net amortization of discounts and premiums on securities held to maturity		215			60
Depreciation and amortization		788			692
Provision for loan losses		29,610			2,139
Compensation expense on stock options		259			207
Excess tax benefit from share based payment arrangements		—			(109	)
Net gains on sales of loans held for sale		(152	)		(236	)
Proceeds from sales of loans held for sale		13,325			8,168
Originations of loans held for sale		(16,156	)		(6,504	)
(Increase) decrease in accrued interest receivable and other assets		(8,044	)		443
Decrease in accrued interest payable and other liabilities		(1,438	)		(2,151	)

Net cash provided by operating activities		3,690			6,743


Cash Flows from Investing Activities:
Net (increase) decrease in:
Time deposits with other financial institutions		(764	)		1,349
Loans		(41,103	)		(129,731	)
Purchase of equipment and leasehold improvements		(701	)		(1,041	)
Redemption of FHLB stock		—			237
Purchase of FHLB stock		(100	)		(628	)
Purchase of securities held to maturity		(34,882	)		(33,208	)
Proceeds from maturities of securities held to maturity		23,097			37,158
Proceeds from sale of Other real estate owned		714			—

Net cash used in investing activities		(53,739	)		(125,864	)


Cash Flows from Financing Activities:
Net increase (decrease) in:
Demand deposits		3,336			(3,387	)
Interest bearing demand deposits		(1,215	)		4,986
Savings and money market deposits		(5,522	)		21,811
Certificates of deposit		47,594			62,390
Excess tax benefit from share based payment arrangements		—			109
(Payments on) proceeds from increase in FHLB Advances		(10,000	)		20,000
Increase in securities sold under agreements to repurchase		35,544			2,099
Proceeds from stock options exercised		—			79
Dividends paid on preferred stock		(656	)		(656	)

Net cash provided by financing activities		69,081			107,431

Net Increase (Decrease) in Cash and Cash Equivalents		19,032			(11,690	)
Cash and Cash Equivalents, Beginning of Period		44,250			47,542

Cash and Cash Equivalents, End of Period	$	63,282		$	35,852


Supplemental Disclosure 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	$	17,342		$	17,103
Income taxes		370			3,117

The accompanying notes are an integral part of these statements.

- 5 -

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

For the Six Months Ended June 30, 2008 and 2007


	*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


	*Preferred Stock*				*Common Stock*				*Additional*
	*Number of*				*Number*				*Paid In*		*Undivided*
	*Shares*		*Amount*		*of Shares*		*Amount*		*Capital*		*Profits*			*Total*
	(Dollars and shares in thousands)
Balance, December 31, 2007		—	$	—		6,178	$	6,722	$	1,110	$	29,951		$	37,783
Reclassification of Preferred Stock from Mezzanine capital to shareholders’ equity		1,400		19,016		—		—		—		—			19,016
Dividends paid on preferred stock		—		—		—		—		—		(656	)		(656	)
Compensation expense on stock options		—		—		—		—		259		—			259
Net (loss)		—		—		—		—		—		(14,717	)		(14,717	)

Balance, June 30, 2008		1,400	$	19,016		6,178	$	6,722	$	1,369	$	14,578		$	41,685

Part I. Item 1. (continued)

ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2008
(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, 2007 and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The results of operations for the six months ended June 30, 2008 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, 2008.

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 that was incorporated in 2000 in the State of California. The Bank is a commercial bank that was incorporated in 1979 in the State of California. The Bank is chartered by the California Department of Financial Institutions and its deposit accounts are insured by the Federal Deposit Insurance Corporation. The Bank conducts its banking operations primarily in the six Southern California counties: Los Angeles, Orange, Riverside, San Diego, San Bernardino, and Ventura and occasionally other areas of California and other states. References in these Notes to the “Company” refer to Bancshares and its consolidated subsidiaries.

Bancshares has three other 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. FASB interpretation No. 46R does 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 which is included 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, 2007 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 2004 through 2007 subject to examination by the Internal Revenue Service and 2003 through 2007 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.

Other Real Estate Owned

Other real estate owned represents real estate acquired through foreclosure and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for loan losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. There was one property in other real estate owned during the period ended June 30, 2008 with a net book value of $0.9 million which was sold during the second quarter at an amount that approximated its carrying value.

Equity Compensation Plans

The Company has two stock-based equity compensation plans, which are described more fully in Note 4. The following table summarizes various information for stock options issued under the plans for the six months ended June 30, 2008:


					*Weighted Average*
			*Weighted Average*		*Remaining*			*Aggregate Intrinsic*
	*Shares*		*Exercise Price*		*Contractual Life*			*Value*
2008
Outstanding at December 31, 2007		490,600	$	11.32
Granted		5,000	$	3.05
Exercised		100	$	6.10
Forfeited		10,000	$	11.03

Outstanding at June 30, 2008		485,500	$	11.24		6.15	years	$	74,440

Vested or expected to vest at June 30, 2008		469,063	$	11.15		6.11		$	74,440

Options exercisable at June 30, 2008		253,600	$	8.91		5.08		$	74,440

The total intrinsic value of options exercised during the six months ended June 30, 2007 was $182,300. The total intrinsic value of options exercised during the six months ended June 30, 2008 is zero.

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,*
	*2008*			*2007*
	(Dollars in thousands)
Balance at beginning of period	$	15,284		$	9,195
Charge-offs		(26,989	)		(282	)
Recoveries		809			128

Net charge-offs		(26,180	)		(154	)
Provision for loan losses		29,610			2,139
Other adjustments		(223	)		62

Balance at end of period	$	18,491		$	11,242

3. Earnings per Share

Basic and diluted earnings (loss) per share for the periods indicated are computed as follows:


						*Per Share*
*Three Months Ended June 30, 2008*	*Net loss*			*Shares*		*Amount*
	(Dollars in thousands)
Basic and diluted loss per share:
Net loss	$	(15,290	)
Cash dividends on preferred stock		(328	)

Net loss attributable to common shareholders		(15,618	)		6,177,961	$	(2.53	)


						*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

The diluted EPS computation does not include the anti-dilutive effect of options to purchase 410,900 shares and 17,500 shares for the quarters ended June 30, 2008 and 2007, respectively.


						*Per Share*
*Six Months Ended June 30, 2008*	*Net Earnings*			*Shares*		*Amount*
	(Dollars in thousands)
Basic and diluted loss per share:
Net loss	$	(14,717	)
Cash dividends on preferred stock		(656	)

Net loss attributable to common shareholders		(15,373	)		6,177,920	$	(2.49	)


						*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

4. Stock Options

The Company has one equity incentive plan currently in effect, the 2005 Equity Incentive Plan (the “2005 Plan”). Under the 2005 Plan, the Company may issue up to 450,000 shares of common stock upon the exercise of incentive and non-qualified options, as restricted stock grants, or upon exercise of stock appreciation rights. To date, the Company has issued only options under the 2005 Plan.

The Company had another equity incentive plan, the 1996 Combined Incentive and Qualified Stock Option Plan (“1996 Plan”), pursuant to which the Company could issue up to 800,000 shares of common stock upon exercise of incentive and non-qualified options. The 1996 Plan expired in February 2006, although options remain outstanding under that 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 must vest in various increments not less frequently than 20% per year.

At June 30, 2008, compensation expense related to non-vested stock option grants aggregated to $1.3 million and is expected to be recognized as follows:


	*Stock Option*
	*Compensation*
	*Expense*
	(Dollars in thousands)
Remainder of 2008	$	245
2009		458
2010		340
2011		188
2012		53

Total	$	1,284

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,*
	*2008*			*2007*
Risk-free rate		3.56	%		4.81	%
Expected term	6.5 years			4 - 6.5 years
Expected volatility		39.30	%		36.04	%

5. Operating Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS No. 131”) 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 that provide a wide range of credit products and banking services primarily to small to medium sized businesses, executives, and professionals. The Bank’s regional banking centers are considered operating segments and have been aggregated for segment reporting purposes because the products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. 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.

Management’s 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. Since the Company derives substantially all of its revenues from interest and noninterest income, and interest expense is its most significant expense, the Company reports the net interest income (interest income less interest expense), which includes the effect of internal funds transfer pricing, and noninterest income for each of these segments as shown in the following table for the three and six months ended June 30, 2008 and 2007. The following table also shows the assets allocated to each of these segments as of June 30, 2008 and December 31, 2007.


	Regional		Real Estate
	Banking		Industries
Three Months Ended June 30	Centers		Division			SBA		Other			Total
	(Dollars in thousands)
2008
Interest income	$	8,939	$	4,212		$	787	$	2,296		$	16,234
Credit for funds provided		6,599		329			34		(6,962	)		—

Total interest income		15,538		4,541			821		(4,666	)		16,234

Interest expense		2,927		—			—		5,938			8,865
Charge for funds used		6,072		4,004			377		(10,453	)		—

Total interest expense		8,999		4,004			377		(4,515	)		8,865

Net interest income		6,539		537			444		(151	)		7,369
Provision for loan losses		—		—			—		27,800			27,800

Net interest income (loss) after provision for loan losses		6,539		537			444		(27,951	)		(20,431	)

Non-interest income		422		277			233		190			1,122
Non-interest expense		2,352		827			279		3,215			6,673

Net contribution to earnings before tax expense	$	4,609	$	(13	)	$	398	$	(30,976	)	$	(25,982	)


	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 (loss) 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
Six Months Ended June 30	Centers		Division		SBA		Other			Total
	(Dollars in thousands)
2008
Interest income	$	17,720	$	11,199	$	1,630	$	4,656		$	35,205
Credit for funds provided		13,700		700		67		(14,467	)		—

Total interest income		31,420		11,899		1,697		(9,811	)		35,205

Interest expense		6,575		—		—		11,866			18,441
Charge for funds used		12,162		8,236		751		(21,149	)		—

Total interest expense		18,737		8,236		751		(9,283	)		18,441

Net interest income		12,683		3,663		946		(528	)		16,764
Provision for loan losses		—		—		—		29,610			29,610

Net interest income (loss) after provision for loan losses		12,683		3,663		946		(30,138	)		(12,846	)

Non-interest income		715		345		297		385			1,742
Non-interest expense		5,016		1,583		624		6,581			13,804

Net contribution to earnings before tax expense	$	8,382	$	2,425	$	619	$	(36,334	)	$	(24,908	)


	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

Segment assets as of:
June 30, 2008	$	534,183	$	328,537	$	34,035	$	223,033		$	1,119,788

December 31, 2007	$	489,666	$	357,087	$	32,575	$	187,275		$	1,066,603

Note: Overhead expenses and the provision for loan losses are not allocated for costs from administration departments to operating segments.

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 adoption of SFAS 159 had no impact on the Company’s consolidated financial statements as management did not elect the fair value option for any financial assets or liabilities.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. SFAS 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis for which delayed application is permitted until fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 effective January 1, 2008 and the adoption did not have a material impact on the consolidated financial statement or results of operations of the Company.

7. Fair Value Measurements

Effective January 1, 2008, the Company partially adopted SFAS 157, Fair Value Measurements, of SFAS 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. SFAS 157 was issued to increase consistency and comparability in reporting fair values. In February 2008, the Financial Accounting Standards Board issued Staff Position No. FAS 157-2, or FSP 157-2, which delays the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities, to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The delay is intended to allow additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157. The Company has elected to apply the deferral provisions in FSP 157-2 and therefore has only partially applied the provisions of SFAS 157. The Company’s adoption of SFAS 157 did not have a material impact on the Company’s financial condition or results of operations.

SFAS No. 157, Fair Value Measurements, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The three levels are defined as follows:


•	Level 1	inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•	Level 2	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•	Level 3	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company has not adopted the provisions of SFAS 157 with respect to certain nonfinancial assets, such as other real estate owned. The Company will fully adopt SFAS 157 with respect to such items effective January 1, 2009. The Company does not believe that such adoption will have a material impact on the consolidated financial statements, but will result in additional disclosures related to the fair value of nonfinancial assets.

The Company has identified impaired loans with allocated reserves under SFAS 114 as those items requiring disclosure under SFAS 157.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Assets

Fair Value on a Recurring Basis

The table below presents the balance of securities held to maturity at June 30, 2008, the fair value of which is disclosed on a recurring basis:

Fair Value Measurements Using

Quoted Prices

Significant

In Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Securities held to maturity

117,251

—

117,251

—

Securities held to maturity consist of AAA-rated US Government agency securities, corporate bonds and collateralized mortgage obligations and mortgage-backed securities. The Company discloses securities held to maturity at fair value on a recurring basis. The fair value of the Company’s securities held to maturity are determined using Level 1 inputs, which are derived from readily available pricing sources and third-party pricing services for identical or comparable instruments, respectively.

Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the balance sheet by caption and by level within the SFAS 157 hierarchy as of June 30, 2008.

Fair Value Measurements Using

Quoted Prices

Significant

In Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Impaired loans

137,929

—

137,929

The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of collateral was determined based on appraisals. In some cases, adjustments were made to the appraised values to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Specific reserves were calculated for impaired loans with an aggregate carrying amount of $2.7 million during the quarter ended June 30, 2008. The collateral underlying these loans had a fair value of $2.7 million, less estimated costs to sell of $1.2 million, resulting in a specific reserve in the allowance for loan losses of $1.2 million.

Loans held for sale

Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS No. 157, market value represents fair value. As of June 30, 2008, the Company has approximately $3.0 million of loans held for sale. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions which is a level 2 input. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, the entire balance of loans held for sale was recorded at its cost.

8. Amendment of Preferred Stock

In June 2008, the terms of our 7% Series A Non-Cumulative Preferred Stock and 6.82% Series B Non-Cumulative Preferred Stock were amended to eliminate the right of the Company to redeem the Preferred Stock. As a result, the Preferred Stock amounts are now reflected on the consolidated statement of financial condition of the Company as shareholders equity and not mezzanine capital.

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 under “Item IA. Risk Factors in Part II — Other Information” in Management’s Discussion and Analysis of Financial Condition and Results of Operation”, in this Quarterly Report on Form 10-Q for the period ended June 30, 2008 (see page 37). 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 reported a net loss of $15.3 million ($2.53 basic and diluted loss per share) for the three months ended June 30, 2008 as compared to net earnings of $2.2 million ($0.30 basic and $0.28 diluted earnings per share) for the same period of 2007. For the six months ended June 30, 2008, we reported a net loss of $14.7 million ($2.49 basic and diluted loss per share) as compared to net earnings of $4.0 million ($0.55 basic and $0.53 diluted earnings per share) for the same period of 2007. The decrease in net earnings for the second quarter was primarily attributable to provisions for loan losses of $27.8 million, as compared to $1.1 million in the second quarter of 2007. In the second quarter of 2008, the Company, being aware of the continued effects of the weakening economy and the further deterioration of the real estate market in Southern California, took steps to ensure the collateral securing our loan portfolio was adequate. Following an extensive review of our loan portfolio, we identified a number of loans that are secured by property which is below the recently appraised values of each related loan. As a result, for those loans that are deemed to be impaired, we have charged off or written down the related loan balances by a total of $24.6 million during the second quarter and provided $29.6 million to our allowance for loan losses to increase it to 2.01% of gross loans.

We have been adversely impacted by the deterioration in the Southern California real estate markets. This has particularly impacted our construction lending, a substantial portion of which has included loans for the construction of tract projects and single homes built for unidentified buyers and loans to improve land. Our homebuilder borrowers are experiencing declining prices and longer sale periods for their completed homes and lots, resulting in slower repayments than originally projected. This situation has resulted in a significant amount of loan defaults within the construction loan portfolio. Further real estate market declines may have additional adverse affects on the values of the properties collateralizing our loans and we could incur higher losses on sales of properties collateralizing our loans.

Our non-performing assets have continued to increase, from $29.9 million at December 31, 2007 to $93.4 million at June 30, 2008. Substantially all of the increase was in non-accrual loans, which increased from $28.8 million to $88.8 million. Our allowance for loan losses was $18.5 million or 2.01% of loans at June 30, 2008 compared to $15.3 million or 1.69% of loans at December 31, 2007. We expect the economic environment to remain weak into 2009 with credit costs in our construction loan portfolio to remain at elevated levels.

We began curtailing the origination of construction loans in mid-2007, and these types of loans now represent a smaller portion of our loan portfolio (23% at June 30, 2008, down from 36% at June 30, 2007). We still have $43.1 million of unfunded commitments for these loans, but believe that the substantial part of these commitments will expire unfunded because conditions to funding will not be satisfied. In addition, approximately 88% in principal amount of our construction loans that were non-performing assets at June 30, 2008, represented projects that were complete (as to construction of the entire project or current phase, or as to land development), and thus would not require material additional funds to complete prior to sale by the borrower or following foreclosure. We do not intend to originate any material amount of new construction loans under present market conditions, and we expect that construction loans will continue to decrease through 2008, both in total amount and as a percentage of our loan portfolio.

As a result of the weak economy and the downturn in the housing sector, we continue our efforts to contain costs. Operating expenses decreased by $0.6 million and $0.5 million for the three and six months ended June 30, 2008 as compared to the same periods in 2007, notwithstanding the opening and staffing of our Westside Regional Banking Center in the summer of 2007. Salaries and related benefits decreased 16.3% and 8.4% for the three and six months ended June 30, 2008 as compared to the same periods in 2007 as we reduced our bonus accrual, our profit sharing accrual and restructured our sales incentive plan. In addition, we combined a number of dispersed functions into one location in Irvine at the end of June in order to improve efficiencies while reducing staff.

In addition to a higher provision for loan losses, our net interest income declined during the three and six months end June 30, 2008 compared to the same periods of 2007 primarily due to: (i) construction loans, our highest yielding loans, constituting a smaller portion of our loan portfolio; (ii) the increase in non-accrual loans, which resulted in interest reversals of $2.1 million and $2.4 million for the three and six months ended June 30, 2008 and impacted the weighted average yield on our interest earning assets by approximately 0.77% and 0.47% for the three months and six months ended June 30, 2008; and (iii) a decrease in the prime rate of 325 basis points (from 8.25% to 5.00%) between June 30, 2007 and June 30, 2008, which affected the yields on our assets more than the cost of our liabilities in the short term.

These factors also contributed to our decline in net interest margin from 4.74% in the second quarter of 2007 to 2.69% in the second quarter of 2008 and 4.86% in the first six months of 2007 to 3.12% in the first six months of 2008. Our net interest margin was also adversely impacted by an increase from quarter to quarter in certificates of deposit, our highest cost deposits. The weighted average rate paid on our certificates of deposit declined only 51 and 32 basis points for the three and six months ended June 30, 2008, from 5.19% to 4.68% and from 5.15% to 4.83%, respectively, because of the longer repricing intervals of these deposits and competitive conditions, which sustained the rates required to be paid on these deposits notwithstanding the decline in the prime rate. Approximately $164 million of our certificates of deposit will mature prior to the end of the year, and we anticipate they will be renewed or replaced at lower rates.

We continue to grow, although at a slower pace than in the past several years. Our total assets increased $53.2 million to $1,119.8 million at June 30, 2008. This increase was due principally to: (i) an $81.3 million increase in our real estate loans, including primarily loans secured by commercial properties; (ii) a $12.5 million increase in Federal funds sold; and (iii) an $11.6 million increase in investment securities. Deposits increased from $860.3 million at December 31, 2007 to $904.5 million at June 30, 2008 generated primarily through brokered deposits.

Our total capital for regulatory purposes was $80.5 million at June 30, 2008 and we continued to meet all applicable regulatory capital requirements and the Bank was considered “adequately capitalized” under applicable regulations. We have engaged the services of Stifel Nicolaus & Company and Wunderlich Securities, Inc. as our financial advisors to assist us in raising additional capital. We may also improve the Company’s capital ratios through reducing total assets, principally through sales of loans or participations.

Because the Bank is not “well capitalized,” we may not accept brokered deposits without the prior approval of the FDIC. The Company is in the process of requesting approval from the FDIC however, we cannot provide assurance that we will be able to obtain this approval. In addition, we believe that we may 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.

RESULTS OF OPERATIONS — Three months and six months ended June 30, 2008 and 2007

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*
	*2008*			*2007*			*Change*			*2008*			*2007*			*Change*
	(Unaudited)
	(Dollars in thousands)
Interest income	$	16,234		$	20,265			(19.9	)%	$	35,205		$	39,440			(10.7	)%
Interest expense		8,865			9,086			(2.4	)%		18,441			17,479			5.5	%
Net interest income before provision for loan losses		7,369			11,179			(34.1	)%		16,764			21,961			(23.7	)%
Net interest margin		2.69	%		4.74	%		(43.2	)%		3.12	%		4.86	%		(35.8	)%

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”).

Our net interest income before provision for loan losses decreased from $11.2 million and $22.0 million for the three and six months ended June 30, 2007 to $7.4 million and $16.8 million for the same periods in 2008. The decrease for the three months ended June 30, 2008 was due to a $4.0 million decrease in interest income. The decrease for the six months ended June 30, 2008 was due to a $4.2 million decrease in interest income while interest expense increased by $1.0 million. The decreases in interest income are attributable to the increase in our non-accrual loans and interest reversed on previously accruing loans. The increase in interest expense is primarily due to the higher rates paid on our certificates of deposit.

Interest income was $16.2 million and $35.2 million for the three and six months ended June 30, 2008 as compared to $20.3 million and $39.4 million for the three and six months ended June 30, 2007. The decreases were due to 2.66% and 2.18% decreases in the weighted average yield on interest earning assets for the three and six months ended June 30, 2008, which more than offset the $154.1 million and $169.7 million increases in average interest earning assets for the three and six months ended June 30, 2008. The decreases in weighted average yield on interest earning assets was due primarily to 3.03% and 2.50% decreases in the weighted average yield on loans for the three and six months ended June 30, 2008, which was caused by: (i) construction loans, our highest yielding loans, constituting a smaller portion of our loan portfolio (23% at June 30, 2008 compared to 36% for the same period in 2007); (ii) the fact that our a substantial part of our loan portfolio has adjustable rates tied to the prime rate, and the prime rate declined from 8.25% in the first six months of 2007 to 5% in the first six months of 2008; and (iii) an increase in our non-accrual loans that resulted in the reversal of interest on loans previously accruing interest of $2.1 million and $2.4 million affecting our loan yields by a drop of approximately 0.89% and 0.54% for the three and six months ended June 30, 2008. The increases in average interest earning assets was due primarily to increases in our loan portfolio, and in particular commercial real estate loans.

Interest expense decreased slightly from $9.1 million in the quarter ended June 30, 2007 to $8.9 million in the quarter ended June 30, 2008. This decrease was due to a 1.06% decrease in the weighted average rates paid on interest bearing liabilities offset in part by $184.4 million increase in average interest bearing liabilities. Interest expense increased from $17.5 million for the six months ended June 30, 2007 to $18.4 million for the six months ended June 30, 2008. The increase in interest expense for the six months ended June 30, 2008 was due to a $187.4 million increase in average interest bearing liabilities despite a 0.81% decrease in the weighted average rates paid on interest bearing liabilities for the six months ended June 30, 2008.

The increases in average interest bearing liabilities was due primarily to a $125.4 million and $126.1 million increase in average certificates of deposit (“CDs”) and to a lesser extent increases in average repurchase agreements during the three and six months ended June 30, 2008. We funded our growth with CDs because we did not want to fully utilize our FHLB and repurchase agreement borrowing capability, which require loans and securities as collateral. Our weighted average cost of funds was also adversely affected because our weighted average rate paid on our CDs declined only by 51 and 32 basis points for the three and six months ended June 30, 2008, from 5.19% to 4.68% and from 5.15% to 4.83%, respectively. These were due to the longer repricing intervals of these deposits and competitive conditions, which sustained the market rates on CDs notwithstanding the decline in the prime rate. Approximately $164 million of our certificates of deposit will mature prior to the end of the year, and we anticipate they will be renewed or be replaced at lower rates.

The increase in average interest earning assets and average interest bearing liabilities is a result of continued efforts to expand all of the Bank’s Regional Banking Centers. Most of this growth occurred in the commercial real estate loan category which was funded primarily by certificates of deposits.

Our interest rate spread decreased from 3.68% during the second quarter of 2007 to 2.09% during the second quarter of 2008. This decrease resulted from a decrease in the weighted average yield on our interest earning assets of 2.66% during the three months ended June 30, 2008 offset by the 1.06% decrease in the weighted average cost of our interest bearing liabilities during the same period. The 325 basis point decline in the prime rate impacted our loan portfolio more immediately and to a greater extent than its impact on our interest bearing liabilities generally and our CDs in particular. Our interest rate spread was also adversely affected by our higher levels of non-accrual loans and a change in the composition of our loan portfolio from construction loans, which declined from 36% of our loan portfolio in 2007 to 23% of our loan portfolio in 2008, and an increase in commercial real estate loans from 34% to 48% of our loan portfolio during the same period. During the past year, commercial real estate loans generally have interest rates somewhat lower than concurrently originated construction loans. Our net interest spread was also adversely impacted by an increase from quarter to quarter in certificates of deposit, our highest cost deposits. The weighted average rate paid on our certificates of deposit declined only 51 basis points, from 5.19% to 4.68%. This increase in the high cost of certificates of deposits was offset somewhat by the lower rates paid on our savings and money market accounts decreasing from 4.18% and 4.21% for the three and six months ended June 30, 2007 to 2.34% and 2.65% for the same period in 2008.

These factors also contributed to a decline in net interest margin from 4.74% in the second quarter of 2007 to 2.69% in the second quarter of 2008. Our net interest margin continues to remain higher than our interest rate spread as we have a significant amount of non-interest bearing liabilities, including principally non-interest bearing demand deposits.

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.

ANALYSIS OF NET INTEREST INCOME


	*Three Months ended June 30,*
	*2008*							*2007*
					*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	$	43,564	$	216		1.99	%	$	57,510	$	759		5.29	%
Time deposits		2,310		17		2.89	%		1,972		20		4.07	%
Securities		114,942		1,547		5.41	%		93,083		1,246		5.37	%
Loans ⁽²⁾		939,419		14,454		6.19	%		793,548		18,240		9.22	%

Total interest earning assets		1,100,235		16,234		5.93	%		946,113		20,265		8.59	%

Non-interest earning assets		31,870							29,210

Total assets	$	1,132,105						$	975,323

Interest bearing liabilities:
Interest bearing demand deposits	$	9,943		30		1.21	%	$	16,452		63		1.54	%
Savings and money market deposits		204,601		1,190		2.34	%		200,330		2,090		4.18	%
Certificates of deposit		549,942		6,396		4.68	%		424,501		5,489		5.19	%
FHLB advances:
Short-term		40,903		361		3.55	%		—		—		—
Long-term		30,000		213		2.85	%		50,566		679		5.39	%
Securities sold under repurchase agreements		63,243		336		2.13	%		22,386		253		4.53	%
Junior subordinated debentures		27,837		339		4.90	%		27,837		512		7.38	%

Total interest bearing liabilities		926,469		8,865		3.85	%		742,072		9,086		4.91	%

Non-interest bearing liabilities		148,290							177,379

Total liabilities		1,074,759							919,451
Redeemable preferred stock and shareholders’ equity		57,346							55,872

Total liabilities and shareholders’ equity	$	1,132,105						$	975,323

Net interest income			$	7,369						$	11,179

Interest rate spread						2.09	%						3.68	%
Net interest margin						2.69	%						4.74	%


⁽¹⁾		Interest income on loans includes loan fees of $0.5 million in 2008 and $1.2 million in 2007.

⁽²⁾		Loans include nonaccrual loans with an average balance of $99.3 million in 2008 and $23.0 million in 2007.

⁽³⁾		Annualized


	*Six Months ended June 30,*
	*2008*							*2007*
					*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	$	41,495	$	534		2.59	%	$	45,198	$	1,167		5.21	%
Time deposits		2,099		33		3.14	%		2,019		39		3.90	%
Securities		112,261		2,992		5.36	%		94,886		2,489		5.29	%
Loans ⁽²⁾		924,364		31,646		6.88	%		768,416		35,745		9.38	%

Total interest earning assets		1,080,219		35,205		6.55	%		910,519		39,440		8.73	%

Non-interest earning assets		33,240							29,828

Total assets	$	1,113,459						$	940,347

Interest bearing liabilities:
Interest bearing demand deposits	$	10,361		74		1.43	%	$	15,276		117		1.54	%
Savings and money market deposits		210,780		2,781		2.65	%		198,162		4,141		4.21	%
Certificates of deposit		532,168		12,786		4.83	%		406,020		10,371		5.15	%
FHLB advances:
Short-term		40,728		778		3.84	%		—		—		—
Long-term		30,000		484		3.24	%		50,292		1,357		5.44	%
Securities sold under repurchase agreements		54,402		746		2.76	%		21,320		473		4.47	%
Junior subordinated debentures		27,837		792		5.72	%		27,837		1,020		7.39	%

Total interest bearing liabilities		906,276		18,441		4.09	%		718,907		17,479		4.90	%

Non-interest bearing liabilities		149,590							166,192

Total liabilities		1,055,866							885,099
Redeemable preferred stock and shareholders’ equity		57,593							55,248

Total liabilities and shareholders’ equity	$	1,113,459						$	940,347

Net interest income			$	16,764						$	21,961

Interest rate spread						2.46	%						3.83	%
Net interest margin						3.12	%						4.86	%


⁽¹⁾		Interest income on loans includes loan fees of $1.1 million in 2008 and $2.5 million in 2007.

⁽²⁾		Loans include nonaccrual loans with an average balance of $116.7 million in 2008 and $20.8 million in 2007.

⁽³⁾		Annualized

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 NET INTEREST INCOME


	*Three Months Ended June 30, 2008*									*Six Months Ended June 30, 2008*
	*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	$	(152	)	$	(391	)	$	(543	)	$	(89	)	$	(544	)	$	(633	)
Time deposits		3			(6	)		(3	)		2			(8	)		(6	)
Securities		294			7			301			462			41			503
Loans		2,957			(6,743	)		(3,786	)		6,422			(10,521	)		(4,099	)

Total interest earning assets		3,102			(7,133	)		(4,031	)		6,797			(11,032	)		(4,235	)

Interest expense:
Interest bearing demand		(21	)		(12	)		(33	)		(35	)		(8	)		(43	)
Savings and money market		44			(944	)		(900	)		249			(1,609	)		(1,360	)
Certificates of deposit		1,500			(593	)		907			3,061			(646	)		2,415
FHLB advances:
Short-term		361			—			361			778			—			778
Long-term		(216	)		(250	)		(466	)		(437	)		(436	)		(873	)
Securities sold under agreements to repurchase		272			(189	)		83			509			(236	)		273
Junior subordinated debentures		—			(173	)		(173	)		—			(228	)		(228	)

Total interest bearing liabilities		1,940			(2,161	)		221			4,125			(3,163	)		962

Net interest income	$	1,164		$	(4,879	)	$	(3,715	)	$	2,672		$	(7,869	)	$	(5,197	)

Provision for Loan Losses

We made provisions for loan losses of $27.8 million and $29.6 million, respectively, for the three and six months ended June 30, 2008 as compared to provisions of $1.1 million and $2.1 million for the comparable periods of 2007. We have made an extensive review of our loan portfolio, and identified a large number of loans where the appraisal value of the property was below the carrying value of the related loan. Thus, for those loans that were considered to be impaired, we have chosen to charge off or write down the related loan balances on each of these loans in the second quarter. This resulted in providing an additional provision for loan losses to increase our allowance to approximately 2.01% of our loan portfolio. The continuing housing slump in Southern California and the nation and its uncertain future have unfavorably impacted our homebuilding borrowers and the value of their collateral. At June 30, 2008, we had outstanding construction loans to developers for tract projects and single homes for sale to unidentified buyers totaling $140.2 million, representing 15.3% of our loan portfolio, and additional commitments for these projects in the amount of $24.2 million (although we believe that the substantial part of these commitments will expire unfunded because conditions for funding will not be satisfied). We began curtailing the origination of construction loans in mid-2007, and these types of loans now represent a smaller portion of our loan portfolio (23% at June 30, 2008 from 36% at June 30, 2007). We do not intend to originate any material amount of new construction loans under present market conditions, and we expect that construction loans will decrease through 2008, both in total amount and as a percentage of our loan portfolio. While we have increased our loan loss provisions, a prolonged or deeper decline in the housing market will impact our homebuilder borrowers. We will continue to monitor this closely to determine whether further loan loss provisions are required. We do expect credit losses in our residential construction loan portfolio to remain at elevated levels throughout 2008 and into 2009 as compared to the recent past.

We assess the adequacy of the allowance for loan losses (the “Allowance”) each calendar quarter. Impaired loans are carried at the lower of the adjusted principal balance or the fair market value based on their discounted cashflows, or if collateral dependent, the fair market value of the underlying collateral less estimated costs to sell. Loans that are not impaired are subdivided into pools of similar loans by loan type and are assigned reserve percentages based on our loss history. 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.

Non-Interest Income

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*
	*2008*		*2007*		*Change*			*2008*		*2007*		*Change*
	(Dollars in thousands)
Service charges	$	417	$	281		48.4	%	$	716	$	567		26.3	%
Gain on sale of loans, net		106		184		(42.4	)%		152		236		(35.6	)%
Loan broker fee income		126		47		168.1	%		159		129		23.3	%
Other		473		262		80.5	%		715		463		54.4	%

Total	$	1,122	$	774		45.0	%	$	1,742	$	1,395		24.9	%

Non-interest income primarily includes service charges on deposit accounts, net gains on sales of loans, loan broker fees for referring loans to other lenders and fund control service fees. Non-interest income increased by 45.0% and 24.9% for the three and six months ended June 30, 2008 as compared to the same period in 2007, due to increases in service charges and other income. Service changes increased primarily due to the growth of our deposits and the increase in the account activities of our demand deposit customers which contribute to higher amounts of fee income. Other income increased by 80.5% and 54.4% for the three and six months ended June 30, 2008 due to fees received for performing certain fund control services on our construction loans in-house as opposed to outsourcing this service in 2007.

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.

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*
	*2008*		*2007*		*Change*			*2008*		*2007*		*Change*
	(Dollars in thousands)
Salaries and related benefits	$	3,546	$	4,239		(16.3	)%	$	7,702	$	8,412		(8.4	)%
Occupancy and equipment		1,055		935		12.8	%		2,136		1,880		13.6	%
Professional fees		476		419		13.6	%		840		707		18.8	%
Data processing		249		238		4.6	%		475		431		10.2	%
Other operating expense		1,348		1,272		6.0	%		2,651		2,886		(8.1	)%

Total	$	6,673	$	7,286		(8.4	)%	$	13,804	$	14,316		(3.6	)%

Salaries and related benefits expense decreased by 16.3% and 8.4% for the three and six months ended June 30, 2008 as compared to the same period in 2007. We have made a concerted effort to contain costs due to the slowing of the housing market and the overall current economic environment. We have managed to reduce our salaries and related benefits by decreasing bonus accrual, profit sharing accruals and restructuring our overall incentive plan. Additionally, in June 2008 we consolidated a number of dispersed functions into one location in Irvine to improve efficiencies.

Occupancy and equipment expenses increased by 12.8% and 13.6% for the three and six months ended June 30, 2008 as compared to the same period in 2007 due primarily to the opening of our Westside Regional Banking Center.

Professional fees increased by 13.6% and 18.8% for the three and six months ended June 30, 2008 as compared to the same period in 2007 primarily due to the legal fees incurred in connection with the increase in our non-performing assets.

As a result of the current economy and the downturn in the housing sector, we have taken a number of actions to contain costs. Our cost containment efforts included but were not limited to the areas of marketing, business and entertainment, as well as recruiting fees for hiring new employees. Other operating expense increased only 6.0% for the three months ended June 30, 2008 as compared to the same period in 2007 notwithstanding the opening of our Westside Regional Banking Center in the summer of 2007 and the increase in FDIC assessment fee. Other operating expense decreased by 8.1% for the six months ended June 30, 2008 as compared to the same period in 2007 due to our efforts to contain costs.

FINANCIAL CONDITION

Regulatory Capital

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, 2008


						*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)	$	80,543		8.45	%	$	76,283		>=8.0	%		N/A		N/A
Tier 1 Capital (to risk-weighted assets)	$	55,391		5.81	%	$	38,141		>=4.0	%		N/A		N/A
Tier 1 Capital (to average assets)	$	55,391		4.90	%	$	45,246		>=4.0	%		N/A		N/A
Bank
Total Capital (to risk-weighted assets)	$	80,252		8.43	%	$	76,180		>=8.0	%	$	95,225		>=10.0	%
Tier 1 Capital (to risk-weighted assets)	$	68,268		7.17	%	$	38,090		>=4.0	%	$	57,135		>=6.0	%
Tier 1 Capital (to average assets)	$	68,268		6.04	%	$	45,246		>=4.0	%	$	56,557		>=5.0	%

Our regulatory capital decreased since December 31, 2007 as a result of our net loss and by dividends on our preferred stock. At June 30, 2008, Bancshares and the Bank met all applicable regulatory capital requirements and the Bank was “adequately capitalized” as defined under applicable regulations. However, we have little excess regulatory capital, and thus we will be unable to grow except to the extent we increase our regulatory capital through earnings or issuances of capital stock or other securities that may be included in regulatory capital. The Company has engaged the services of Stifel Nicolaus & Company and Wunderlich Securities, Inc. as our financial advisors to assist us in raising additional capital. We may also improve the Company’s capital ratios through reducing total assets, principally through sales of loans or participations of loans.

Because the Bank is not “well capitalized” under the FDIC prompt corrective action rules, we may not accept brokered deposits without the prior approval of the FDIC. The Company is in the process of requesting approval from the FDIC however, we cannot provide assurance that we will be able to obtain this approval. 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.

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, brokers or the internet.

Average deposits provide most of our funds. This relatively stable and low-cost source of funds has, along with average preferred stock and shareholders’ equity, provided 86% and 89%, respectively, of our funding as a percentage of average total assets during the six months ended June 30, 2008 and 2007.

Secondary sources of liquidity include borrowing arrangements with the 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, 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, 2008, we had $70.0 million outstanding FHLB advances and had no outstanding borrowings from the FRB. Subsequent to June 30, 2008, our maximum borrowing capacity at FHLB was $85 million.

We also have liquidity as a net seller of overnight funds. During the six months ended June 30, 2008, we had an average balance of $41.5 million in overnight funds sold representing 4% of total average assets. Subsequent to June 30, 2008, the Company has improved it’s net liquid asset position to an amount in excess of $100 million.

We may also obtain funds from securities sold under agreements to repurchase. See “Borrowed Funds — Securities Sold Under Agreements to Repurchase.”

Cash Flow from Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2008 decreased by $2.3 million as compared to the same period in 2007 primarily due to the increase in accrued interest receivable and other assets.

Cash Flow from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2008 decreased by $71.4 million as compared to the same period in 2007 primarily due to the decrease in loan growth.

Cash Flows from Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2008 decreased by $38.4 million as compared to the same period in 2007 primarily due to a decrease in savings and money market deposits, demand deposits and FHLB advances, offset by an increase in certificate of deposits and securities sold under agreements to repurchase.

Rate Sensitivity

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.

The following table sets forth the distribution of rate-sensitive assets and liabilities at the date indicated:

RATE SENSITIVITY
June 30, 2008
(Dollars in thousands)


				Over Three			Over One
	Three			Through			Year			Over
	Months			Twelve			Through			Five
	Or Less			Months			Five Years			Years			Total
Assets
Federal funds sold	$	39,460		$	—		$	—		$	—		$	39,460
Time deposits with other financial institutions		717			1,100			198			—			2,015
Securities held to maturity		—			4,004			995			112,517			117,516
Loans, gross		392,946			82,615			298,471			145,215			919,247

Total rate-sensitive assets	$	433,123		$	87,719		$	299,664		$	257,732		$	1,078,238


Liabilities:
Interest bearing demand deposits	$	8,619		$	—		$	—		$	—		$	8,619
Savings and money market		191,554			—			—			—			191,554
Certificates of deposit		87,406			262,926			203,442			—			553,774
FHLB advances		50,000			10,000			10,000			—			70,000
Securities sold under agreements to repurchase		70,908			—			—			—			70,908
Junior subordinated debentures		27,837			—			—			—			27,837

Total rate sensitive liabilities	$	436,324		$	272,926		$	213,442		$	—		$	922,692


Interval Gaps:
Interest rate sensitivity gap	$	(3,201	)		($185,207	)	$	86,222		$	257,732		$	155,546

Rate sensitive assets to rate sensitive liabilities		99.3	%		32.1	%		140.4	%		N/A			116.9	%


Cumulative Gaps:
Cumulative interest rate sensitivity gap	$	(3,201	)		($188,408	)	$	(102,186	)	$	155,546		$	155,546

Rate sensitive assets to rate sensitive liabilities		99.3	%		73.4	%		88.9	%		116.9	%		116.9	%


% of rate sensitive assets in period		40.2	%		48.3	%		76.1	%		100.0	%		N/A

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, 2008*					*December 31, 2007*
			*Weighted*					*Weighted*
			*Average*					*Average*
	*Book Value*		*Yield*			*Book Value*		*Yield*
	(Dollars in thousands)
Time deposits maturing:
Within one year	$	1,817		3.06	%		1,053		3.78	%
After one year but within five years		198		4.00	%		198		4.00	%

Total time deposits	$	2,015		3.15	%	$	1,251		3.82	%

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 periods covered by the following tables.

INVESTMENT SECURITIES


	*June 30, 2008*					*December 31, 2007*
			*Weighted*					*Weighted*
			*Average*					*Average*
	*Book Value*		*Yield*			*Book Value*		*Yield*
	(Dollars in thousands)
Investment securities maturing:
Within one year	$	4,004		5.29	%	$	7,994		5.20	%
After one year but within five years		995		4.13	%		8,492		5.02	%
Collateralized mortgage obligations and mortgage-backed securities		112,517		5.60	%		89,460		5.44	%

Total investment securities	$	117,516		5.57	%	$	105,946		5.38	%

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, 2008, we classified all our investment securities as held to maturity as we intend to hold the securities to maturity.

At June 30, 2008 and 2007, securities with an amortized cost of $102.2 million and $40.0 million, respectively, were pledged to secure securities sold under agreements to repurchase, a letter of credit, FHLB advances and a discount line at the FRB.

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, 2008*
U.S. Agency securities	$	995	$	1	$	—	$	996
Corporate bonds		4,004		—		117		3,887
Collateralized mortgage obligations and mortgage-backed securities:		112,517		885		1,034		112,368

	$	117,516	$	886	$	1,151	$	117,251


			*Gross*		*Gross*
			*Unrealized*		*Unrealized*		*Estimated Fair*
	*Amortized Cost*		*Gains*		*Losses*		*Value*
	(Dollars in thousands)
*December 31, 2007*
U.S. Agency securities	$	10,477	$	26	$	—	$	10,503
Corporate bonds		6,009		—		143		5,866
Collateralized mortgage obligations and mortgage-backed securities		89,460		834		381		89,913

	$	105,946	$	860	$	524	$	106,282

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, 2008 are summarized as follows:

UNREALIZED LOSSES ON INVESTMENT SECURITIES


	*Less than 12 Months*				*12 Months or More*				*Total*
			*Unrealized*				*Unrealized*				*Unrealized*
	*Fair value*		*loss*		*Fair value*		*loss*		*Fair value*		*loss*
	(Dollars in thousands)
Corporate bonds	$	—	$	—	$	2,885	$	117	$	2,885	$	117
Collateralized mortgage obligations and mortgage-backed securities		36,955		440		18,023		594		54,978		1,034

	$	36,955	$	440	$	20,908	$	711	$	57,863	$	1,151

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, 2008. Because these securities mature within the next six months, 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, 2008 or 2007.

Additionally, at June 30, 2008, approximately 71% 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, 2008 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, 2008*						*December 31, 2007*
	*Amount*			*Percent of*			*Amount*			*Percent of*
	*Outstanding*			*Total*			*Outstanding*			*Total*
	(Dollars in thousands)
Commercial loans	$	254,318			27.6	%	$	262,374			29.0	%
Construction loans		208,435			22.7			272,279			30.1
Real estate loans		440,191			47.9			358,907			39.7
Other loans		16,303			1.8			11,075			1.2

		919,247			100.0	%		904,635			100.0	%

Less — Deferred loan fees, net		(1,611	)					(1,699	)
Less — Allowance for loan losses		(18,491	)					(15,284	)

Net loans	$	899,145					$	887,652

At June 30, 2008, we had outstanding construction loans to developers for tract projects and single homes for sale to unidentified buyers totaling $140.2 million, representing 15.3% of our loan portfolio. We still have $24.2 million of unfunded commitments for these loans, but believe that the substantial part of these commitments will expire unfunded because conditions to funding will not be satisfied. We began curtailing the origination of construction loans in mid-2007, and these types of loans now represent a smaller portion of our loan portfolio. In addition, approximately 88% in principal amount of our construction loans that were non-performing assets at June 30, 2008, represented projects that were complete (as to construction of the entire project or current phase, or as to land development), and thus would not require material additional funds to complete prior to sale by the borrower or following foreclosure. We do not intend to originate any material amount of new construction loans under present market conditions, and we expect that construction loans will decrease through 2008, both in total amount and as a percentage of our loan portfolio.

At June 30, 2008 and December 31, 2007, qualifying loans with an outstanding balance of $416.4 million and $340.4 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, 2008 excluding loans held for sale:

LOAN MATURITIES


	*June 30, 2008*
			*After One Year*
	*One Year or*		*Through Five*
	*Less*		*Years*		*After Five Years*		*Total*
	(Dollars in thousands)
Commercial loans	$	122,471	$	112,769	$	19,078	$	254,318
Construction loans		185,926		21,178		1,331		208,435
Real estate loans		55,397		169,132		215,662		440,191
Other loans		2,221		6,887		7,195		16,303

	$	366,015	$	309,966	$	243,266	$	919,247

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; 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:


	*June 30,*		*December 31,*
	*2008*		*2007*
	(Dollars in thousands)
Non-accrual loans	$	88,768	$	28,774
Accruing loans past due 90 days or more		350		—
Troubled debt restructuring		4,296		—
Other real estate owned		—		1,100

Balance at end of period	$	93,414	$	29,874

Non-performing assets with an outstanding balance in excess of $4.0 million at June 30, 2008 included:

1. A $10.5 million construction loan to acquire and convert 16 apartment buildings into condominium units in Southern California

2. Two construction loans totaling $5.8 million to develop 10 finished lots and two model homes in Southern California.

3. A $4.1 million construction loan to complete 28 condominium units in Kirkwood, California.

4. Two construction loans totaling $12.1 million for a 65 unit residential condominium project in Southern California.

5. Three construction loans totaling $5.1 million loan to develop homes in Southern California.

6. A $6.0 million construction loan secured by 27 completed residential condominium units in Southern California.

7. Three loans totaling $4.1 million to develop homes in Southern California.

8. Two loans totaling $4.3 million to build a 16 unit attached townhome project in Southern California

9. Two loans totaling $5.8 million construction to build a 7,250 square foot custom home in Southern California.

10. A $4.0 million loan secured by land to complete a 61 unit residential condominium project in Southern California.

We closely monitor our non-performing loans and believe that we can timely identify and downgrade any loans where the borrower is experiencing slower than projected sales and/or the loan-to-value ratio is increasing. However, we can give no assurance that in the future we will not identify other projects that will require a material provisions to our Allowance as a result of facts and conditions existing today of which we are not aware or a continuing and/or prolonged deterioration in the economic environment.

Cash collections on non-performing loans totaled $13.2 million during the six months ended June 30, 2008 of which $12.9 million was applied to principal and $0.3 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 $3.6 million and $1.2 million for the six months ended June 30, 2008 and 2007, respectively. Non-performing loans were assigned a reserve of $1.2 million and $2.7 million at June 30, 2008 and December 31, 2007, respectively.

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

IMPAIRED LOANS

The following is a summary of the information pertaining to impaired loans at the dates indicated:


	*As of and for*		*As of and for*
	*the six*		*the twelve*
	*months ended*		*months ended*
	*June 30,*		*December 31,*
	*2008*		*2007*
	(Dollars in thousands)
Impaired loans with a valuation allowance	$	2,687	$	16,863
Impaired loans without a valuation allowance		135,241		28,124

Total Impaired loans	$	137,929	$	44,987

Valuation allowance related to impaired loans	$	1,182	$	2,700

Average recorded investment in impaired loans	$	183,360	$	54,238

Cash collections applied to reduce principal balance	$	21,572	$	12,137

Interest income recognized on cash collections	$	665	$	3,485

Changes in Allowance for Loan Losses

See Note 2, “Changes in Allowance for Loan Losses” in the Notes to the Consolidated Financial Statements for discussion regarding changes in the Allowance.

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, 2008, we had undisbursed loan commitments of $234.4 million, of which, $156.1 million in commercial loans, $32.0 million in real estate loans, and $43.1 million in construction loans.

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, 2008, we had outstanding standby letters of credit with a potential $45.1 million of obligations maturing at various dates through 2012.

Deposits

Total deposits increased from $860.3 million at December 31, 2007 to $904.5 million at June 30, 2008. This increase was primarily due to a $47.6 million increase in certificates of deposits. The increase in deposits resulted from an increase in our brokered deposits, which we used to fund the increase in our loan portfolio, to purchase additional investment securities to collateralize our securities sold under agreements to repurchase and to increase our liquidity.

The following table sets forth information concerning the amount of deposits from various sources at the dates indicated:

SOURCE OF DEPOSITS


	*June 30, 2008*					*December 31, 2007*
			*Percent of*					*Percent of*
	*Amount*		*Total*			*Amount*		*Total*
	(Dollars in thousands)
Regional Bank Centers	$	492,535		54.5	%	$	494,184		57.4	%
Money desk		112,508		12.4			101,060		11.7
Brokered		258,812		28.6			197,159		22.9
Internet		40,670		4.5			67,929		8.0

Total	$	904,525		100.0	%	$	860,332		100.0	%

Our money desk attracts primarily CDs from institutional investors nationwide by telephone. We also engage brokers to place CDs for their customers. During 2008, the CDs obtained through our money desk or deposit brokers generally had maturities ranging from one month 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 CDs for us. When we desire to use these brokers to place CDs, we generally advise all of them of the amount and maturities of the CDs we want to place, and place the CDs through the broker offering the lowest interest rates. Notwithstanding this procedure, all except $10.0 million of our brokered deposits at June 30, 2008 were obtained through one broker. We believe that should our business discontinue with this broker, we could continue to obtain the CDs we desire through other brokers. However, we could be adversely affected because the CDs through other brokers may bear slightly higher interest rates. Further, the deposits obtained through this broker as of June 30, 2008 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.

In recent years, the interest rates on CDs obtained through deposit brokers generally have been lower than the interest rates then offered to local customers for CDs 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. We are in the process of obtaining FDIC approval to accept brokered deposits but can provide no assurance that such approval will be granted. The Company has engaged the services of Stifel Nicolaus & Company and Wunderlich Securities, Inc. as our financial advisors to assist us in raising additional capital. We believe that if the Bank is not “well capitalized”, we will have greater difficulty obtaining CDs 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.

The aggregate amount of the CDs in denominations of $100,000 or more at June 30, 2008 was approximately $396.1 million. Interest expense on these deposits was approximately $8.8 million for the six months ended June 30, 2008.

The approximate scheduled maturities of CDs at June 30, 2008 was as follows:

CERTIFICATES OF DEPOSIT


Certificate of Deposit Maturing:	Amount⁽¹⁾
	(Dollars in thousands)
Three months or less	$	85,276
Over three and through twelve months		249,607
Over twelve months		186,226

Total	$	521,109


⁽¹⁾		Excludes time deposits included in IRA accounts.

Borrowed Funds

FHLB Advances. At June 30, 2008, we had $40 million of short-term and $30.0 million of long-term advances from the FHLB which, along with a $38 million letter of credit, were collateralized by certain qualifying loans with a carrying value of $416.4 million and investment securities with an amortized cost of $2.9 million. These advances bear interest at the rates noted below. Interest is payable monthly or quarterly with principal and any accrued interest due at maturity. Subsequent to June 30, 2008, our maximum borrowing capacity at FHLB was $85 million.

The table below sets forth the amounts, interest rates, and the maturity dates of FHLB advances as of June 30, 2008:

FHLB ADVANCES


Principal Amount	Interest rate	Maturity date
(Dollars in thousands)
10,000	Fixed at 5.31%	August 2008
10,000	Fixed at 4.54%	October 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	Fixed at 3.86%	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 6.13% at June 30, 2008).

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 4.58% at June 30, 2008).

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 4.30% at June 30, 2008).

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 borrowing is collateralized by various collateral mortgage obligations and mortgage-backed securities with an amortized cost of $30.7 million at June 30, 2008. Interest is payable on a quarterly basis and adjusts quarterly at the rate of the three-month LIBOR minus 1.00% per annum (the rate was 1.77% per annum at June 30, 2008) until November 2008 at which time it converts to a fixed rate of 4.54% per annum. The borrowing has a maturity date of November 2016 and is callable by the holder at any time after November 2008. The weighted average rate paid during the period was 2.33%. Because the Company was not “well capitalized” at June 30, 2008, it was in default with respect to this agreement.

In August 2007, we entered into a repurchase agreement in the amount of $10.0 million. This borrowing is collateralized by various collateralized mortgage obligations and mortgage-backed securities with an amortized cost of $11.1 million at June 30, 2008. Interest is payable on a quarterly basis and accrues at the rate of 3.55% per annum through September 2008 and adjusts quarterly thereafter at the rate of 8.75% per annum minus the three-month LIBOR with a zero percent floor and a cap of 4.75% per annum. The borrowing has a maturity date of September 2014 and is callable by the holder at any time after September 2008. Because the Company was not “well capitalized” at June 30, 2008, it was in default with respect to this agreement.

Beginning in 2007, we offered the securities sold under agreements to repurchase to various customers. We swept funds from various deposit accounts that exceeded an established minimum threshold into overnight repurchase accounts. These repurchase agreements were in essence overnight borrowings by us collateralized by certain securities. For the six months ended June 30, 2008, the average daily balance of these repurchase agreements was $8.6 million and the maximum amount of funds provided by these customers at any date was $31.4 million. The weighted average rate paid during the period was 2.45%.

Beginning in 2008, we offered a similar type of securities sold under agreements to repurchase to various customers. We swept the funds from various deposit accounts that exceeded an established minimum threshold into overnight repurchase agreements. These repurchase agreements were in essence overnight borrowings by us collateralized by certain of our investment securities. These securities, however, were held by an independent third party financial institution that can cause the securities to be liquidated upon default. During the six months ended June 30, 2008, the average balance of these repurchase agreements was $15.8 million and the maximum amount of funds provided by these customers at any date was $35.5 million. The weighted average rate paid during the period was 2.95%.

Being less than “well capitalized” may adversely impact our borrowing agreements including those with FHLB and other third parties.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Nothing to report

ITEM 1A. RISK FACTORS

Our business is strongly influenced by economic conditions in our market area (principally, Southern California) as well as regional and national economic conditions. Should the economic condition in these areas continue to deteriorate, the financial condition of our borrowers could weaken, which could lead to higher levels of loan defaults or a decline in the value of collateral for our loans. In addition, the continuation of an unfavorable economy could reduce the demand for our loans and other products and services.

At June 30, 2008, a significant number of our loans were collateralized by real estate located in California. Because of this concentration, our financial position and results of operations have been influenced by weaknesses in the housing market and the California economy. Real estate market declines have adversely affected the values of the properties collateralizing loans and may continue to decline. If the principal balances of our loans, together with any primary financing on the mortgaged properties, equal or exceed the value of the mortgaged properties, we could incur higher losses on sales of properties collateralizing foreclosed loans. In addition, California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides, which are not typically covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may adversely impact our ability to recover losses on properties affected by such disasters and adversely impact our results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Nothing to report.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Nothing to report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Shareholders was held on May 23, 2008. 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		5,644,011		13,866
Robert H. Bothner		5,643,811		14,066
Lyn S. Caron		5,640,811		17,066
Willie D. Davis		5,641,811		16,066
Daniel T. Jackson		5,643,011		14,866
Curtis S. Reis		5,644,011		13,866
D. Gregory Scott		5,644,011		13,866
Andrew A. Talley		5,644,011		13,866
Robert H. Thompson		5,644,011		13,866


		Page No.
Part I. Financial Information

Item 1. Financial Statements

Consolidated Statements of Financial Condition at June 30, 2008 and December 31, 2007		3

Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007		4

Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007		5

Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2008 and 2007		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		35

Item 4. Controls and Procedures		35

Part II. Other Information

Item 1. Legal Proceedings		37

Item 1A. Risk Factors		37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3. Defaults Upon Senior Securities		37

Item 4. Submission of Matters to a Vote of Security Holders		37

Item 5. Other Information		38

Item 6. Exhibits		39

Signatures		40
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


Votes For	Votes Against		Abstain
5,649,377		1,200		7,300


Votes For	Votes Against		Abstain
5,606,077		12,100		39,700


Votes For			Votes Against		Abstain
485,200	(66.19	%)		10,000		12,500


Votes For	Votes Against		Abstain
5,606,077		15,300		38,900

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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 14, 2008 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 14, 2008 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.


DATE: August 14, 2008	ALLIANCE BANCSHARES CALIFORNIA
	By:	/s/ Daniel L. Erickson
		Daniel L. Erickson
		Executive Vice President and Chief Financial Officer


Exhibit
Number		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 14, 2008 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 14, 2008 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.