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 September 30, 2008

OR

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

For the transition period from                      to                     

Commission file number 000-33455

ALLIANCE BANCSHARES CALIFORNIA

(Exact name of Registrant as specified in its charter)

California	91-2124567
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)
100 Corporate Pointe	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 smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller 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.

6,179,979 shares of Common Stock as of October 31, 2008

ALLIANCE BANCSHARES CALIFORNIA

QUARTERLY REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

	Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition at September 30, 2008 and December 31, 2007		3
Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007		4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007		5
Consolidated Statements of Shareholders’ Equity for the nine months ended September 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		37
Item 4. Controls and Procedures		37
Part II. Other Information
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3. Defaults Upon Senior Securities		38
Item 4. Submission of Matters to a Vote of Security Holders		38
Item 5. Other Information		38
Item 6. Exhibits		39
Signatures		40
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30, 2008		December 31, 2007
	(Unaudited)
	(Dollars in thousands)
Assets
Cash and due from banks	$	20,968	$	17,325
Federal funds sold		—		26,925
Total cash and cash equivalents		20,968		44,250
Time deposits with other financial institutions		7,539		1,251
Securities held to maturity, fair market value $146,605 at September 30, 2008; $106,282 at December 31, 2007		148,892		105,946
Loans held for sale		3,064		—
Loans, net of the allowance for loan losses of $19,850 at September 30, 2008; $15,284 at December 31, 2007		888,376		887,652
Equipment and leasehold improvements, net		4,883		4,795
Accrued interest receivable and other assets		38,944		22,709
Total assets	$	1,112,666	$	1,066,603
Liabilities, Redeemable Preferred Stock and Shareholders’ Equity
Deposits:
Non-interest bearing demand	$	101,046	$	147,242
Interest bearing:
Demand		8,002		9,834
Savings and money market		79,519		197,076
Certificates of deposit		669,057		506,180
Total deposits		857,624		860,332
Accrued interest payable and other liabilities		5,015		6,271
Federal funds purchased		10,000		—
Securities sold under agreements to repurchase		99,594		35,364
FHLB advances		85,000		80,000
Junior subordinated debentures		27,837		27,837
Total liabilities		1,085,070		1,009,804
Commitments and contingencies		—		—
Redeemable Preferred Stock (Note 9)		—		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 September 30, 2008		7,697		—
6.82% Series B Non-Cumulative Convertible Non-Voting: Authorized and outstanding – 665,096 shares at September 30, 2008		11,285		—
Common stock, no par value:
Authorized - 20,000,000 shares; Outstanding - 6,179,979 shares at September 30, 2008 and 6,177,979 shares at December 31, 2007		6,756		6,722
Additional Paid in Capital		1,479		1,110
Undivided profits		379		29,951
Total shareholders’ equity		27,596		37,783
Total liabilities, redeemable preferred stock and shareholders’ equity	$	1,112,666	$	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 September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
	(Dollars in thousands except earnings per share)
Interest Income:
Interest and fees on loans	$	14,011		$	18,398	$	45,656		$	54,143
Interest on time deposits with other financial institutions		17			14		50			53
Interest on securities held to maturity		1,801			1,383		4,793			3,872
Interest on federal funds sold		189			489		724			1,656
Total interest income		16,018			20,284		51,223			59,724
Interest Expense:
Interest on deposits		7,823			8,042		23,464			22,671
Interest on federal funds purchased		2			—		2			—
Interest on FHLB advances		547			762		1,810			2,119
Interest on securities sold under repurchase agreements		575			271		1,319			744
Interest on junior subordinated debentures		339			522		1,132			1,542
Total interest expense		9,286			9,597		27,727			27,076
Net interest income before provision for loan losses		6,732			10,687		23,496			32,648
Provision for Loan Losses		6,438			1,060		36,048			3,199
Net interest income (expense)		294			9,627		(12,552	)		29,449
Non-Interest Income		633			1,462		2,375			2,857
Non-Interest Expense:
Salaries and related benefits		3,275			4,588		10,978			13,000
Occupancy and equipment expenses		1,073			932		3,209			2,812
Professional fees		543			415		1,378			1,122
Data processing		281			186		755			617
Other operating expense		2,020			1,379		4,677			4,265
Total non-interest expense		7,192			7,500		20,997			21,816
Earnings (Losses) Before Income Tax Expense (Benefit)		(6,265	)		3,589		(31,174	)		10,490
Income tax expense (benefit)		7,606			1,599		(2,585	)		4,466
Net Earnings (Loss)	$	(13,872	)	$	1,990	$	(28,589	)	$	6,024
Earnings (loss) per Common Share:
Basic earnings (loss) per share	$	(2.30	)	$	0.27	$	(4.79	)	$	0.82
Diluted earnings (loss) per share	$	(2.30	)	$	0.26	$	(4.79	)	$	0.79

The accompanying notes are an integral part of these statements.

4

Part I. Item 1. (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net earnings (loss)	$	(28,589	)	$	6,024
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Net amortization of discounts and premiums on securities held to maturity		463			36
Depreciation and amortization		1,165			1,039
Provision for loan losses		36,048			3,199
Compensation expense on stock options		369			337
Excess tax benefit from share based payment arrangements		—			(118	)
Net gains on sales of loans held for sale		(134	)		(1,008	)
Proceeds from sales of loans held for sale		14,439			65,015
Originations of loans held for sale		(17,369	)		(63,702	)
(Increase) decrease in accrued interest receivable and other assets		252			901
Decrease in accrued interest payable and other liabilities		(1,256	)		(2,653	)
Net cash provided by operating activities		5,380			9,070
Cash Flows from Investing Activities:
Net (increase) decrease in:
Time deposits with other financial institutions		(6,288	)		1,085
Loans		(53,238	)		(134,442	)
Purchase of equipment and leasehold improvements		(1,451	)		(1,678	)
Purchase of FHLB stock		(529	)		(427	)
Purchase of securities held to maturity		(80,742	)		(47,877	)
Proceeds from maturities of securities held to maturity		37,333			48,101
Proceeds from sale of other real estate owned		714			—
Net cash used in investing activities		(104,201	)		(135,238	)
Cash Flows from Financing Activities:
Net increase (decrease) in:
Demand deposits		(46,196	)		(8,734	)
Interest bearing demand deposits		(1,832	)		7,737
Savings and money market deposits		(117,557	)		28,445
Certificates of deposit		162,877			97,530
Excess tax benefit from share based payment arrangements		—			118
Proceeds from Federal Funds Purchased		10,000			—
Proceeds from FHLB Advances		5,000			10,000
Increase in securities sold under agreements to repurchase		64,230			11,096
Proceeds from stock options exercised		—			112
Dividends paid on preferred stock		(983	)		(984	)
Net cash provided by financing activities		75,539			145,320
Net Increase (Decrease) in Cash and Cash Equivalents		(23,282	)		19,152
Cash and Cash Equivalents, Beginning of Period		44,250			47,542
Cash and Cash Equivalents, End of Period	$	20,968		$	66,694
Supplemental Disclosure of Noncash Investing and Financing Activities
Transfer from loans to Other Real Estate Owned	$	16,466		$	1,100
Conversion of preferred stock into common stock	$	34			—
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest	$	27,264		$	25,775
Income taxes		370			5,922

The accompanying notes are an integral part of these statements.

5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

For the Nine Months Ended September 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		20		112		—		—			112
Dividends paid on preferred stock		—		—		—		(984	)		(984	)
Tax benefit on non-qualified stock options		—		—		118		—			118
Compensation expense on stock options		—		—		337		—			337
Net earnings		—		—		—		6,024			6,024
Balance, September 30, 2007		6,172	$	6,712	$	957	$	32,205		$	39,874

	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
Conversion of Preferred Stock into Common Stock		(2	)		(34	)		2		34							—
Dividends paid on preferred stock		—			—			—		—		—		(983	)		(983	)
Compensation expense on stock options		—			—			—		—		369		—			369
Net (loss)		—			—			—		—		—		(28,589	)		(28,589	)
Balance, September 30, 2008		1,398		$	18,982			6,180	$	6,756	$	1,479	$	379		$	27,596

6

Part I. Item 1. (continued)

ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 nine months ended September 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.

     The Company has recorded a deferred tax asset in the amount of $9.3 million which represents the refund of prior taxes paid. Management has concluded that it is not more likely than not that the remaining deferred tax asset will be utilized in light of the uncertainties surrounding their ability to generate future taxable income and has established a deferred tax asset valuation allowance in the amount of $10.2 million. To the extent we are able to generate sufficient taxable income in future periods, this deferred tax asset valuation allowance would be reduced and the future tax benefits would be recognized. Any reductions in the deferred tax valuation allowance in future periods would have a positive impact on our net income and shareholders’ equity.

2. Going Concern and Regulatory Actions

     Going Concern

     The Company has been adversely impacted by the continuing deterioration in the Southern California real estate market. The Company incurred a net loss of $13.9 million for the three months ended September 30, 2008 and $28.6 million for the nine months ended September 30, 2008. Excluding the redeemable preferred stock, shareholders’ equity has decreased from $37.8 million or 3.5% of total assets at December 31, 2007 to $8.6 million or 0.8% of total assets at September 30, 2008. The net losses in 2008 were due primarily to a provision for loan losses of $6.4 million and $36.0 million in the three and nine months ended September 30, 2008, a valuation allowance for deferred taxes of $10.2 million for the nine months ended September 30, 2008 and an increase in nonperforming assets which has reduced the Company’s net interest income. Further, the Company’s financial condition has adversely affected funding sources during the past quarter and caused substantial withdrawals of uninsured deposits. As a result of the losses, the Company is deemed to be under capitalized as of September 30, 2008. These conditions create an uncertainty about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of the Company’s inability to repay the outstanding principal balance of its debt or from any extraordinary regulatory action, either of which would affect its ability to continue as a going concern.

     Management of the Company has taken certain steps in an effort to continue with safe and sound banking practices and the Company has engaged Stifel, Nicolaus & Company, Incorporated and Wunderlich Securities to assist in seeking additional capital, exercising the contractual right to defer the interest on trust preferred securities, taking a number of actions to contain costs, continuing to reduce its lending exposure, and increasing the borrowing line at the Federal Reserve Bank’s discount window in an amount up to approximately $117.0 million.

      Regulatory Actions

     On October 15, 2008, the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Financial Institutions (the “DFI”) jointly issued to the Bank an Order to Cease and Desist (the “Order”). The Order requires the Bank, to among other things increase the Bank’s Tier 1 capital by not less than $30,000,000 by December 12, 2008, and to remain “well capitalized” during the life of the Order, to maintain an adequate allowance for loan and lease losses and maintain sufficient liquidity to meet obligations as they become due. The Order specifies certain time frames for meeting these requirements, and the Bank must furnish periodic progress reports to the FDIC and DFI regarding its compliance with the Order. The Order will remain in effect until modified or terminated by the FDIC and the DFI. The FDIC and DFI did not impose or recommend any monetary penalties. The Company has complied with all the requirements of the Order at this time.

               On October 10, 2008, Bancshares entered into a written agreement (the “FRB Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB of SF”). Under the FRB Agreement, Bancshares must, among other things obtain written approval from the FRB prior to declaring or paying any dividends, making any distribution of interest, principal, or other sums on subordinated debentures or trust preferred securities. Bancshares must submit a capital plan to maintain sufficient capital to the FRB of SF. The Company must furnish periodic progress reports to the FRB regarding its compliance with the FRB Agreement. The FRB Agreement will remain in effect until modified or terminated by the FRB.

               If the Bank is not successful in raising additional capital, it will not be able to become fully compliant with the provisions of the Order. As a result, the FDIC may take further enforcement action, including placing the Bank into receivership. If the Bank is placed into FDIC receivership, it is likely that the Bank would be required to cease operations and liquidate. If the Bank were to liquidate it is unlikely that there would be any assets available to the holders of the preferred or common shareholders of the Company.

7

     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. At September 30, 2008, there were three properties in other real estate owned with a net book value of $16.6 million. At December 31, 2007, there was one property in other real estate owned which was sold during the second quarter of 2008 at an amount that approximated its carrying value.

     Equity Compensation Plans

     The Company has outstanding options under one current and one terminated equity compensation plan, which are described more fully in Note 4. The following table summarizes various information for stock options issued under the plans for the nine months ended September 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		37,000	$	12.65
Outstanding at September 30, 2008		458,500	$	11.12	5.83		years	$	32,800
Vested or expected to vest at September 30, 2008		440,892	$	11.00		5.77		$	22,240
Options exercisable at September 30, 2008		254,500	$	8.65		4.66		$	32,800

The total intrinsic value of options exercised during the nine months ended September 30, 2007 was $205,000. The total intrinsic value of options exercised during the nine months ended September 30, 2008 is zero.

3. 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

	Nine Months Ended September 30,
	2008			2007
	(Dollars in thousands)
Balance at beginning of period	$	15,284		$	9,195
Charge-offs		(32,474	)		(1,643	)
Recoveries		1,195			166
Net charge-offs		(31,279	)		(1,477	)
Provision for loan losses		36,048			3,199
Other adjustments		(203	)		145
Balance at end of period	$	19,850		$	11,062

8

4. Earnings per Share

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

						Per Share
Three Months Ended September 30, 2008	Net loss			Shares		Amount
	(Dollars in thousands)
Basic and diluted loss per share:
Net loss	$	(13,872	)
Cash dividends on preferred stock		(328	)
Net loss attributable to common shareholders	$	(14,200	)		6,179,283	$	(2.30	)

						Per Share
Three Months Ended September 30, 2007	Net Earnings			Shares		Amount
	(Dollars in thousands)
Basic earnings per share:
Net earnings	$	1,990
Cash dividends on preferred stock		(328	)
Net earnings available to common shareholders		1,662			6,169,488	$	0.27
Preferred stock dividend		328
Effect of exercise of options		—			87,774
Effect of conversion of Series A preferred stock		—			733,050
Effect of conversion of Series B preferred stock		—			667,096
Diluted earnings per share:
Net earnings available to common shareholders	$	1,990			7,657,408	$	0.26

     The diluted EPS computation does not include the anti-dilutive effect of options to purchase 406,500 shares and 225,000 shares for the quarters ended September 30, 2008 and 2007, respectively.

						Per Share
Nine Months Ended September 30, 2008	Net Earnings			Shares		Amount
	(Dollars in thousands)
Basic and diluted loss per share:
Net loss	$	(28,589	)
Cash dividends on preferred stock		(983	)
Net loss attributable to common shareholders	$	(29,573	)		6,178,378	$	(4.79	)

						Per Share
Nine Months Ended September 30, 2007	Net Earnings			Shares		Amount
	(Dollars in thousands)
Basic earnings per share:
Net earnings	$	6,024
Cash dividends on preferred stock		(984	)
Net earnings available to common shareholders		5,040			6,163,638	$	0.82
Preferred stock dividend		984
Effect of exercise of options		—			83,542
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	$	6,024			7,647,326	$	0.79

9

5. 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 September 30, 2008, compensation expense related to non-vested stock option grants aggregated to $1.0 million and is expected to be recognized as follows:

	Stock Option
	Compensation
	Expense
	(Dollars in thousands)
Remainder of 2008	$	108
2009		406
2010		307
2011		175
2012		48
Total	$	1,044

     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:

	Nine Months Ended September 30,
	2008			2007
Risk-free rate		3.56	%		4.81	%
Expected term	6.5 years			6.25 years
Expected volatility		39.30	%		36.04	%

6. 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

10

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, asset management group, 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 nine months ended September 30, 2008 and 2007. The following table also shows the assets allocated to each of these segments as of September 30, 2008 and December 31, 2007.

	Regional		Real Estate
	Banking		Industries
Three Months Ended September 30	Centers		Division		SBA		Other			Total
	(Dollars in thousands)
2008
Interest income	$	8,843	$	3,195	$	659	$	3,321		$	16,018
Credit for funds provided		5,755		146		26		(5,927	)		—
Total interest income		14,598		3,341		685		2,606			16,018
Interest expense		2,931		—		—		6,354			9,286
Charge for funds used		6,275		2,444		369		(9,088	)		—
Total interest expense		9,206		2,444		369		(2,733	)		9,286
Net interest income		5,392		897		316		127			6,732
Provision for loan losses		—		—		—		6,438			6,438
Net interest income (loss) after provision for loan losses		5,392		897		316		(6,311	)		294
Non-interest income		309		10		53		261			633
Non-interest expense		2,270		340		293		4,289			7,192
Net contribution to earnings (loss) before tax expense	$	3,431	$	567	$	76	$	(10,339	)	$	(6,265	)

	Regional		Real Estate
	Banking		Industries
Three Months Ended September 30	Centers		Division		SBA		Other			Total
	(Dollars in thousands)
2007
Interest income	$	8,181	$	8,478	$	1,061	$	2,564		$	20,284
Credit for funds provided		7,056		425		45		(7,526	)		—
Total interest income		15,237		8,903		1,106		(4,962	)		20,284
Interest expense		4,155		—		6		5,436			9,597
Charge for funds used		5,258		4,471		455		(10,184	)		—

11

	Regional		Real Estate
	Banking		Industries
Three Months Ended September 30	Centers		Division		SBA		Other			Total
	(Dollars in thousands)
Total interest expense		9,413		4,471		461		(4,748	)		9,597
Net interest income		5,824		4,432		645		(214	)		10,687
Provision for loan losses		—		—		—		1,060			1,060
Net interest income (loss) after provision for loan losses		5,824		4,432		645		(1,274	)		9,627
Non-interest income		194		205		135		928			1,462
Non-interest expense		2,756		704		344		3,696			7,500
Net contribution to earnings before tax expense	$	3,262	$	3,933	$	436	$	(4,042	)	$	3,589

	Regional		Real Estate
	Banking		Industries
Nine Months Ended September 30	Centers		Division		SBA		Other			Total
	(Dollars in thousands)
2008
Interest income	$	26,563	$	14,394	$	2,289	$	7,977		$	51,223
Credit for funds provided		19,455		846		93		(20,394	)		—
Total interest income		46,018		15,240		2,382		(12,417	)		51,223
Interest expense		9,506		—		—		18,221			27,727
Charge for funds used		18,437		10,680		1,120		(30,237	)		—
Total interest expense		27,943		10,680		1,120		(12,016	)		27,727
Net interest income		18,075		4,560		1,262		(401	)		23,496
Provision for loan losses		—		—		—		36,048			36,048
Net interest income (loss) after provision for loan losses		18,075		4,560		1,262		(36,449	)		(12,552	)
Non-interest income		1,024		355		350		646			2,375
Non-interest expense		7,286		1,923		918		10,870			20,997
Net contribution to earnings (loss) before tax expense	$	11,813	$	2,992	$	694	$	(46,673	)	$	(31,174	)

	Regional		Real Estate
	Banking		Industries
Nine Months Ended September 30	Centers		Division		SBA		Other			Total
	(Dollars in thousands)
2007
Interest income	$	22,969	$	26,190	$	3,116	$	7,449		$	59,724
Credit for funds provided		20,010		1,265		126		(21,401	)		—
Total interest income		42,979		27,455		3,242		(13,952	)		59,724
Interest expense		11,418		—		1		15,657			27,076
Charge for funds used		14,341		13,375		1,290		(29,006	)		—
Total interest expense		25,759		13,375		1,291		(13,349	)		27,076
Net interest income		17,220		14,080		1,951		(603	)		32,648
Provision for loan losses		—		—		—		3,199			3,199
Net interest income after provision for loan losses		17,220		14,080		1,951		(3,802	)		29,449
Non-interest income		717		362		495		1,283			2,857
Non-interest expense		7,527		1,944		1,124		11,221			21,816
Net contribution to earnings before tax expense	$	10,410	$	12,498	$	1,322	$	(13,740	)	$	10,490
Segment assets as of:
September 30, 2008	$	542,674	$	197,612	$	33,929	$	338,451		$	1,112,666
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.

12

7. 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.

8. Fair Value Measurements

     Effective January 1, 2008, the Company partially adopted SFAS 157, Fair Value Measurements, 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 157 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:

13

Assets

Fair Value on a Recurring Basis

     The table below presents the balance of securities held to maturity at September 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		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Securities held to maturity	$	146,605		—	$	146,605		—

     Securities held to maturity consist of AAA-rated US Government agency securities, corporate bonds, treasury bills 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 2 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 September 30, 2008.

	Fair Value Measurements Using
			Quoted Prices		Significant
			In Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Impaired loans	$	124,526		—		—	$	124,526

     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 $24.9 million during the quarter ended September 30, 2008. The collateral underlying these loans had a fair value of $22.9 million, less estimated costs to sell of $2.0 million, resulting in a specific reserve in the allowance for loan losses of $2.0 million.

     The following table provides a reconciliation of the beginning and ending balances for asset categories measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2008:

	Impaired
	Loans
	(In Thousands)
Beginning balance, July 1, 2008	$	137,929
Additions to Impaired Loans		19,571
Sales or transfers		(41,586	)
Fair market value adjustment, net		(8,612	)
Ending balance September 30, 2008	$	124,526

	Impaired
	Loans
	(In Thousands)
Beginning balance, January 1, 2008	$	42,287
Additions to Impaired Loans		129,906
Sales or transfers		(52,863	)
Fair market value adjustment, net		(5,196	)
Ending balance September 30, 2008	$	124,526

14

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 September 30, 2008, the Company has approximately $3.1 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 September 30, 2008, the entire balance of loans held for sale was recorded at its cost.

9. Amendment of Preferred Stock

     In June 2008, the terms of the Company’s 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.

10. Subsequent Event

               As required by the FRB Agreement, Bancshares has exercised its right to defer interest payments on its junior subordinated debentures. Under the terms of the debentures, Bancshares may defer interest payments for up to 20 consecutive quarters. During the period when interest payments are being deferred, interest continues to accrue at an annual rate equal to the interest in effect for such period and must be paid at the end of the deferral period. Until Bancshares resumes making interest payments, the debentures prohibit Bancshares from, among other things, paying any dividends on, or repurchasing any shares of Bancshares capital stock.

15

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 (“the Bank”).

Forward-Looking Information

     The statements contained in this Report 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 “Factors Which May Affect Our Future Operating Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operation”, in our Annual Report on Form 10-K for the year ended December 31, 2007. 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 incurred a net loss of $13.9 million ($2.30 basic and diluted loss per share) for the three months ended September 30, 2008 as compared to net earnings of $2.0 million ($0.27 basic and $0.26 diluted earnings per share) for the same period of 2007. For the nine months ended September 30, 2008, we incurred a net loss of $28.6 million ($4.79 basic and diluted loss per share) as compared to net earnings of $6.0 million ($0.82 basic and $0.79 diluted earnings per share) for the same period of 2007. Our net losses in 2008 were due primarily to increased provisions for loan losses, a valuation allowance on our deferred taxes of $10.2 million, and an increase in nonperforming assets which has reduced the Company’s net interest income. Provisions for loan losses increased from $1.1 million and $3.2 million in the three and nine months ended September 30, 2007 to $6.4 million and $36.0 million in the three and nine months ended September 30, 2008.

     These losses have resulted in a decrease in our shareholders’ equity and regulatory capital. Our shareholders’ equity was $27.6 million at September 30, 2008, and as of September 30, 2008, the Bank was undercapitalized under prompt corrective action rules of the Federal Deposit Insurance Corporation (“FDIC”).

     We have been adversely impacted by the continuing 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 these properties.

     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 (20% at September 30, 2008, down from 34% at September 30, 2007). At September 30, 2008, we still had $7.9 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 68% in principal amount of our construction loans that were non-performing assets at September 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, both in total amount and as a percentage of our loan portfolio.

     Our non-performing assets have continued to increase, from $29.9 million at December 31, 2007 to $118.1 million at September 30, 2008. The increase was in non-accrual loans, which increased from $28.8 million to $93.9 million, and other real estate owned which increased from $1.1 million to $16.6 million. Our allowance for loan losses was $19.9 million or 2.18% of loans at September 30, 2008 compared to $15.3 million or 1.69% of loans at

16

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.

     Our financial condition has adversely affected our funding sources during the past quarter. As a result of the Bank not being “well capitalized” under applicable regulations after June 30, 2008, we may not accept brokered deposits without the approval of the FDIC, which denied our application for approval. In addition, in August 2008 the FHLB reduced our maximum borrowing capacity at the FHLB to $85 million, although in October 2008 it increased our limit to $110 million. Further, in the third quarter we experienced substantial withdrawals of uninsured deposits, although we have been helped by the increase in deposit insurance limit from $100,000 to $250,000 and then to unlimited amounts for non-interest bearing transaction accounts. Subsequent to September 30, 2008, we implemented an aggressive strategy to obtain longer -term (one year) certificates of deposit through our regional banking centers through advertising and attractive interest rates, and have substantially increased those deposits. In addition, we have pledged collateral at the Federal Reserve Bank of San Francisco (“FRB of SF”) to enable us to obtain overnight advances.

     Our total assets have increased from $1.07 billion at December 31, 2007 to $1.11 billion at September 30,2008. We have not pursued a growth strategy during the past two quarters as a result of declining regulatory capital ratios. Because at September 30, 2008 we were “under capitalized” we do not intend to grow and may reduce our total assets in coming periods through securities and loan sales and loan participations.

     Because of our net losses, loss of well-capitalized status and high levels of non-performing assets, in October 2008 the FDIC and the California Department of Financial Institutions jointly issued to the Bank an Order to Cease and Desist (the “Order”). Among other things, the Order requires the Bank to increase its Tier 1 capital by not less than $30 million by December 12, 2008, and to remain “well capitalized” during the life of the Order. In addition, the Order requires us to develop a plan to reduce our reliance on money desk and brokered deposits as funding sources. The Company also entered into a written agreement with the FRB of SF that places certain restrictions and prohibitions on the Company, including that it may not pay dividends on or repurchase its capital stock or make payments on its junior subordinated debentures. See Notes 1 and 10 of Notes to Consolidated Financial Statements

     As a result of being undercapitalized under the prompt corrective action rules, the Bank is subject to certain regulatory restrictions. These include, among others, that the Bank may not make any capital distributions, must submit an acceptable capital restoration plan to the FDIC, may not increase its average total assets during a calendar quarter to exceed its average total assets during the preceding calendar quarter and may not acquire a business, establish or acquire a branch office or engage in a new line of business.

     As a result of the Order, we are actively seeking additional capital either directly through the sale of securities or indirectly through the merger with another bank or financial institution (which could be accompanied by a financing). The financial advisors we engaged Stifel, Nicolaus & Company, Incorporated and Wunderlich Securities, are assisting in these efforts. We expect that any sale of securities would most likely be through a private placement to institutional investors. In addition, we have applied to the United States Department of Treasury for capital assistance through its Troubled Asset Relief Program (“TARP”) Capital Purchase Program pursuant to the EESA. Based on our initial discussions with our regulators, our application will not be accepted except in connection with a merger or capital financing. While we have had discussions with various financing sources and potential merger partners, at the date of this Report we have no agreements for any such transaction. Any merger or financing could involve a change of control of the Company.

     If the Bank is not successful in raising additional capital, it will not be able to become fully compliant with the provisions of the Order. As a result, the FDIC may take further enforcement action, including placing the Bank into receivership. If the Bank is placed into FDIC receivership, it is likely that the Bank would be required to cease operations and liquidate. If the Bank were to liquidate it is unlikely that there would be any assets available to the holders of the preferred or common shareholders of the Company.

     Set forth below are certain key financial performance ratios for the periods indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Return on average assets (1)		(4.85	)%		0.80	%		(3.99	)%		0.84	%
Return on average shareholders’ equity (1)		(134.5	)%		20.15	%		(67.91	)%		21.64	%
Average equity to average assets		3.60	%		4.43	%		4.62	%		4.71	%

⁽¹⁾ Annualized

17

RESULTS OF OPERATIONS — Three months and nine months ended September 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 September 30,									Nine Months Ended September 30,
							Percent									Percent
	2008			2007			Change			2008			2007			Change
	(Unaudited)
	(Dollars in thousands)
Interest income	$	16,018		$	20,284			(21.0	)%	$	51,223		$	59,724			(14.2	)%
Interest expense		9,286			9,597			(3.2	)%		27,727			27,076			2.4	%
Net interest income before provision for loan losses		6,732			10,687			(37.0	)%		23,496			32,648			(28.0	)%
Net interest margin		2.42	%		4.43	%		(45.4	)%		2.88	%		4.71	%		(38.9	)%

     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 $10.7 million and $32.6 million for the three and nine months ended September 30, 2007 to $6.7 million and $23.5 million for the same periods in 2008. The decrease for the three months ended September 30, 2008 was due to a $4.3 million decrease in interest income. The decrease for the nine months ended September 30, 2008 was due to a $8.5 million decrease in interest income while interest expense increased by $0.7 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 certificates of deposit (“CDs”), one of our highest cost of funds constituting a larger portion of our average interest bearing liabilities (62% at September 30, 2008 compared to 56% at September 30, 2007)..

     Interest income was $16.0 million and $51.2 million for the three and nine months ended September 30, 2008 as compared to $20.3 million and $59.7 million for the three and nine months ended September 30, 2007. The decreases were due to 2.67% and 2.34% decreases in the weighted average yield on interest earning assets for the three and nine months ended September 30, 2008, which more than offset the $151.4 million and $163.6 million increases in average interest earning assets for the three and nine months ended September 30, 2008. The decreases in weighted average yield on interest earning assets were due primarily to 2.97% and 2.65% decreases in the weighted average yield on loans for the three and nine months ended September 30, 2008, which was caused by: (i) construction loans, our highest yielding loans, constituting a smaller portion of our loan portfolio (20% at September 30, 2008 compared to 34% for the same period in 2007); (ii) the fact that 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 nine months of 2007 to 5% in the first nine months of 2008; and (iii) an increase in our non-accrual loans from average balances of $22.3 million and $31.7 million in the three and nine months ended September 30, 2007 to average balances of $89.7 million and $107.7 million in the three and nine months ended September 30, 2008; and (iv) the reversal of interest on loans previously accruing interest of $0.9 million and $3.4 million negatively affecting our loan yields by approximately 0.39% and 0.49% for the three and nine months ended September 30, 2008. The increases in average

18

interest earning assets was due primarily to increases in our loan portfolio, and in particular commercial real estate loans.

     Interest expense decreased slightly from $9.6 million in the quarter ended September 30, 2007 to $9.3 million in the quarter ended September 30, 2008. This decrease was due to a 1.10% decrease in the weighted average rates paid on interest bearing liabilities offset in part by $195.6 million increase in average interest bearing liabilities. Interest expense increased from $27.1 million for the nine months ended September 30, 2007 to $27.7 million for the nine months ended September 30, 2008. The increase in interest expense for the nine months ended September 30, 2008 was due to a $190.1 million increase in average interest bearing liabilities despite a 0.91% decrease in the weighted average rates paid on interest bearing liabilities for the nine months ended September 30, 2008.

     The increases in average interest bearing liabilities was due primarily to a $193.7 million and $148.7 million increase in average CDs and to a lesser extent increases in average repurchase agreements during the three and nine months ended September 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 79 and 49 basis points for the three and nine months ended September 30, 2008, from 5.20% to 4.41% and from 5.17% to 4.68%, 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 $82.8 million of our CDs will mature prior to the end of the year, and we anticipate they will be renewed or be replaced at lower rates. Because the Bank is less than “well capitalized”, we have had to offer somewhat higher rates than our competitors to attract new deposits.

     The increase in average interest earning assets and average interest bearing liabilities was the result principally of our growth strategy in 2007, as we have grown only slightly in 2008.

     Our interest rate spread decreased from 3.52% during the third quarter of 2007 to 1.96% during the third quarter of 2008. This decrease resulted from a decrease in the weighted average yield on our interest earning assets of 2.67% during the three months ended September 30, 2008 which exceeded the 1.10% 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 34% of our loan portfolio at September 30, 2007 to 20% of our loan portfolio at September 30, 2008, and an increase in commercial real estate loans from 36% to 47% of our loan portfolio during the same period. 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 in the amount of CDs, our highest cost deposits, a decrease in the amount of lower costing interest bearing demand, savings, and money market deposits. As our lower costing deposits declined, the Bank offered higher rates on CDs to attract more deposits. Further, the weighted average rate paid on our CDs declined only 79 basis points, a far lesser decrease than the decreases in our other sources of funds.

     These factors also contributed to a decline in net interest margin from 4.43% in the third quarter of 2007 to 2.42% in the third 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.

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     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 September 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	$	40,287	$	189		1.87	%	$	39,326	$	489		4.93	%
Time deposits		2,814		17		2.40	%		1,606		14		3.46	%
Securities		131,713		1,801		5.44	%		100,001		1,383		5.49	%
Loans (2)		932,858		14,011		5.98	%		815,389		18,398		8.95	%
Total interest earning assets		1,107,672		16,018		5.75	%		956,322		20,284		8.42	%
Non-interest earning assets		30,615							31,560
Total assets	$	1,138,287						$	987,882
Interest bearing liabilities:
Interest bearing demand deposits	$	8,828		26		1.17	%	$	18,505		72		1.54	%
Savings and money market deposits		138,390		780		2.24	%		212,414		2,217		4.14	%
Certificates of deposit		632,459		7,017		4.41	%		438,747		5,753		5.20	%
Federal funds purchased		889		2		0.89	%		—		—		—
FHLB advances:
Short-term		42,730		335		3.12	%		—		—		—
Long-term		30,000		212		2.81	%		55,406		762		5.46	%
Securities sold under repurchase agreements		91,944		575		2.49	%		24,600		271		4.37	%
Junior subordinated debentures		27,837		339		4.84	%		27,837		522		7.44	%
Total interest bearing liabilities		973,077		9,286		3.80	%		777,509		9,597		4.90	%
Non-interest bearing liabilities		124,192							152,176
Total liabilities		1,097,269							929,685
Redeemable preferred stock and shareholders’ equity		41,018							58,197
Total liabilities and shareholders’ equity	$	1,138,287						$	987,882
Net interest income			$	6,732						$	10,687
Interest rate spread						1.96	%						3.52	%
Net interest margin						2.42	%						4.43	%

(1)	Interest income on loans includes loan fees of $0.4 million in 2008 and $0.9 million in 2007.
(2)	Loans include nonaccrual loans with an average balance of $89.7 million in 2008 and $22.3 million in 2007.
(3)	Annualized

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	Nine Months ended September 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	$	41,092	$	724		2.35	%	$	43,240	$	1,656		5.21	%
Time deposits		2,337		50		2.86	%		1,882		53		3.77	%
Securities		118,745		4,793		5.39	%		96,591		3,872		5.36	%
Loans (2)		927,196		45,656		6.58	%		784,074		54,143		9.23	%
Total interest earning assets		1,089,370		51,223		6.28	%		925,787		59,724		8.62	%
Non-interest earning assets		32,165							30,405
Total assets	$	1,121,535						$	956,192
Interest bearing liabilities:
Interest bearing demand deposits	$	9,850		99		1.34	%	$	16,352		188		1.54	%
Savings and money market deposits		186,650		3,561		2.55	%		202,914		6,358		4.19	%
Certificates of deposit		565,598		19,804		4.68	%		416,930		16,125		5.17	%
Federal funds purchased		296		2		0.90	%		—		—		—
FHLB advances:
Short-term		41,396		695		2.24	%		—		—		—
Long-term		30,000		1,115		4.96	%		51,997		2,119		5.45	%
Securities sold under repurchase agreements		66,916		1,319		2.63	%		22,408		744		4.44	%
Junior subordinated debentures		27,837		1,132		5.43	%		27,837		1,542		7.41	%
Total interest bearing liabilities		928,543		27,727		3.99	%		738,438		27,076		4.90	%
Non-interest bearing liabilities		141,124							161,523
Total liabilities		1,069,667							899,961
Redeemable preferred stock and shareholders’ equity		51,868							56,231
Total liabilities and shareholders’ equity	$	1,121,535						$	956,192
Net interest income			$	23,496						$	32,648
Interest rate spread						2.29	%						3.72	%
Net interest margin						2.88	%						4.71	%

(1)	Interest income on loans includes loan fees of $1.4 million in 2008 and $3.4 million in 2007.
(2)	Loans include nonaccrual loans with an average balance of $107.7 million in 2008 and $31.7 million in 2007.
(3)	Annualized

21

     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 September 30, 2008									Nine Months Ended September 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	$	12		$	(312	)	$	(300	)	$	(79	)	$	(854	)	$	(933	)
Time deposits		8			(5	)		3			11			(14	)		(3	)
Securities		434			(16	)		418			894			27			921
Loans		2,384			(6,771	)		(4,387	)		8,781			(17,267	)		(8,486	)
Total interest earning assets		2,838			(7,104	)		(4,266	)		9,607			(18,108	)		(8,501	)
Interest expense:
Interest bearing demand		(31	)		(15	)		(46	)		(68	)		(21	)		(89	)
Savings and money market		(619	)		(818	)		(1,437	)		(476	)		(2,321	)		(2,797	)
Certificates of deposit		2,250			(986	)		1,264			5,320			(1,641	)		3,679
Federal funds purchased		1			1			2			1			1			2
FHLB advances:
Short-term		335			—			335			695			—			695
Long-term		(267	)		(283	)		(550	)		(830	)		(174	)		(1,004	)
Securities sold under agreements to repurchase		465			(161	)		304			979			(404	)		575
Junior subordinated debentures		—			(183	)		(183	)		—			(410	)		(410	)
Total interest bearing liabilities		2,134			(2,445	)		(311	)		5,621			(4,970	)		650
Net interest income	$	704		$	(4,659	)	$	(3,955	)	$	3,986		$	(13,138	)	$	(9,152	)

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Provision for Loan Losses

     The continuing housing slump in Southern California and the nation and its uncertain future have unfavorably impacted our homebuilder borrowers and the value of the real properties securing their loans. During the second and third quarters of 2008 we identified a large number of loans, principally construction and land improvement loans, where the appraised value of the real property collateral was below the carrying value of the related loan.. This resulted in charge-offs of $32.5 million for the nine months ended September 30, 2008 as compared to charge-offs of $1.6 million for the nine months ended September 30, 2007. 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 (20% at September 30, 2008 from 34% at September 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 continue to decrease, both in total amount and as a percentage of our loan portfolio.

     We assess the adequacy of the allowance for loan losses (the “Allowance”) each quarter. Impaired loans are carried at the lower of the adjusted principal balance or the fair market value based on their discounted cash flows, 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.

     Based on this assessment, we made provisions for loan losses of $6.4 million and $36.0 million, respectively, for the three and nine months ended September 30, 2008 as compared to provisions of $1.1 million and $3.2 million for the comparable periods of 2007. Notwithstanding these additional provisions for loan losses, a prolonged or deeper decline in the housing market will impact our homebuilder borrowers and increase the likelihood of defaults and reduce the value of the real property collateral. At September 30, 2008, we had outstanding construction loans to developers for tract projects and single homes for sale to unidentified buyers totaling $126.6 million, representing 13.9% of our loan portfolio, and additional commitments for these projects in the amount of $7.9 million (although we believe that the substantial part of these commitments will expire unfunded because conditions for funding will not be satisfied). 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.

     The credit quality of our loans will be influenced by underlying trends in the economic cycle, particularly in Southern California, and other factors, which are ostensibly beyond management’s control. Accordingly, no assurance can be given that we will not sustain loan losses that in any particular period will be sizable in relation to the Allowance. Although we believe that we employ an appropriate approach to downgrading credits that are experiencing slower than projected sales and/or increases in loan to value ratios, subsequent evaluation of the loan portfolio by us and by our regulators, in light of factors then prevailing, may require increases in the Allowance through changes to the provision for loan losses.

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Non-Interest Income

     The components of noninterest income were as follows for the periods indicated:

NON-INTEREST INCOME

	Three Months Ended September 30,								Nine Months Ended September 30,
						Percent							Percent
	2008			2007		Change			2008		2007		Change
	(Dollars in thousands)
Service charges	$	452		$	294		53.7	%	$	1,168	$	861		35.7	%
Gain on sale of loans, net		(18	)		772		(102.3	)%		134		1,008		(86.7	)%
Loan broker fee income		—			45		(100.0	)%		159		174		(8.6	)%
Other		199			351		(43.3	)%		914		814		12.3	%
Total	$	633		$	1,462		(56.7	)%	$	2,375	$	2,857		(16.9	)%

     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 decreased by 56.7% and 16.9% for the three and nine months ended September 30, 2008 as compared to the same period in 2007, due to decreases in gain on sale of loans and other income offset by the increase in service charges. Service charges increased primarily due to the increase in the account activities of our demand deposit customers which contribute to higher amounts of fee income. We did not realize any loan broker fee income in the third quarter of 2008 because the market for these types of loans severely declined. Other income decreased by 43.3% for the three months ended September 30, 2008 due to a decrease in the collection of fees for performing certain fund control services on our construction loans as these loans have declined from the prior year.

     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 of 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 September 30,							Nine Months Ended September 30,
					Percent							Percent
	2008		2007		Change			2008		2007		Change
	(Dollars in thousands)
Salaries and related benefits	$	3,275	$	4,588		(28.6	)%	$	10,978	$	13,000		(15.6	)%
Occupancy and equipment		1,073		932		15.1	%		3,209		2,812		14.1	%
Professional fees		543		415		30.8	%		1,378		1,122		22.8	%
Data processing		281		186		51.1	%		755		617		22.4	%
Other operating expense		2,020		1,379		46.5	%		4,677		4,265		(9.7	)%
Total	$	7,192	$	7,500		(4.1	)%	$	20,997	$	21,816		(3.8	)%

     Salaries and related benefits expense decreased by 28.6% and 15.6% for the three and nine months ended September 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 accruals, 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 15.1% and 14.1% for the three and nine months ended September 30, 2008 as compared to the same period in 2007 due primarily to the opening of our Westside Regional Banking Center.

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     Professional fees increased by 30.8% and 22.8% for the three and nine months ended September 30, 2008 as compared to the same period in 2007 primarily due to the legal and other professional 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. Notwithstanding these efforts, other operating expense increased 46.5% for the three months ended September 30, 2008 as compared to the same period in 2007 due to expenses related to other real estate owned and nonperforming loans. Other operating expense decreased by 9.7% for the nine months ended September 30, 2008 as compared to the same period in 2007 because our efforts to contain costs more than offset the more recent costs related to problem assets.

     The Company has recorded a deferred tax asset in the amount of $9.3 million which represents the refund of prior taxes paid. Management has concluded that it is not more likely than not that the remaining deferred tax asset will be utilized in light of the uncertainties surrounding their ability to generate future taxable income and has established a deferred tax asset valuation allowance in the amount of $10.2 million. To the extent we are able to generate sufficient taxable income in future periods, this deferred tax asset valuation allowance would be reduced and the future tax benefits would be recognized. Any reductions in the deferred tax valuation allowance in future periods would have a positive impact on our net income and shareholders’ equity.

25

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
September 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)	$	66,441		7.01	%	$	75,827		>=8.0	%		N/A		N/A
Tier 1 Capital (to risk-weighted assets)	$	36,645		3.87	%	$	37,914		>=4.0	%		N/A		N/A
Tier 1 Capital (to average assets)	$	36,645		3.22	%	$	45,485		>=4.0	%		N/A		N/A
Bank
Total Capital (to risk-weighted assets)	$	66,383		7.01	%	$	75,745		>=8.0	%	$	94,682		>=10.0	%
Tier 1 Capital (to risk-weighted assets)	$	54,439		5.75	%	$	37,873		>=4.0	%	$	56,809		>=6.0	%
Tier 1 Capital (to average assets)	$	54,439		4.79	%	$	45,485		>=4.0	%	$	56,856		>=5.0	%

     Our regulatory capital decreased since December 31, 2007 as a result of our net loss and, for Bancshares, by dividends on our preferred stock. At September 30, 2008, Bancshares and the Bank were “under capitalized” as defined under applicable the prompt corrective action rules of the FDIC. We are actively seeking additional capital through the sale of debt or equity securities or merger with another financial institution.. We may also improve our capital ratios through reducing total assets, principally through securities or loan sales or loan participations.

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.

     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 85% and 89%, respectively, of our funding as a percentage of average total assets during the nine months ended September 30, 2008 and 2007. We have historically obtained deposits through our branches, a money desk and through brokers.

26

     Secondary sources of liquidity include borrowing arrangements with the Federal Reserve Bank of San Francisco (“FRB of SF”) and the Federal Home Loan Bank (“FHLB”). Borrowings from the FRB of SF are short-term and must be collateralized by pledged securities or loans. As of September 30, 2008, we had no borrowings from FRB of SF. However, since September 30, 2008, we have obtained overnight borrowings from the FRB of SF. As of September 30, 2008 we had pledged loans with an aggregate principal balance of over $187.8 million which gives us a borrowing capacity of $116.9 million from the FRB of SF at October 31, 2008. The FRB of SF is not obligated to make or renew any loans to us, and it makes a separate credit decision with each advance request. Credit limitations are based on the assessment by the FRB of SF of the Bank’s creditworthiness, including the purpose of the borrowing, an adequate level of collateral, sources of funds for repayment, and other factors.

     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 loans or securities and may be for terms of one day to several years. As of September 30, 2008, we had $85.0 million of outstanding FHLB advances.

     We also have liquidity as a net seller of federal funds. During the nine months ended September 30, 2008, we had an average balance of $41.1 million in overnight funds sold representing 4% of total average assets.

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

     Our financial condition has adversely affected our funding sources during the past quarter. As a result of the Bank not being “well capitalized” under applicable regulations, we may not accept brokered deposits without the approval of the FDIC, which initially denied our application for approval. Approval to obtain brokered deposits may be granted based upon meeting certain conditions. The Order issued by the FDIC and DFI requires us to develop a plan to reduce our reliance on money desk and brokered deposits as funding sources. In addition, in August 2008 the FHLB reduced our maximum borrowing capacity to $85 million, although in October 2008 it increased our limit to $110 million. Further, in the third quarter we experienced substantial withdrawals of uninsured deposits, although we have been helped by the increase in deposit insurance limit from $100,000 to $250,000 and then to unlimited amounts for non-interest bearing transaction accounts. Some of these deposits were moved into the securities sold under agreements to repurchase product that we offer (see “Borrowed Funds—Securities Sold Under Agreements to Repurchase”). Subsequent to September 30, 2008, we implemented an aggressive strategy to obtain longer term certificates of deposit through our regional banking centers through advertising and attractive interest rates, and have substantially increased those deposits. In addition, we have pledged collateral at the FRB of SF to enable us to obtain overnight advances.

     Cash Flow from Operating Activities

     Net cash provided by operating activities for the nine months ended September 30, 2008 decreased by $3.7 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 nine months ended September 30, 2008 decreased by $31.0 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 nine months ended September 30, 2008 decreased by $69.8 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.

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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
September 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	$	—		$	—		$	—		$	—		$	—
Time deposits with other financial institutions		6,341			1,000			198			—			7,539
Securities held to maturity		1,998			22,887			995			123,012			148,892
Loans, gross		399,232			66,936			293,653			149,642			909,463
Total rate-sensitive assets	$	407,571		$	90,823		$	294,846		$	272,654		$	1,065,894
Liabilities:
Interest bearing demand deposits	$	8,002		$	—		$	—		$	—		$	8,002
Savings and money market		79,519			—			—			—			79,519
Certificates of deposit		89,337			370,182			209,538			—			669,057
Federal funds purchased		10,000			—			—			—			10,000
FHLB advances		50,000			25,000			10,000			—			85,000
Securities sold under agreements to repurchase		99,594			—			—			—			99,594
Junior subordinated debentures		27,837			—			—			—			27,837
Total rate sensitive liabilities	$	364,289		$	395,182		$	219,538		$	—		$	979,009
Interval Gaps:
Interest rate sensitivity gap	$	43,282		$	(304,359	)	$	75,308		$	272,654		$	86,885
Rate sensitive assets to rate sensitive liabilities		111.9	%		23.0	%		134.3	%		N/A			110.0	%
Cumulative Gaps:
Cumulative interest rate sensitivity gap	$	43,282		$	(261,077	)	$	(185,769	)	$	86,955		$	86,955
Rate sensitive assets to rate sensitive liabilities		111.9	%		65.6	%		81.0	%		108.9	%		108.9	%
% of rate sensitive assets in period		38.2	%		46.8	%		74.4	%		100.0	%		N/A

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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

	September 30, 2008					December 31, 2007
			Weighted					Weighted
			Average					Average
	Book Value		Yield			Book Value		Yield
	(Dollars in thousands)
Time deposits maturing:
Within one year	$	7,341		2.18	%		1,053		3.78	%
After one year but within five years		198		4.00	%		198		4.00	%
Total time deposits	$	7,539		2.23	%	$	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

	September 30, 2008					December 31, 2007
			Weighted					Weighted
			Average					Average
	Book Value		Yield			Book Value		Yield
	(Dollars in thousands)
Investment securities maturing:
Within one year	$	24,885		1.89	%	$	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		123,012		5.59	%		89,460		5.44	%
Total investment securities	$	148,892		4.96	%	$	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 September 30, 2008, we classified all our investment securities as held to maturity as we intend to hold the securities to maturity.

     At September 30, 2008 and 2007, securities with an amortized cost of $144.9 million and $46.0 million, respectively, were pledged to secure securities sold under agreements to repurchase, Fed Funds lines, 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)
September 30, 2008
U.S. Agency securities	$	995	$	4	$	—	$	999
Corporate bonds		4,002		—		224		3,778
Treasury bills		20,883		2		8		20,877
Collateralized mortgage obligations and mortgage-backed securities		123,012		1,013		3,074		120,951
	$	148,892	$	1,019	$	3,306	$	146,605

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			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 September 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)
Treasury bills		19,877		8		—		—		19,877		8
Corporate bonds	$	—	$	—	$	2,778	$	224	$	2,778	$	224
Collateralized mortgage obligations and mortgage-backed securities		35,105		1,419		17,537		1,655		52,642		3,074
	$	54,982	$	1,427	$	20,315	$	1,879	$	75,297	$	3,306

     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 September 30, 2008. Because these securities mature within the next three months, we believe that we will fully recover our principal investment and do not consider these investments to be other than temporarily impaired at September 30, 2008.

     Additionally, at September 30, 2008, approximately 73% 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 September 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 presently offer secured and unsecured commercial term loans and lines of credit, accounts receivable and equipment loans, SBA loans and home equity lines of credit. Historically, we offered construction loans, but no longer do so in light of the housing market and our financial condition. 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.

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     The following table sets forth the composition of our loan portfolio at the dates indicated (excluding loans held for sale):

LOAN PORTFOLIO COMPOSITION

	September 30, 2008						December 31, 2007
	Amount			Percent of			Amount			Percent of
	Outstanding			Total			Outstanding			Total
	(Dollars in thousands)
Commercial loans	$	278,178			30.6	%	$	262,374			29.0	%
Construction loans		183,216			20.2			272,279			30.1
Real estate loans		427,864			47.1			358,907			39.7
Other loans		20,205			2.1			11,075			1.2
		909,463			100.0	%		904,635			100.0	%
Less — Deferred loan fees, net		(1,237	)					(1,699	)
Less — Allowance for loan losses		(19,850	)					(15,284	)
Net loans	$	888,376					$	887,652

     At September 30, 2008, we had outstanding construction loans to developers for tract projects and single homes for sale to unidentified buyers totaling $126.6 million, representing 13.9% of our loan portfolio. We still have $7.9 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.

     At September 30, 2008 and December 31, 2007, qualifying loans with an outstanding balance of $178.5 million and $340.4 million, respectively, were pledged to secure advances at the FHLB. We have pledged $187.6 million of our commercial and industrial loans pledged at the Federal Reserve Bank of San Francisco under an inter-creditor agreement with the FHLB.

     The following table sets forth the maturity distribution of our loan portfolio at September 30, 2008 excluding loans held for sale at the date indicated:

LOAN MATURITIES

	September 30, 2008
			After One Year
	One Year or		Through Five
	Less		Years		After Five Years		Total
	(Dollars in thousands)
Commercial loans	$	129,081	$	106,461	$	42,636	$	278,178
Construction loans		151,806		19,969		11,441		183,216
Real estate loans		42,608		124,517		254,611		427,864
Other loans		3,878		6,345		9,982		20,205
	$	327,373	$	257,292	$	318,670	$	909,463

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:

	September 30,		December 31,
	2008		2007
	(Dollars in thousands)
Non-accrual loans	$	95,153	$	28,774
Accruing loans past due 90 days or more		1,343		—
Troubled debt restructurings		4,993		—
Other real estate owned		16,608		1,100
Balance at end of period	$	118,097	$	29,874

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     Our non-performing assets at September 30, 2008 were comprised of several loans including condominium units, model homes, land development loans primarily located 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 $45.4 million during the nine months ended September 30, 2008 of which $44.3 million was applied to principal and $1.2 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 $10.1 million and $2.3 million for the nine months ended September 30, 2008 and 2007, respectively. Non-performing loans were assigned a reserve of $2.0 million and $2.7 million at September 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.

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

IMPAIRED LOANS

	As of and for		As of and for
	the nine		the twelve
	months ended		months ended
	September 30,		December 31,
	2008		2007
	(Dollars in thousands)
Impaired loans with a valuation allowance	$	24,930	$	16,863
Impaired loans without a valuation allowance		80,693		28,124
Total Impaired loans	$	105,623	$	44,987
Valuation allowance related to impaired loans	$	1,995	$	2,700
Average recorded investment in impaired loans	$	185,418	$	54,238
Cash collections applied to reduce principal balance	$	44,283	$	12,137
Interest income recognized on cash collections	$	1,159	$	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 information regarding changes in the Allowance.

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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 September 30, 2008, we had undisbursed loan commitments of $197.2 million, of which, $143.5 million were commercial loans, $30.2 million were real estate loans, and $20.6 million were 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 September 30, 2008, we had outstanding standby letters of credit with a potential $6.6 million of obligations maturing at various dates through 2012.

Deposits

     Total deposits decreased from $860.3 million at December 31, 2007 to $857.6 million at September 30, 2008. This decrease was primarily due to a $46.2 million decrease in non-interest bearing demand deposits, a $117.6 million decrease in savings and money market accounts offset by a $162.9 million increase in CDs.

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

SOURCE OF DEPOSITS

	September 30, 2008					December 31, 2007
			Percent of					Percent of
	Amount		Total			Amount		Total
	(Dollars in thousands)
Regional Bank Centers	$	321,701		37.5	%	$	494,184		57.4	%
Money desk		160,916		18.8			101,060		11.7
Brokered		336,562		39.2			197,159		22.9
Internet		38,445		4.5			67,929		8.0
Total	$	857,624		100.0	%	$	860,332		100.0	%

     Our deposits obtained through our regional bank centers declined due to the Bank being less than “well capitalized” and concerns of the customers about their balances being uninsured. Some of these deposits were moved into securities sold under agreements to repurchase product that we offer (see “Securities Sold Under Agreement to Repurchase”). Deposit outflow has been slowed as a result of the increase in FDIC deposit insurance from $100,000 to $250,000 and to an unlimited amount for non-interest bearing transaction accounts.

     Because of deposit outflows at our regional bank centers, we increasingly used our money desk and brokers to attract deposits. Through the use of deposit brokers we have been able to attract larger amounts of deposits (all CDs) in shorter periods of time, and at lower rates, than we could have through our branches. 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.

     As a result of the Bank not being “well capitalized” under applicable regulations, since August 2008 we have not been allowed to accept brokered deposits. We applied to the FDIC for approval to accept brokered deposits, but the FDIC initially denied our application. Approval to obtain brokered deposits may be granted based upon meeting certain conditions. In addition, the Order issued by the FDIC and DFI requires us to develop a plan to reduce our reliance on money desk and brokered deposits as funding sources.

     During the past several months, we have implemented an aggressive strategy to obtain longer term (one year) CDs through our regional bank centers through advertising and attractive interest rates, and have substantially increased those deposits in the last several months.

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     The aggregate amount of the CDs in denominations of $100,000 or more at September 30, 2008 was approximately $497.3 million. Interest expense on these deposits was approximately $14.0 million for the nine months ended September 30, 2008.

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

CERTIFICATES OF DEPOSIT

Certificate of Deposit Maturing:	Amount(1)
	(Dollars in thousands)
Three months or less	$	82,808
Over three and through twelve months		361,478
Over twelve months		194,475
Total	$	638,761

⁽¹⁾ Excludes time deposits included in IRA accounts.

Borrowed Funds

     FHLB Advances. At September 30, 2008, we had $55.0 million of short-term and $30.0 million of long-term advances from the FHLB which were collateralized by certain qualifying loans with a carrying value of $178.5 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. At September 30, 2008, our maximum borrowing capacity at the FHLB was $85 million.; this limit was increased to $110 million in October 2008.

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

FHLB ADVANCES

Principal Amount	Interest rate	Maturity date
(Dollars in thousands)
$10,000	Fixed at 4.54%	October 2008
10,000	Prime minus 2.87%	December 2008
10,000	Prime minus 2.83%	January 2009
25,000	Fixed at 2.85%	September 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
$85,000

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     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 Bancshares’ 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 6.25% at September 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 Bancshares’ 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 4.71% at September 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 Bancshares’ 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 4.71% at September 30, 2008).

     Bancshares has unconditionally guaranteed distributions on, and payments on liquidation and redemption of, both issues of the trust preferred securities.

     As required by the FRB Agreement, Bancshares has exercised its right to defer interest payments on its junior subordinated debentures commencing the first interest payment due after September 30, 2008. Under the terms of the debentures, we may defer interest payments for up to 20 consecutive quarters. During the period when interest payments are being deferred, interest continues to accrue at an annual rate equal to the interest in effect for such period and must be paid at the end of the deferral period. Until the Bancshares’ resumes making interest payments, the debentures prohibit Bancshares from, among other things, paying any dividends on or repurchasing any shares of the Bancshares’ capital stock.

     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 $25.9 million at September 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 1.80% per annum at September 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 2.17%. Because the Company was not “well capitalized” at September 30, 2008 and was under a Cease and Desist Order, it was in default with respect to this agreement; however, the default has been waived until December 12, 2008.

     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 $10.5 million at September 30, 2008. Interest is payable on a quarterly basis and accrues at the rate of 3.55% per annum through early 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 rate was 4.75% at September 30, 2008). 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 September 30, 2008 and was under a Cease

35

and Desist Order, it was in default with respect to this agreement; however, the default has been waived until December 12, 2008.

     Since 2007, we have offered to selected customers securities sold under agreements to repurchase. For these customers, we swept funds from their 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 nine months ended September 30, 2008, the average daily balance of these repurchase agreements was $14.6 million, the maximum amount of funds provided by these customers at any date was $55.4 million and 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, except that the securities are held by an independent third party financial institution that can cause the securities to be liquidated upon default. During the nine months ended September 30, 2008, the average balance of these repurchase agreements was $22.4 million and the maximum amount of funds provided by these customers at any date was $41.0 million. The weighted average rate paid during the period was 2.69%.

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

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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.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Nothing to report.

ITEM 1A. RISK FACTORS

     Not applicable.

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

     Nothing to report.

ITEM 5. OTHER INFORMATION

     Nothing to report.

38

ITEM 6. EXHIBITS

31.1	Section 302 CEO Certification
31.2	Section 302 CFO Certification
32.1	Certificate by Curtis S. Reis, Chairman and Chief Executive Officer of the Company dated November 19, 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 November 19, 2008 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

39

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: November 19, 2008	ALLIANCE BANCSHARES CALIFORNIA
		By:	/s/ Daniel L. Erickson
			Daniel L. Erickson
			Executive Vice President and Chief Financial Officer

40

EXHIBIT INDEX

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 November 19, 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 November 19, 2008 pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.