##### Table of Contents

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended September 30, 2006

OR



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

For the transition period fromto

Commission file number 000-33455



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ALLIANCE BANCSHARES CALIFORNIA

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 91-2124567                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|100 Corporate Pointe Culver City, California                   |  | 90230                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

(310) 410-9281

(Registrants telephone number, including area code)



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



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

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.

6,098,179 shares of Common
Stock as of October 31, 2006

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##### Table of Contents

ALLIANCE BANCSHARES CALIFORNIA

QUARTERLY REPORT ON FORM 10-Q

FOR

THE QUARTER ENDED SEPTEMBER 30,
2006

TABLE OF CONTENTS



|                              |  |                                                                                                       |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                       |  | Page No.
|Part I. Financial Information |  |                                                                                                      
|                              |  |                                                                                                      
|Item 1.                       |  | Financial Statements                                                                                  |  |         
|                              |  |                                                                                                      
|                              |  | Consolidated Statements of Financial Condition at September 30, 2006 and December 31, 2005            |  | 3       
|                              |  |                                                                                                      
|                              |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 |  | 4       
|                              |  |                                                                                                      
|                              |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005           |  | 5       
|                              |  |                                                                                                      
|                              |  | Consolidated Statements of Shareholders Equity for the nine months ended September 30, 2006 and 2005 |  | 6       
|                              |  |                                                                                                      
|                              |  | Notes to Consolidated Financial Statements                                                            |  | 7       
|                              |  |                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 13      
|                              |  |                                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 27      
|                              |  |                                                                                                      
|Item 4.                       |  | Controls and Procedures                                                                               |  | 28      
|                              | 
|Part II. Other Information    |  |                                                                                                      
|                              |  |                                                                                                      
|Item 6.                       |  | Exhibits                                                                                              |  | 29      
|                              |  |                                                                                                      
|Signatures                    |  |                                                                                                       |  | 30      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



|                                                                                                                                              |  |                    |             |                   |   |            
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | -----------
|                                                                                                                                              |  | September 30, 2006 |             | December 31, 2005
|                                                                                                                                              |  | (Unaudited)        |             |                  
|Assets                                                                                                                                        |  |                    |             |                   |   |            
|Cash and due from banks                                                                                                                       |  | $                  | 22,016,700  |                   | $ | 15,574,200 
|Federal funds sold                                                                                                                            |  |                    | 31,955,000  |                   |   | 14,575,000 
|                                                                                                                                              |  |                    |             |                   |   |            
|Total cash and cash equivalents                                                                                                               |  |                    | 53,971,700  |                   |   | 30,149,200 
|                                                                                                                                              |  |                    |             |                   |   |            
|Time deposits with other financial institutions                                                                                               |  |                    | 2,376,100   |                   |   | 8,244,900  
|Securities held to maturity, fair market value $104,745,000 at September 30, 2006; $73,733,600 at December 31, 2005                           |  |                    | 105,530,200 |                   |   | 75,479,000 
|Loans held for sale                                                                                                                           |  |                    | 2,762,500   |                   |   | 607,500    
|Loans, net of the allowance for loan losses of $8,142,200 at September 30, 2006; $6,051,000 at December 31, 2005                              |  |                    | 654,925,200 |                   |   | 544,819,400
|Equipment and leasehold improvements, net                                                                                                     |  |                    | 3,918,000   |                   |   | 3,994,700  
|Accrued interest receivable and other assets                                                                                                  |  |                    | 13,420,700  |                   |   | 11,678,500 
|                                                                                                                                              |  |                    |             |                   |   |            
|Total assets                                                                                                                                  |  | $                  | 836,904,400 |                   | $ | 674,973,200
|                                                                                                                                              |  |                    |             |                   |   |            
|Liabilities, Redeemable Preferred Stock and Shareholders Equity                                                                              |  |                    |             |                   |   |            
|Deposits:                                                                                                                                     |  |                    |             |                   |   |            
|Noninterest bearing demand                                                                                                                    |  | $                  | 157,805,000 |                   | $ | 106,405,100
|Interest bearing:                                                                                                                             |  |                    |             |                   |   |            
|Demand                                                                                                                                        |  |                    | 8,608,500   |                   |   | 9,042,700  
|Savings and money market                                                                                                                      |  |                    | 216,945,500 |                   |   | 165,363,300
|Certificates of deposit                                                                                                                       |  |                    | 323,738,500 |                   |   | 250,498,000
|                                                                                                                                              |  |                    |             |                   |   |            
|Total deposits                                                                                                                                |  |                    | 707,097,500 |                   |   | 531,309,100
|                                                                                                                                              |  |                    |             |                   |   |            
|Accrued interest payable and other liabilities                                                                                                |  |                    | 5,921,000   |                   |   | 4,111,200  
|Securities sold under agreements to repurchase                                                                                                |  |                    |            |                   |   | 41,133,600 
|FHLB advances                                                                                                                                 |  |                    | 45,000,000  |                   |   | 35,000,000 
|Junior subordinated debentures                                                                                                                |  |                    | 27,837,000  |                   |   | 17,527,000 
|                                                                                                                                              |  |                    |             |                   |   |            
|Total liabilities                                                                                                                             |  |                    | 785,855,500 |                   |   | 629,080,900
|                                                                                                                                              |  |                    |             |                   |   |            
|Commitments and contingencies                                                                                                                 |  |                    |            |                   |   |           
|Redeemable Preferred Stock:                                                                                                                   |  |                    |             |                   |   |            
|Serial preferred stock, no par value:                                                                                                         |  |                    |             |                   |   |            
|Authorized  20,000,000 shares                                                                                                                |  |                    |             |                   |   |            
|7% Series A Non-Cumulative Convertible Non-Voting: Authorized and outstanding  733,050 shares at September 30, 2006 and
December 31, 2005    |  |                    | 7,697,000   |                   |   | 7,697,000  
|6.82% Series B Non-Cumulative Convertible Non-Voting: Authorized and outstanding  667,096 shares at September 30, 2006 and
December 31, 2005 |  |                    | 11,318,600  |                   |   | 11,318,600 
|                                                                                                                                              |  |                    |             |                   |   |            
|Total redeemable preferred stock                                                                                                              |  |                    | 19,015,600  |                   |   | 19,015,600 
|                                                                                                                                              |  |                    |             |                   |   |            
|Shareholders Equity:                                                                                                                         |  |                    |             |                   |   |            
|Common stock, no par value:                                                                                                                   |  |                    |             |                   |   |            
|Authorized - 20,000,000 shares                                                                                                                |  |                    |             |                   |   |            
|Outstanding - 6,098,179 shares at September 30, 2006 and 6,065,579 shares at December 31, 2005                                                |  |                    | 6,482,300   |                   |   | 6,406,600  
|Undivided profits                                                                                                                             |  |                    | 25,551,000  |                   |   | 20,470,100 
|                                                                                                                                              |  |                    |             |                   |   |            
|Total shareholders equity                                                                                                                    |  |                    | 32,033,300  |                   |   | 26,876,700 
|                                                                                                                                              |  |                    |             |                   |   |            
|Total liabilities, redeemable preferred stock and shareholders equity                                                                        |  | $                  | 836,904,400 |                   | $ | 674,973,200
|                                                                                                                                              |  |                    |             |                   |   |            

The accompanying notes are an integral part of these statements.



3



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##### Table of Contents

Part I. Item 1. (continued)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|----------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                            |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30,
|                                                            |  | 2006                            |            | 2005                           |   | 2006       |  | 2005
|Interest income:                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Interest and fees on loans                                  |  | $                               | 15,925,100 |                                | $ | 9,484,700  |  | $    | 42,945,000 |  | $ | 23,237,400
|Interest on time deposits with other financial institutions |  |                                 | 25,900     |                                |   | 34,400     |  |      | 157,100    |  |   | 93,600    
|Interest on securities held to maturity                     |  |                                 | 1,168,400  |                                |   | 680,700    |  |      | 3,073,100  |  |   | 2,060,400 
|Interest on federal funds sold                              |  |                                 | 381,100    |                                |   | 197,200    |  |      | 1,023,700  |  |   | 305,400   
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total interest income                                       |  |                                 | 17,500,500 |                                |   | 10,397,000 |  |      | 47,198,900 |  |   | 25,696,800
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Interest expense:                                           |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Interest on deposits                                        |  |                                 | 5,938,100  |                                |   | 2,945,000  |  |      | 15,762,600 |  |   | 6,475,800 
|Interest on FHLB advances                                   |  |                                 | 576,500    |                                |   | 329,300    |  |      | 1,391,500  |  |   | 1,048,600 
|Interest on federal funds purchased                         |  |                                 |           |                                |   | 2,700      |  |      |           |  |   | 4,500     
|Interest on securities sold under repurchase agreements     |  |                                 | 369,900    |                                |   |           |  |      | 996,000    |  |   |          
|Interest on junior subordinated debentures                  |  |                                 | 517,200    |                                |   | 250,900    |  |      | 1,195,500  |  |   | 660,400   
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total interest expense                                      |  |                                 | 7,401,700  |                                |   | 3,527,900  |  |      | 19,345,600 |  |   | 8,189,300 
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Net interest income before provision for loan losses        |  |                                 | 10,098,800 |                                |   | 6,869,100  |  |      | 27,853,300 |  |   | 17,507,500
|Provision for loan losses                                   |  |                                 | 1,090,000  |                                |   | 750,000    |  |      | 2,813,000  |  |   | 1,727,000 
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Net interest income                                         |  |                                 | 9,008,800  |                                |   | 6,119,100  |  |      | 25,040,300 |  |   | 15,780,500
|Non-interest income                                         |  |                                 | 716,400    |                                |   | 806,200    |  |      | 2,056,200  |  |   | 2,185,100 
|Non-interest expenses:                                      |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Salaries and related benefits                               |  |                                 | 3,427,000  |                                |   | 2,110,800  |  |      | 9,471,400  |  |   | 5,594,700 
|Occupancy and equipment expenses                            |  |                                 | 780,500    |                                |   | 632,700    |  |      | 2,185,700  |  |   | 1,682,400 
|Professional fees                                           |  |                                 | 474,400    |                                |   | 194,500    |  |      | 1,194,800  |  |   | 654,800   
|Data processing                                             |  |                                 | 203,000    |                                |   | 201,200    |  |      | 653,300    |  |   | 562,000   
|Other operating expenses                                    |  |                                 | 1,299,800  |                                |   | 952,500    |  |      | 3,826,700  |  |   | 2,333,000 
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Total non-interest expense                                  |  |                                 | 6,184,700  |                                |   | 4,091,700  |  |      | 17,331,900 |  |   | 10,826,900
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Earnings before income tax expense                          |  |                                 | 3,540,500  |                                |   | 2,833,600  |  |      | 9,764,600  |  |   | 7,138,700 
|Income tax expense                                          |  |                                 | 1,470,100  |                                |   | 1,086,600  |  |      | 3,959,400  |  |   | 2,760,600 
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Net earnings                                                |  | $                               | 2,070,400  |                                | $ | 1,747,000  |  | $    | 5,805,200  |  | $ | 4,378,100 
|                                                            |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Earnings per common share:                                  |  |                                 |            |                                |   |            |  |      |            |  |   |           
|Basic earnings per share                                    |  | $                               | 0.29       |                                | $ | 0.27       |  | $    | 0.79       |  | $ | 0.65      
|Diluted earnings per share                                  |  | $                               | 0.27       |                                | $ | 0.25       |  | $    | 0.76       |  | $ | 0.63      

The accompanying notes are an integral part of these statements.



4



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##### Table of Contents

Part I. Item 1. (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                    |  |                                 |              |   |      |   |              |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------------ | - | ---- | - | ------------ | -
|                                                                                    |  | Nine Months Ended September 30, |             
|                                                                                    |  | 2006                            |              |   | 2005 |  
|Cash Flows from Operating Activities:                                               |  |                                 |              |   |      |   |              |  
|Net earnings                                                                        |  | $                               | 5,805,200    |   |      | $ | 4,378,100    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                                 |              |   |      |   |              |  
|Net amortization of discounts and premiums on securities held to maturity           |  |                                 | 206,800      |   |      |   | 708,600      |  
|Depreciation and amortization                                                       |  |                                 | 856,800      |   |      |   | 594,200      |  
|Provision for loan losses                                                           |  |                                 | 2,813,000    |   |      |   | 1,727,000    |  
|Compensation expense on stock options                                               |  |                                 | 259,800      |   |      |   |             |  
|Net gains on sales of loans held for sale                                           |  |                                 | (356,500     | ) |      |   | (546,400     | )
|Proceeds from sales of loans held for sale                                          |  |                                 | 22,258,900   |   |      |   | 14,854,800   |  
|Originations of loans held for sale                                                 |  |                                 | (24,057,400  | ) |      |   | (13,427,000  | )
|Increase in accrued interest receivable and other assets                            |  |                                 | (1,367,000   | ) |      |   | (1,738,400   | )
|Increase in accrued interest payable and other liabilities                          |  |                                 | 1,809,800    |   |      |   | 735,200      |  
|                                                                                    |  |                                 |              |   |      |   |              |  
|Net cash provided by operating activities                                           |  |                                 | 8,229,400    |   |      |   | 7,286,100    |  
|                                                                                    |  |                                 |              |   |      |   |              |  
|Cash Flows from Investing Activities:                                               |  |                                 |              |   |      |   |              |  
|Net (increase) decrease in:                                                         |  |                                 |              |   |      |   |              |  
|Time deposits with other financial institutions                                     |  |                                 | 5,868,800    |   |      |   | (415,900     | )
|Loans                                                                               |  |                                 | (112,918,800 | ) |      |   | (162,661,400 | )
|Purchase of equipment and leasehold improvements                                    |  |                                 | (780,100     | ) |      |   | (1,546,600   | )
|(Purchase) redemption of FHLB stock                                                 |  |                                 | (28,800      | ) |      |   | 268,900      |  
|Purchase of securities held to maturity                                             |  |                                 | (41,797,900  | ) |      |   | (2,994,000   | )
|Proceeds from maturities of securities held to maturity                             |  |                                 | 11,539,900   |   |      |   | 7,301,200    |  
|Investment in statutory trust                                                       |  |                                 | (310,000     | ) |      |   | (310,000     | )
|                                                                                    |  |                                 |              |   |      |   |              |  
|Net cash used in investing activities                                               |  |                                 | (138,426,900 | ) |      |   | (160,357,800 | )
|                                                                                    |  |                                 |              |   |      |   |              |  
|Cash Flows from Financing Activities:                                               |  |                                 |              |   |      |   |              |  
|Net increase in:                                                                    |  |                                 |              |   |      |   |              |  
|Demand deposits                                                                     |  |                                 | 51,399,900   |   |      |   | 35,554,200   |  
|Interest bearing demand deposits                                                    |  |                                 | (434,200     | ) |      |   | 1,663,200    |  
|Savings and money market deposits                                                   |  |                                 | 51,582,200   |   |      |   | 41,695,600   |  
|Certificates of deposit                                                             |  |                                 | 73,240,500   |   |      |   | 116,591,700  |  
|Proceeds from issuance of junior subordinated debentures                            |  |                                 | 10,310,000   |   |      |   | 10,310,000   |  
|Advances (Payments) of FHLB borrowings                                              |  |                                 | 10,000,000   |   |      |   | (37,000,000  | )
|(Decrease) in securities sold under agreements to repurchase                        |  |                                 | (41,133,600  | ) |      |   |             |  
|Proceeds from stock options and warrants exercised                                  |  |                                 | 75,700       |   |      |   | 255,100      |  
|Increase in deferred tax assets related to stock options                            |  |                                 | (36,400      | ) |      |   |             |  
|Dividends paid or declared on preferred stock                                       |  |                                 | (984,100     | ) |      |   | (538,800     | )
|                                                                                    |  |                                 |              |   |      |   |              |  
|Net cash provided by financing activities                                           |  |                                 | 154,020,000  |   |      |   | 168,531,000  |  
|                                                                                    |  |                                 |              |   |      |   |              |  
|Net increase in cash and cash equivalents                                           |  |                                 | 23,822,500   |   |      |   | 15,459,300   |  
|Cash and cash equivalents, beginning of period                                      |  |                                 | 30,149,200   |   |      |   | 19,587,600   |  
|                                                                                    |  |                                 |              |   |      |   |              |  
|Cash and cash equivalents, end of period                                            |  | $                               | 53,971,700   |   |      | $ | 35,046,900   |  
|                                                                                    |  |                                 |              |   |      |   |              |  
|Supplemental disclosure of cash flow information                                    |  |                                 |              |   |      |   |              |  
|Cash paid during the period for:                                                    |  |                                 |              |   |      |   |              |  
|Interest                                                                            |  | $                               | 18,230,000   |   |      | $ | 7,631,400    |  
|Income taxes                                                                        |  |                                 | 4,615,900    |   |      |   | 3,305,000    |  

The accompanying notes are an integral part of these statements.



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##### Table of Contents

Part I. Item 1. (continued)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Unaudited)

For the Nine Months Ended September 30, 2006 and 2005



|                                      |  |                 |  |        |           |                  |   |            |       |  |   |            |  
|------------------------------------- |  | --------------- |  | ------ | --------- | ---------------- | - | ---------- | ----- |  | - | ---------- | -
|                                      |  | Common Stock    |  |        |           |                  |   |           
|                                      |  | Number ofShares |  | Amount |           | UndividedProfits |   |            | Total | 
|Balance, December 31, 2004            |  | 5,867,679       |  | $      | 6,090,800 |                  | $ | 14,739,600 |       |  | $ | 20,830,400 |  
|Stock options and warrants exercised  |  | 171,900         |  |        | 255,100   |                  |   |           |       |  |   | 255,100    |  
|Dividends paid on preferred stock     |  |                |  |        |          |                  |   | (538,800   | )     |  |   | (538,800   | )
|Net earnings                          |  |                |  |        |          |                  |   | 4,378,100  |       |  |   | 4,378,100  |  
|                                      |  |                 |  |        |           |                  |   |            |       |  |   |            |  
|Balance, September 30, 2005           |  | 6,039,579       |  | $      | 6,345,900 |                  | $ | 18,578,900 |       |  | $ | 24,924,800 |  
|                                      |  |                 |  |        |           |                  |   |            |       |  |   |            |  
|                                      |  |                 | 
|                                      |  | Common Stock    |  |        |           |                  |   |           
|                                      |  | Number ofShares |  | Amount |           | UndividedProfits |   |            | Total | 
|Balance, December 31, 2005            |  | 6,065,579       |  | $      | 6,406,600 |                  | $ | 20,470,100 |       |  | $ | 26,876,700 |  
|Stock options exercised               |  | 32,600          |  |        | 75,700    |                  |   |           |       |  |   | 75,700     |  
|Dividends paid on preferred stock     |  |                |  |        |          |                  |   | (984,100   | )     |  |   | (984,100   | )
|Compensation expense on stock options |  |                |  |        |          |                  |   | 259,800    |       |  |   | 259,800    |  
|Net earnings                          |  |                |  |        |          |                  |   | 5,805,200  |       |  |   | 5,805,200  |  
|                                      |  |                 |  |        |           |                  |   |            |       |  |   |            |  
|Balance, September 30, 2006           |  | 6,098,179       |  | $      | 6,482,300 |                  | $ | 25,551,000 |       |  | $ | 32,033,300 |  
|                                      |  |                 |  |        |           |                  |   |            |       |  |   |            |  

The accompanying notes are an integral part of these statements.



6



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##### Table of Contents

Part I. Item 1. (continued)

ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2006

(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, shareholders equity 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, 2005 and the notes thereto included in the Companys Form 10-KSB filed under the
Securities Exchange Act of 1934.

The results of operations for the nine months ended September 30, 2006 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, 2006.

The consolidated financial statements include the accounts of Alliance Bancshares California (Bancshares), its wholly owned subsidiary Alliance Bank (the Bank) and Lexib Realcorp, an inactive wholly owned subsidiary
of the Bank. Bancshares is a bank holding company which was incorporated in February 2000 in the State of California. The Bank is a California-chartered bank that commenced operations in 1980. The Banks deposit accounts are insured by the
Federal Deposit Insurance Corporation up to the maximum amount under the terms allowed by federal regulations. References in these Notes to the Company refer to Bancshares and its consolidated subsidiaries. Bancshares has three other
wholly owned subsidiaries, Alliance Bancshares California Capital Trust I, Alliance Bancshares California Capital Trust II, and Alliance Bancshares California Capital Trust III (the Trusts), which it formed in 2002, 2005 and 2006,
respectively, to issue trust preferred securities. FIN 46 and FASB interpretation No. 46R do not allow the consolidation of the Trusts into the Companys consolidated financial statements. As a result, the accompanying consolidated
statements of financial condition include the investment in the common interests of the Trusts of $837,000 in other assets.

Use of
Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Earnings Per Share

Basic earnings per share for each of the periods presented was computed by dividing net earnings by the weighted average number of shares of common stock
outstanding during each period. The weighted average numbers of shares used in the basic earnings per share computations for the three and nine months ended September 30, 2006 were 6,082,853 and 6,071,854, respectively, and for the three and
nine months ended September 30, 2005 were 6,035,619 and 5,946,278, respectively. The weighted average numbers of shares used in the diluted earnings per share computations for the three and nine months ended September 30, 2006 were
7,709,095 and 7,680,073, respectively, and for the three and nine months ended September 30, 2005 were 6,990,749 and 6,910,566, respectively. The diluted EPS computation does not include the anti-dilutive effect of 104,500 options for the
quarter ended September 30, 2006. There were no anti-dilutive options for the period ended September 30, 2005.



7



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##### Table of Contents

Basic and diluted earnings per share for the three months ended September 30, 2006 and 2005 are
computed as follows:



|                                                   |  |              |           |   |        |           |                 |   |     
|-------------------------------------------------- |  | ------------ | --------- | - | ------ | --------- | --------------- | - | ----
|Three Months Ended September 30, 2006              |  | Net Earnings |           |   | Shares |           | Per ShareAmount
|Basic earnings per share:                          |  |              |           |   |        |           |                 |   |     
|Net earnings                                       |  | $            | 2,070,400 |   |        |           |                 |   |     
|Cash dividends paid on convertible preferred stock |  |              | (328,100  | ) |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  |              | 1,742,300 |   |        | 6,082,853 |                 | $ | 0.29
|Preferred stock dividend                           |  |              | 328,100   |   |        |          |                 |   |     
|Effect of exercise of options                      |  |              |          |   |        | 226,096   |                 |   |     
|Effect of conversion of Series A preferred stock   |  |              |          |   |        | 733,050   |                 |   |     
|Effect of conversion of Series B preferred stock   |  |              |          |   |        | 667,096   |                 |   |     
|Diluted earnings per share:                        |  |              |           |   |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  | $            | 2,070,400 |   |        | 7,709,095 |                 | $ | 0.27
|                                                   |  |              |           |   |        |           |                 |   |     
|Three Months
Ended September 30, 2005              |  | Net Earnings |           |   | Shares |           | Per ShareAmount
|Basic earnings per share:                          |  |              |           |   |        |           |                 |   |     
|Net earnings                                       |  | $            | 1,747,000 |   |        |           |                 |   |     
|Cash dividends paid on convertible preferred stock |  |              | (134,700  | ) |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  |              | 1,612,300 |   |        | 6,035,619 |                 | $ | 0.27
|Preferred stock dividend                           |  |              | 134,700   |   |        |          |                 |   |     
|Effect of exercise of options                      |  |              |          |   |        | 222,080   |                 |   |     
|Effect of conversion of Series A preferred stock   |  |              |          |   |        | 733,050   |                 |   |     
|Diluted earnings per share:                        |  |              |           |   |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  | $            | 1,747,000 |   |        | 6,990,749 |                 | $ | 0.25
|                                                   |  |              |           |   |        |           |                 |   |     

Basic and diluted earnings per share for the nine months ended September 30, 2006 and 2005
are computed as follows:



|                                                   |  |              |           |   |        |           |                 |   |     
|-------------------------------------------------- |  | ------------ | --------- | - | ------ | --------- | --------------- | - | ----
|Nine Months Ended September 30, 2006               |  | Net Earnings |           |   | Shares |           | Per ShareAmount
|Basic earnings per share:                          |  |              |           |   |        |           |                 |   |     
|Net earnings                                       |  | $            | 5,805,200 |   |        |           |                 |   |     
|Cash dividends paid on convertible preferred stock |  |              | (984,100  | ) |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  |              | 4,821,100 |   |        | 6,071,854 |                 | $ | 0.79
|Preferred stock dividend                           |  |              | 984,100   |   |        |          |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Effect of exercise of options and warrants         |  |              |          |   |        | 208,073   |                 |   |     
|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      |  | $            | 5,805,200 |   |        | 7,680,073 |                 | $ | 0.76
|                                                   |  |              |           |   |        |           |                 |   |     
|Nine Months
Ended September 30, 2005               |  | Net Earnings |           |   | Shares |           | Per ShareAmount
|Basic earnings per share:                          |  |              |           |   |        |           |                 |   |     
|Net earnings                                       |  | $            | 4,378,100 |   |        |           |                 |   |     
|Cash dividends paid on convertible preferred stock |  |              | (538,800  | ) |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  |              | 3,839,300 |   |        | 5,946,278 |                 | $ | 0.65
|Preferred stock dividend                           |  |              | 538,800   |   |        |          |                 |   |     
|Effect of exercise of options and warrants         |  |              |          |   |        | 231,238   |                 |   |     
|Effect of conversion of Series A preferred stock   |  |              |          |   |        | 733,050   |                 |   |     
|Diluted earnings per share:                        |  |              |           |   |        |           |                 |   |     
|                                                   |  |              |           |   |        |           |                 |   |     
|Net earnings available to common shareholders      |  | $            | 4,378,100 |   |        | 6,910,566 |                 | $ | 0.63
|                                                   |  |              |           |   |        |           |                 |   |     



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##### Table of Contents

Equity Compensation Plans

The Companys 1996 Combined Incentive and Non-Qualified Stock Option Plan (1996 Plan) provides for the issuance of up to 800,000 shares
of the Companys common stock upon exercise of incentive and non-qualified options. The 2005 Equity Incentive Plan (the 2005 Plan), provides for the issuance of up to 450,000 shares of the Companys common stock. Both Plans
provide that each option must have an exercise price not less than the fair market value of the stock at the date of grant and have a term not to exceed ten years (five years with respect to options granted to employees holding 10% or more of the
voting stock of the Company). Options vest in various increments of not less frequently than 20% per year. The 1996 Plan expired in February 2006, although options remain outstanding under that Plan.

Prior to January 1, 2006, the Company accounted for stock-based awards to employees and directors using the intrinsic value method, in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Accordingly, no compensation expense was recognized in the consolidated financial statements for employee and director stock options for the
periods prior to January 1, 2006 as all options granted under the Plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123-R, Share-Based Payment (SFAS 123-R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized for the nine months ended
September 30, 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of September 30, 2006. Results for prior periods have not been restated.

As a result of adopting SFAS 123-R on January 1, 2006, the net income for the nine months ended September 30, 2006, was $223,400 lower and
basic and diluted net income per share for the nine months ended September 30, 2006 were $0.04 and $0.02 lower, respectively, than if the Company continued to account for stock-based compensation under APB Opinion No. 25. Prior to the
adoption of SFAS 123-R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123-R requires the cash flows related to the tax
benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The Company had excess tax benefits of $114,200 resulting from exercise of
non-qualified stock options for the nine months ended September 30, 2006. At September 30, 2006, compensation expense related to non-vested stock option grants aggregated to $1.4 million and is expected to be recognized as follows:



|                  |  |                                 |          
|----------------- |  | ------------------------------- | ---------
|                  |  | Stock OptionCompensationExpense
|Remainder of 2006 |  | $                               | 93,900   
|2007              |  |                                 | 375,800  
|2008              |  |                                 | 357,600  
|2009              |  |                                 | 309,500  
|2010              |  |                                 | 182,900  
|2011              |  |                                 | 36,600   
|                  |  |                                 |          
|Total             |  | $                               | 1,356,300
|                  |  |                                 |          

The following table illustrates the impact of adopting SFAS 123-R and the impact of applying the
original provisions of SFAS 123 as if the Company were to account for share-based compensation under APB 25:



|                                    |  |                                      |             |        |   |            
|----------------------------------- |  | ------------------------------------ | ----------- | ------ | - | -----------
|                                    |  | Nine Months Ended September 30, 2006
|                                    |  | SFAS 123-R                           |             | APB 25
|Income before income taxes          |  | $                                    | 9,764,600   |        | $ | 10,024,400 
|Net income                          |  |                                      | 5,805,200   |        |   | 6,028,600  
|Basic net income per share          |  |                                      | 0.79        |        |   | 0.83       
|Diluted net income per share        |  |                                      | 0.76        |        |   | 0.78       
|Cash flow from operations           |  |                                      | 8,229,400   |        |   | 8,193,000  
|Cash flow from financing activities |  |                                      | 154,020,000 |        |   | 154,056,400



9



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##### Table of Contents

The following table illustrates the effect on net income and earnings per share had the Company accounted
for stock-based compensation in accordance with SFAS 123-R for the nine months ended September 30, 2005:



|                                                                                                                       |  |        |           |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------ | --------- | -
|                                                                                                                       |  | Amount |          
|Net earnings, as reported                                                                                              |  | $      | 4,378,100 |  
|Less  Total stock-based compensation expense determined under fair value method for all qualifying awards, net of tax |  |        | (132,300  | )
|                                                                                                                       |  |        |           |  
|Pro forma net earnings                                                                                                 |  | $      | 4,245,800 |  
|                                                                                                                       |  |        |           |  
|Earnings per share:                                                                                                    |  |        |           |  
|Basic:                                                                                                                 |  |        |           |  
|As reported                                                                                                            |  | $      | 0.65      |  
|Pro forma                                                                                                              |  | $      | 0.62      |  
|Diluted:                                                                                                               |  |        |           |  
|As reported                                                                                                            |  | $      | 0.63      |  
|Pro forma                                                                                                              |  | $      | 0.61      |  

The Company uses the Black-Scholes option valuation model to determine the weighted average 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 expected life of options would be derived from historical data on
employee exercise and post-vesting termination behavior. 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,
|                    |  | 2006                            |  | 2005 
|Risk-free rate      |  | 5.0%                            |  | 4.1% 
|Expected lives      |  | 6.21                            |  | 8.42 
|Expected volatility |  | 42.5%                           |  | 37.0%

The following table summarizes the share option activity under the Plans for the periods
indicated:



|                                     |  |                           |   |  |                                 |       |                           |   |          
|------------------------------------ |  | ------------------------- | - |  | ------------------------------- | ----- | ------------------------- | - | ---------
|                                     |  | Shares Underlying Options |   |  | Weighted Average Exercise Price |       | Aggregate Intrinsic Value
|Nine months ended September 30, 2006 |  |                           |   |  |                                 |       |                           |   |          
|Outstanding at December 31, 2005     |  | 441,500                   |   |  | $                               | 6.50  |                           |   |          
|Granted                              |  | 63,500                    |   |  |                                 | 16.25 |                           |   |          
|Exercised                            |  | (32,600                   | ) |  |                                 | 2.32  |                           |   |          
|Forfeited                            |  | (7,800                    | ) |  |                                 | 13.20 |                           |   |          
|                                     |  |                           |   |  |                                 |       |                           |   |          
|Outstanding at September 30, 2006    |  | 464,600                   |   |  |                                 | 8.61  |                           | $ | 2,975,100
|                                     |  |                           |   |  |                                 |       |                           |   |          
|Exercisable at September 30, 2006    |  | 193,300                   |   |  |                                 | 3.85  |                           | $ | 2,096,600
|                                     |  |                           |   |  |                                 |       |                           |   |          
|                                     |  |                           |  
|                                     |  | Shares Underlying Options |   |  | Weighted Average Exercise Price |       | Aggregate Intrinsic Value
|Nine months ended September 30, 2005 |  |                           |   |  |                                 |       |                           |   |          
|Outstanding at December 31, 2004     |  | 418,500                   |   |  | $                               | 4.19  |                           |   |          
|Granted                              |  | 79,000                    |   |  |                                 | 11.00 |                           |   |          
|Exercised                            |  | (71,900                   | ) |  |                                 | 2.09  |                           |   |          
|Forfeited                            |  | (9,100                    | ) |  |                                 | 7.40  |                           |   |          
|                                     |  |                           |   |  |                                 |       |                           |   |          
|Outstanding at September 30, 2005    |  | 416,500                   |   |  |                                 | 5.78  |                           | $ | 3,529,600
|                                     |  |                           |   |  |                                 |       |                           |   |          
|Exercisable at September 30, 2005    |  | 197,800                   |   |  |                                 | 2.19  |                           | $ | 2,386,100
|                                     |  |                           |   |  |                                 |       |                           |   |          



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##### Table of Contents

The following information applies to options outstanding at September 30, 2006:



|                                                       |  |                |         |               |   |               |  |                |        |                |   |         |  |   |        
|------------------------------------------------------ |  | -------------- | ------- | ------------- | - | ------------- |  | -------------- | ------ | -------------- | - | ------- |  | - | -------
|                                                       |  | Exercise price
|                                                       |  | $1.00 - $2.00  |         | $2.01 - $2.75 |   | $6.10 - $6.71 |  | $8.50 - $11.00 |        | $15.00 $17.77
|Number of options outstanding                          |  |                | 109,000 |               |   | 18,600        |  |                | 56,000 |                |   | 171,500 |  |   | 109,500
|Weighted-average exercise price                        |  | $              | 1.37    |               | $ | 2.72          |  | $              | 6.21   |                | $ | 9.90    |  | $ | 16.04  
|Weighted-average remaining contractual life (years)    |  |                | 1.56    |               |   | 4.74          |  |                | 5.89   |                |   | 7.91    |  |   | 9.07   
|Number of shares underlying options exercisable        |  |                | 109,000 |               |   | 17,800        |  |                | 27,600 |                |   | 38,900  |  |   |       
|Weighted average exercise price of options exercisable |  | $              | 1.37    |               | $ | 2.72          |  | $              | 6.10   |                | $ | 9.73    |  |   |       

A summary of the status of the Companys unvested options and the activity during the nine
months ended September 30, 2006, is presented below:



|                                       |  |         |   |  |                                        |     
|-------------------------------------- |  | ------- | - |  | -------------------------------------- | ----
|                                       |  | Shares  |   |  | Weighted Average Grant-date Fair Value
|Unvested options at December 31, 2005  |  | 256,400 |   |  | $                                      | 5.56
|Granted                                |  | 63,500  |   |  |                                        | 7.89
|Vested                                 |  | (41,200 | ) |  |                                        | 4.27
|Forfeited                              |  | (7,400  | ) |  |                                        | 7.68
|                                       |  |         |   |  |                                        |     
|Unvested options at September 30, 2006 |  | 271,300 |   |  |                                        | 6.25
|                                       |  |         |   |  |                                        |     

A summary of the status of the Companys unvested options and the activity during the nine
months ended September 30, 2005, is presented below:



|                                       |  |         |   |  |                                        |     
|-------------------------------------- |  | ------- | - |  | -------------------------------------- | ----
|                                       |  | Shares  |   |  | Weighted Average Grant-date Fair Value
|Unvested options at December 31, 2004  |  | 178,500 |   |  | $                                      | 3.68
|Granted                                |  | 79,000  |   |  |                                        | 6.08
|Vested                                 |  | (29,700 | ) |  |                                        | 2.96
|Forfeited                              |  | (9,100  | ) |  |                                        | 4.02
|                                       |  |         |   |  |                                        |     
|Unvested options at September 30, 2005 |  | 218,700 |   |  |                                        | 4.63
|                                       |  |         |   |  |                                        |     

2. Allowance for Loan Losses

See Changes in Allowance for Loan Losses in Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations, for discussion regarding changes in the
Allowance for Loan Losses.

3. Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position 13-2 (FSP 13-2) Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income
Taxes Generated by a Leveraged Lease Transaction. This guidance applies to all transactions classified as leveraged leases in accordance with SFAS 13, Accounting for Leases. It requires the projected timing of income tax cash flows
generated by a leveraged lease transaction to be reviewed annually or more frequently if events or changes in circumstances indicate that a change in timing has occurred or is projected to occur. If the projected timing of the income tax cash flows
is revised, the rate of return and the allocation of income to positive investment years shall be recalculated from the inception of the lease. This guidance shall be applied to fiscal years beginning after December 15, 2006. The Company does
not expect the adoption of FSP 13-2 to have a material effect on the Companys consolidated financial statements.

In September 2006,
the FASB issued SFAS 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement
clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. It also
emphasizes that fair value is a market-based measurement not an entity specific measurement. SFAS 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition.
The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period. The Company does not expect the adoption of
SFAS 157 to have a material effect on the Companys consolidated financial statements.



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##### Table of Contents

In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R. This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS 158 is effective
for fiscal years beginning after December 15, 2006 for employers with publicly traded securities except for the requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end statement of
financial position which is effective for fiscal years ending December 15, 2008. The Company does not expect the adoption of SFAS 158 to have a material effect on the Companys consolidated financial statements.

4. Segment Reporting

SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way that public businesses report information about operating segments in annual and interim financial statements and establishes
standards for related disclosures about an enterprises products and services, geographic areas, and major customers.

In accordance
with the provisions of SFAS No. 131, reportable segments have been determined based upon the Companys internal management and profitability reporting system, which is organized based on lines of business. Certain business units have been
aggregated for segment reporting purposes where the products and services are similar and are sold to similar types of customers, have similar production and distribution processes, and have similar economic characteristics. The reportable segments
for the Company are the Regional Offices, the Real Estate Industries Division, the Small Business Administration (SBA), and Other. The Regional Offices segment is comprised of the Banks four regional offices which provide a wide range of
credit products and banking services primarily to small to medium sized businesses, executives, and professionals. The Real Estate Industries Division is comprised of real estate lending, including construction loans for commercial buildings,
condominium and apartment projects, multifamily properties, and single-family subdivisions as well as commercial real estate loans. The SBA segment provides credit products that are in part guaranteed by the U.S. government and are made to qualified
small business owners for the purpose of accessing capital for operations, acquisitions, and inventory or debt management. The segment entitled Other incorporates all remaining business units such as the Companys corporate office,
administrative and treasury functions, as well as other types of products and services such as asset-based lending, investment securities, money desk certificates of deposit and brokered deposits.

The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial
accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, reported segment results are not necessarily comparable with similar information reported by other financial institutions.

The Company does not allocate provisions for loan losses, general and administrative expenses, or income taxes to the business segments.
In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded
in administration. Since the Company derives substantially all of its revenues from interest and noninterest income, and interest expense is our 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, 2006 and 2005.



12



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##### Table of Contents

The following table also shows the assets allocated to each of these segments as of September 30,
2006 and December 31, 2005.



|                                                                                              |  |                 |             |                                 |   |             |  |       |            |  |       |             |   |  |   |            
|--------------------------------------------------------------------------------------------- |  | --------------- | ----------- | ------------------------------- | - | ----------- |  | ----- | ---------- |  | ----- | ----------- | - |  | - | -----------
|                                                                                              |  | RegionalOffices |             | Real Estate Industries Division |   | SBA         |  | Other |            |  | Total
|Net interest income before provision for loan losses for the nine months ended September 30:  |  |                 |             |                                 |   |             |  |       |            |  |       |             |   |  |   |            
|2006                                                                                          |  | $               | 12,294,700  |                                 | $ | 13,000,300  |  | $     | 1,996,800  |  | $     | 561,500     |   |  | $ | 27,853,300 
|2005                                                                                          |  |                 | 8,811,900   |                                 |   | 7,232,700   |  |       | 1,375,600  |  |       | 87,300      |   |  |   | 17,507,500 
|Noninterest income for the nine months ended September 30:                                    |  |                 |             |                                 |   |             |  |       |            |  |       |             |   |  |   |            
|2006                                                                                          |  |                 | 868,700     |                                 |   | 107,200     |  |       | 645,300    |  |       | 435,000     |   |  |   | 2,056,200  
|2005                                                                                          |  |                 | 733,400     |                                 |   | 28,900      |  |       | 1,154,500  |  |       | 268,300     |   |  |   | 2,185,100  
|Net interest income before provision for loan losses for the three months ended September 30: |  |                 |             |                                 |   |             |  |       |            |  |       |             |   |  |   |            
|2006                                                                                          |  |                 | 4,616,300   |                                 |   | 4,834,800   |  |       | 680,300    |  |       | (32,600     | ) |  |   | 10,098,800 
|2005                                                                                          |  |                 | 3,423,200   |                                 |   | 3,032,600   |  |       | 582,300    |  |       | (169,000    | ) |  |   | 6,869,100  
|Noninterest income for the three months ended September 30:                                   |  |                 |             |                                 |   |             |  |       |            |  |       |             |   |  |   |            
|2006                                                                                          |  |                 | 252,200     |                                 |   | 7,000       |  |       | 294,900    |  |       | 162,300     |   |  |   | 716,400    
|2005                                                                                          |  |                 | 263,700     |                                 |   | 15,700      |  |       | 417,800    |  |       | 109,000     |   |  |   | 806,200    
|Segment assets as of:                                                                         |  |                 |             |                                 |   |             |  |       |            |  |       |             |   |  |   |            
|September 30, 2006                                                                            |  |                 | 302,105,400 |                                 |   | 316,518,700 |  |       | 32,223,000 |  |       | 186,057,300 |   |  |   | 836,904,400
|December 31, 2005                                                                             |  |                 | 196,386,100 |                                 |   | 203,982,900 |  |       | 26,895,300 |  |       | 247,708,900 |   |  |   | 674,973,200

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources. Substantially all of our operations are conducted by the Bank and the Bank accounts for substantially all
of our revenues and expenses. This information should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, contained elsewhere in this Report.

References in this report to the Company, we or us refer to Alliance Bancshares California (Bancshares)
and its consolidated subsidiaries, including Alliance Bank (Bank).

Forward-Looking Information

The statements contained herein that are not historical facts are forward-looking statements based on managements current expectations and beliefs
concerning future developments and their potential effects on the Company. These forward-looking statements involve risks and uncertainties, including the risks and uncertainties described herein under the caption Factors Which May Affect
Future Operating Results. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management, and actual results may differ from those projected in the forward-looking statements.
Statements regarding policies and procedures are not intended, and should not be interpreted to mean, that such policies and procedures will not be amended, modified or repealed at any time in the future.

Overview

We recorded net earnings of $2.1 million
($0.29 basic and $0.27 diluted earnings per share) for the third quarter of 2006 as compared to $1.7 million ($0.27 basic and $0.25 diluted earnings per share) for the third quarter of 2005. The increase in net earnings was primarily due to a $3.2
million increase in net interest income before provision for loan losses offset by a $2.1 million increase in non-interest expenses.

For
the nine months ended September 30, 2006, we generated net earnings of $5.8 million ($0.79 basic and $0.76 diluted earnings per share) as compared to $4.4 million ($0.65 basic and $0.63 diluted earnings per share) for the same period of 2005.
The improvement in earnings in 2006 was due primarily to a $10.3 million increase in net interest income before provision for loan loss offset by a $6.5 million increase non-interest expenses and a $1.1 million increase in the provision for loan
losses.



13



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##### Table of Contents

We continued to grow, with total assets increasing from $675.0 million at December 31, 2005 to
$836.9 million at September 30, 2006. Net loans, including loans held for sale, grew from $545.4 million at December 31, 2005 to $657.7 million at September 30, 2006. Deposits grew from $531.3 million at December 31, 2005 to
$707.1 million at September 30, 2006.

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



|                                                 |  |                                 |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------ |  | ------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                 |  | Three Months EndedSeptember 30, |       |   | Nine Months Ended September 30, |  
|                                                 |  | 2006                            |       |   | 2005                            |   |       | 2006 |  |   | 2005  |  
|Return on average assets (1)                     |  |                                 | 1.01  | % |                                 |   | 1.23  | %    |  |   | 1.02  | % |  |   | 1.17  | %
|Return on average shareholders equity (1)       |  |                                 | 26.16 | % |                                 |   | 28.25 | %    |  |   | 26.34 | % |  |   | 25.24 | %
|Net yield on average interest earning assets (1) |  |                                 | 5.10  | % |                                 |   | 5.09  | %    |  |   | 5.10  | % |  |   | 4.94  | %
|Earnings per common share:                       |  |                                 |       |   |                                 |   |       |      |  |   |       |   |  |   |       |  
|Basic earnings per share                         |  | $                               | 0.29  |   |                                 | $ | 0.27  |      |  | $ | 0.79  |   |  | $ | 0.65  |  
|Diluted earnings per share                       |  | $                               | 0.27  |   |                                 | $ | 0.25  |      |  | $ | 0.76  |   |  | $ | 0.63  |  

---

|(1) | Annualized.
|--- | -----------

The following table sets forth selected
financial information for the periods indicated:



|                                                     |  |                                  |            |      |                                 |               |  |      |      |  |      |            |               |   |            |  |      |  
|---------------------------------------------------- |  | -------------------------------- | ---------- | ---- | ------------------------------- | ------------- |  | ---- | ---- |  | ---- | ---------- | ------------- | - | ---------- |  | ---- | -
|                                                     |  | Three Months Ended September 30, |            |      | Nine Months Ended September 30, |              
|                                                     |  | 2006                             |            | 2005 |                                 | PercentChange |  |      | 2006 |  | 2005 |            | PercentChange |  
|Net interest income before provision for loan losses |  | $                                | 10,098,800 |      | $                               | 6,869,100     |  | 47.0 | %    |  | $    | 27,853,300 |               | $ | 17,507,500 |  | 59.1 | %
|Provision for loan losses                            |  |                                  | 1,090,000  |      |                                 | 750,000       |  | 45.3 | %    |  |      | 2,813,000  |               |   | 1,727,000  |  | 62.9 | %
|Non-interest expense                                 |  |                                  | 6,184,700  |      |                                 | 4,091,700     |  | 51.2 | %    |  |      | 17,331,900 |               |   | 10,826,900 |  | 60.1 | %
|Tax Expense                                          |  |                                  | 1,470,100  |      |                                 | 1,086,600     |  | 35.3 | %    |  |      | 3,959,400  |               |   | 2,760,600  |  | 43.4 | %
|Net income                                           |  |                                  | 2,070,400  |      |                                 | 1,747,000     |  | 18.5 | %    |  |      | 5,805,200  |               |   | 4,378,100  |  | 32.6 | %
|Net income per share  diluted                       |  |                                  | 0.27       |      |                                 | 0.25          |  | 8.0  | %    |  |      | 0.76       |               |   | 0.63       |  | 20.6 | %
|Weighted average number of shares - diluted          |  |                                  | 7,709,095  |      |                                 | 6,990,749     |  | 10.3 | %    |  |      | 7,680,073  |               |   | 6,910,566  |  | 11.1 | %

The increase in net interest income in the three months and nine months ended September 30,
2006, as compared to the corresponding period of 2005, was primarily the result of growth in the volume of loans and investment securities. Average loans grew by $217.5 million, or 56.3%, to $603.6 million at September 30, 2006 from $386.2
million at September 30, 2005. Average investment securities grew by $23.8 million or 34.1% to $93.4 million at September 30, 2006 from $69.7 million at September 30, 2005.

The provision for loan losses increased by $0.3 million or 45.3% and $1.1 million or 62.9% to $2.8 million, respectively, in the first three months and
nine months of 2006 as compared to the corresponding period of 2005. This increase was primarily attributable to a 42.6% increase in net loans which includes loans held for sale.

Non-interest expense increased by $2.1 million, or 51.2%, to $6.2 million for the three months ended September 30, 2006 and $6.5 million, or 60.1%,
to $17.3 million for the nine months ended September 30, 2006 primarily due to an increase in salaries and related benefits expense due to the growth of the Company.



14



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##### Table of Contents

RESULTS OF OPERATIONS  Three and nine months ended September 30, 2006 and 2005

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, |  
|                                                     |  | 2006                             |            |   | 2005                            |   |            | PercentChange |  |       | 2006 |  |   | 2005       |   |  | PercentChange |           
|Interest income                                      |  | $                                | 17,500,500 |   |                                 | $ | 10,397,000 |               |  | 68.3  | %    |  | $ | 47,198,900 |   |  | $             | 25,696,800 |   |  | 83.7  | %
|Interest expense                                     |  |                                  | 7,401,700  |   |                                 |   | 3,527,900  |               |  | 109.8 | %    |  |   | 19,345,600 |   |  |               | 8,189,300  |   |  | 136.2 | %
|Net interest income before provision for loan losses |  |                                  | 10,098,800 |   |                                 |   | 6,869,100  |               |  | 47.0  | %    |  |   | 27,853,300 |   |  |               | 17,507,500 |   |  | 59.1  | %
|Net interest margin                                  |  |                                  | 5.10       | % |                                 |   | 5.09       | %             |  | 2.0   | %    |  |   | 5.10       | % |  |               | 4.94       | % |  | 3.2   | %

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, referred to as volume changes. 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 FRB.

We recorded interest income of $17.5 million and $47.2 million, respectively, for the three and nine months ended
September 30, 2006 as compared to $10.4 million and $25.7 million, respectively, for the three and nine months ended September 30, 2005. Interest expense totaled $7.4 million and $19.3 million, respectively, for the three and nine months
ended September 30, 2006 as compared to $3.5 million and $8.2 million, respectively, for the three and nine months ended September 30, 2005. The increase in interest income was due to $250.4 million and $256.0 million increases in average
interest earning assets in conjunction with a 1.13% and 1.39% increases in the weighted average yield earned on those assets for the three and nine months ended September 30, 2006. The increase in interest expense was due to a $225.2 million
and $239.4 million increase in average interest bearing liabilities in addition to 1.21% and 1.27% increases in the weighted average rates paid on interest bearing liabilities. The prime rate increased from 5.25% at December 31, 2004 to 8.25%
at September 30, 2006 causing an overall increase in our interest rates.

The increase in average interest earning assets and average
interest bearing liabilities is a result of the Companys continued efforts to expand all of the Banks Regional Offices, the continued growth of all categories of loans and investments and to favorable economic conditions. Average loans
increased 47.4% and 56.3%, respectively to $648.7 million and $603.6 million for the three and nine months ended September 30, 2006 from $440.1 million and $386.2 million, respectively, for the three and nine months ended September 30,
2005, with the increase occurring in all major loan categories. Average investment securities increased 54.5% and 34.1%, respectively, to $104.9 million and $93.4 million from $67.9 million and $69.7 million, respectively, during the three and nine
months ended September 30, 2006, as we invested in U.S. Government agency and mortgage-backed securities. Average interest bearing deposits increased 47.3% and 66.2%, respectively, to $522.9 million and $491.1 million, respectively, for the
three and nine months ended September 30, 2006 compared to $355.0 million and $295.5 million, respectively, during the three and nine months ended September 30, 2005.

Our interest rate spread decreased from 4.30% during the third quarter of 2005 to 4.22% during the third quarter of 2006, and our net interest margin
increased slightly from 5.09% during the third quarter of 2005 to 5.10% during the third quarter of 2006. The decrease in interest rate spread was due principally to an increase in our cost of funds which exceeded the increase in yields on our
interest earning assets. The increase in our cost of funds was due to increasing market interest rates, resulting in increases in all categories of interest-bearing liabilities, and to higher cost certificates of deposit constituting a greater
percentage of our total average interest-bearing liabilities (33.3% for the nine months ended September 30, 2005 compared to 49.9% for the nine months ended September 30, 2006). The increase in certificates of deposit was due to an
increase in brokered deposits which increased from $69.4 million as of September 30, 2005 to $149.5 million as of September 30, 2006. Our weighted average cost of funds was positively affected by our ability to borrow



15



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##### Table of Contents

through securities sold under repurchase agreements in 2006, which had a lower cost than all categories of deposits other than demand deposits. The
arrangement under which we effected these borrowings terminated in the last part of September 2006. See Financial ConditionBorrowed FundsSecurities Sold Under Agreements to Repurchase. Our net interest margin remains high in
comparison with our interest rate spread because a significant portion of our interest earning assets is funded by non-interest bearing demand deposits, preferred stock, and shareholders equity.

The following table presents 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, |            
|                                                                        |  | 2006                             |             |                              | 2005 |                                   
|                                                                        |  | AverageBalance                   |             | Interest Income/ Expense.(1) |      | WeightedAverageRatesEarned/Paid(3) |  |      | AverageBalance |  | Interest Income/ Expense(1) |             | WeightedAverageRatesEarned/Paid (3) |  
|Interest earning assets:                                                |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Federal funds sold                                                      |  | $                                | 29,101,100  |                              | $    | 381,100                            |  | 5.20 | %              |  | $                           | 22,324,700  |                                     | $ | 197,200    |  | 3.50 | %
|Time deposits                                                           |  |                                  | 3,559,900   |                              |      | 25,900                             |  | 2.89 | %              |  |                             | 5,582,900   |                                     |   | 34,400     |  | 2.44 | %
|Securities                                                              |  |                                  | 104,889,600 |                              |      | 1,168,400                          |  | 4.42 | %              |  |                             | 67,896,500  |                                     |   | 680,700    |  | 3.98 | %
|Loans (2)                                                               |  |                                  | 648,738,500 |                              |      | 15,925,100                         |  | 9.74 | %              |  |                             | 440,091,700 |                                     |   | 9,484,700  |  | 8.55 | %
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Total interest-earning assets                                           |  |                                  | 786,289,100 |                              |      | 17,500,500                         |  | 8.83 | %              |  |                             | 535,895,800 |                                     |   | 10,397,000 |  | 7.70 | %
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Non-interest-earning assets                                             |  |                                  | 29,928,500  |                              |      |                                    |  |      |                |  |                             | 27,577,500  |                                     |   |            |  |      |  
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Total assets                                                            |  | $                                | 816,217,600 |                              |      |                                    |  |      |                |  | $                           | 563,473,300 |                                     |   |            |  |      |  
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Interest bearing liabilities:                                           |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Interest-bearing demand deposits                                        |  | $                                | 9,781,400   |                              |      | 47,000                             |  | 1.91 | %              |  | $                           | 5,993,900   |                                     |   | 21,400     |  | 1.42 | %
|Savings and money market deposits                                       |  |                                  | 193,332,900 |                              |      | 2,050,000                          |  | 4.21 | %              |  |                             | 185,478,100 |                                     |   | 1,345,400  |  | 2.88 | %
|Certificates of deposit                                                 |  |                                  | 319,803,300 |                              |      | 3,841,100                          |  | 4.77 | %              |  |                             | 163,517,700 |                                     |   | 1,578,200  |  | 3.83 | %
|Federal funds purchased                                                 |  |                                  |            |                              |      |                                   |  |     |                |  |                             | 270,600     |                                     |   | 2,700      |  | 3.96 | %
|FHLB advances:                                                          |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Short-term                                                              |  |                                  | 5,000,000   |                              |      | 67,800                             |  | 5.38 | %              |  |                             | 15,000,000  |                                     |   | 96,100     |  | 2.54 | %
|Long-term                                                               |  |                                  | 36,459,500  |                              |      | 508,700                            |  | 5.54 | %              |  |                             | 24,280,800  |                                     |   | 233,200    |  | 3.81 | %
|Securities sold under agreements to repurchase                          |  |                                  | 45,052,900  |                              |      | 369,900                            |  | 3.26 | %              |  |                             |            |                                     |   |           |  |     |  
|Junior subordinated debentures                                          |  |                                  | 27,837,000  |                              |      | 517,200                            |  | 7.37 | %              |  |                             | 17,527,000  |                                     |   | 250,900    |  | 5.68 | %
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Total interest-bearing liabilities                                      |  |                                  | 637,267,000 |                              |      | 7,401,700                          |  | 4.61 | %              |  |                             | 412,068,100 |                                     |   | 3,527,900  |  | 3.40 | %
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Non-interest bearing liabilities                                        |  |                                  | 128,537,300 |                              |      |                                    |  |      |                |  |                             | 119,175,300 |                                     |   |            |  |      |  
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Total liabilities                                                       |  |                                  | 765,804,300 |                              |      |                                    |  |      |                |  |                             | 531,243,400 |                                     |   |            |  |      |  
|Redeemable preferred stock and shareholders equity                     |  |                                  | 50,413,300  |                              |      |                                    |  |      |                |  |                             | 32,229,900  |                                     |   |            |  |      |  
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Total liabilities, redeemable preferred stock, and shareholders equity |  | $                                | 816,217,600 |                              |      |                                    |  |      |                |  | $                           | 563,473,300 |                                     |   |            |  |      |  
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Net interest income                                                     |  |                                  |             |                              | $    | 10,098,800                         |  |      |                |  |                             |             |                                     | $ | 6,869,100  |  |      |  
|                                                                        |  |                                  |             |                              |      |                                    |  |      |                |  |                             |             |                                     |   |            |  |      |  
|Interest rate spread                                                    |  |                                  |             |                              |      |                                    |  | 4.22 | %              |  |                             |             |                                     |   |            |  | 4.30 | %
|Net interest margin                                                     |  |                                  |             |                              |      |                                    |  | 5.10 | %              |  |                             |             |                                     |   |            |  | 5.09 | %

---

|(1) | Interest income on loans includes loan fees of $1.2 million
in 2006 and $0.9 million in 2005.
|--- | ---------------------------------------------------------------------------------------------

|(2) | Loans include nonaccrual loans.
|--- | -------------------------------

|(3) | Annualized.
|--- | -----------



16



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##### Table of Contents

ANALYSIS OF NET INTEREST INCOME



|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|----------------------------------------------------------------------- |  | ------------------------------- | ----------- | ---------------------------- | ---- | ----------------------------------- |  | ---- | -------------- |  | ---------------------------- | ----------- | ----------------------------------- | - | ---------- |  | ---- | -
|                                                                        |  | Nine Months Ended September 30, |            
|                                                                        |  | 2006                            |             |                              | 2005 |                                    
|                                                                        |  | AverageBalance                  |             | Interest Income/ Expense
(1) |      | WeightedAverageRatesEarned/Paid (3) |  |      | AverageBalance |  | Interest Income/ Expense
(1) |             | WeightedAverageRatesEarned/Paid (3) |  
|Interest earning assets:                                                |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Federal funds sold                                                      |  | $                               | 27,520,800  |                              | $    | 1,023,700                           |  | 4.97 | %              |  | $                            | 12,773,400  |                                     | $ | 305,400    |  | 3.20 | %
|Time deposits                                                           |  |                                 | 5,552,700   |                              |      | 157,100                             |  | 3.78 | %              |  |                              | 5,603,300   |                                     |   | 93,600     |  | 2.23 | %
|Securities                                                              |  |                                 | 93,442,300  |                              |      | 3,073,100                           |  | 4.40 | %              |  |                              | 69,658,300  |                                     |   | 2,060,400  |  | 3.95 | %
|Loans (2)                                                               |  |                                 | 603,631,500 |                              |      | 42,945,000                          |  | 9.51 | %              |  |                              | 386,152,100 |                                     |   | 23,237,400 |  | 8.05 | %
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Total interest-earning assets                                           |  |                                 | 730,147,300 |                              |      | 47,198,900                          |  | 8.64 | %              |  |                              | 474,187,100 |                                     |   | 25,696,800 |  | 7.25 | %
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Non-interest-earning assets                                             |  |                                 | 29,776,300  |                              |      |                                     |  |      |                |  |                              | 26,748,800  |                                     |   |            |  |      |  
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Total assets                                                            |  | $                               | 759,923,600 |                              |      |                                     |  |      |                |  | $                            | 500,935,900 |                                     |   |            |  |      |  
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Interest bearing liabilities:                                           |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Interest-bearing demand deposits                                        |  | $                               | 9,865,700   |                              |      | 129,500                             |  | 1.75 | %              |  | $                            | 5,741,600   |                                     |   | 54,800     |  | 1.28 | %
|Savings and money market deposits                                       |  |                                 | 182,394,900 |                              |      | 5,346,400                           |  | 3.92 | %              |  |                              | 170,383,400 |                                     |   | 3,242,000  |  | 2.54 | %
|Certificates of deposit                                                 |  |                                 | 298,800,000 |                              |      | 10,286,700                          |  | 4.60 | %              |  |                              | 119,380,700 |                                     |   | 3,179,000  |  | 3.56 | %
|Federal funds purchased                                                 |  |                                 |            |                              |      |                                    |  |     |                |  |                              | 163,800     |                                     |   | 4,500      |  | 3.67 | %
|FHLB advances                                                           |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Short-term                                                              |  |                                 | 5,000,000   |                              |      | 185,200                             |  | 4.95 | %              |  |                              | 15,000,000  |                                     |   | 288,300    |  | 2.57 | %
|Long-term                                                               |  |                                 | 32,073,600  |                              |      | 1,206,300                           |  | 5.03 | %              |  |                              | 31,909,200  |                                     |   | 760,300    |  | 3.19 | %
|Securities sold under agreements to repurchase                          |  |                                 | 47,502,900  |                              |      | 996,000                             |  | 2.80 | %              |  |                              |            |                                     |   |           |  |     |  
|Junior subordinated debentures                                          |  |                                 | 22,682,000  |                              |      | 1,195,500                           |  | 7.05 | %              |  |                              | 16,381,500  |                                     |   | 660,400    |  | 5.39 | %
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Total interest-bearing liabilities                                      |  |                                 | 598,319,100 |                              |      | 19,345,600                          |  | 4.32 | %              |  |                              | 358,960,200 |                                     |   | 8,189,300  |  | 3.05 | %
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Non-interest bearing liabilities                                        |  |                                 | 113,117,500 |                              |      |                                     |  |      |                |  |                              | 111,084,800 |                                     |   |            |  |      |  
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Total liabilities                                                       |  |                                 | 711,436,600 |                              |      |                                     |  |      |                |  |                              | 470,045,000 |                                     |   |            |  |      |  
|Redeemable preferred stock and shareholders equity                     |  |                                 | 48,487,000  |                              |      |                                     |  |      |                |  |                              | 30,890,900  |                                     |   |            |  |      |  
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Total liabilities, redeemable preferred stock, and shareholders equity |  | $                               | 759,923,600 |                              |      |                                     |  |      |                |  | $                            | 500,935,900 |                                     |   |            |  |      |  
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Net interest income                                                     |  |                                 |             |                              | $    | 27,853,300                          |  |      |                |  |                              |             |                                     | $ | 17,507,500 |  |      |  
|                                                                        |  |                                 |             |                              |      |                                     |  |      |                |  |                              |             |                                     |   |            |  |      |  
|Interest rate spread                                                    |  |                                 |             |                              |      |                                     |  | 4.32 | %              |  |                              |             |                                     |   |            |  | 4.20 | %
|Net interest margin                                                     |  |                                 |             |                              |      |                                     |  | 5.10 | %              |  |                              |             |                                     |   |            |  | 4.94 | %

---

|(1) | Interest income on loans includes loan fees of $3.3 million
in 2006 and $2.1 million in 2005.
|--- | ---------------------------------------------------------------------------------------------

|(2) | Loans include nonaccrual loans.
|--- | -------------------------------

|(3) | Annualized.
|--- | -----------



17



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##### Table of Contents

The following tables present information concerning the change in interest income and interest expense
attributable to changes in average volume and average rates during the periods indicated.

ANALYSIS OF CHANGE IN INTEREST INCOME



|                                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|---------------------------------------------- |  | ------------------------------------- | --------- | - | ------------------------------------ | - | ---------- |  | - | --------- | - |  | ---- | ---------- | ---------- |  | - | --------- |  | - | ---------- | -
|                                               |  | Three Months Ended September 30, 2006 |           |   | Nine Months Ended September 30, 2006 |  
|                                               |  | Increase (Decrease) Due To            |           |   | Increase (Decrease) Due To           |  
|                                               |  | Volume                                |           |   | Rate                                 |   | Net Change |  |   | Volume    |   |  | Rate |            | Net Change | 
|Interest income:                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Federal funds sold                             |  | $                                     | 71,000    |   |                                      | $ | 112,900    |  | $ | 183,900   |   |  | $    | 484,900    |            |  | $ | 233,400   |  | $ | 718,300    |  
|Time deposits                                  |  |                                       | (14,000   | ) |                                      |   | 5,500      |  |   | (8,500    | ) |  |      | (900       | )          |  |   | 64,400    |  |   | 63,500     |  
|Securities                                     |  |                                       | 405,100   |   |                                      |   | 82,600     |  |   | 487,700   |   |  |      | 762,800    |            |  |   | 249,900   |  |   | 1,012,700  |  
|Loans                                          |  |                                       | 4,980,100 |   |                                      |   | 1,460,300  |  |   | 6,440,400 |   |  |      | 14,889,300 |            |  |   | 4,818,300 |  |   | 19,707,600 |  
|                                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Total interest-earning assets                  |  |                                       | 5,442,200 |   |                                      |   | 1,661,300  |  |   | 7,103,500 |   |  |      | 16,136,100 |            |  |   | 5,366,000 |  |   | 21,502,100 |  
|                                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Interest expense:                              |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Interest-bearing demand deposits               |  |                                       | 16,500    |   |                                      |   | 9,100      |  |   | 25,600    |   |  |      | 49,100     |            |  |   | 25,600    |  |   | 74,700     |  
|Savings and money market deposits              |  |                                       | 59,200    |   |                                      |   | 645,400    |  |   | 704,600   |   |  |      | 242,800    |            |  |   | 1,861,600 |  |   | 2,104,400  |  
|Certificates of deposit                        |  |                                       | 1,802,000 |   |                                      |   | 460,900    |  |   | 2,262,900 |   |  |      | 5,948,700  |            |  |   | 1,159,000 |  |   | 7,107,700  |  
|Federal funds purchased                        |  |                                       | (2,700    | ) |                                      |   |           |  |   | (2,700    | ) |  |      | (4,500     | )          |  |   |          |  |   | (4,500     | )
|FHLB advances:                                 |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Short-term                                     |  |                                       | (90,800   | ) |                                      |   | 62,500     |  |   | (28,300   | ) |  |      | (266,700   | )          |  |   | 163,600   |  |   | (103,100   | )
|Long-term                                      |  |                                       | 144,800   |   |                                      |   | 130,700    |  |   | 275,500   |   |  |      | 3,900      |            |  |   | 442,100   |  |   | 446,000    |  
|Securities sold under agreements to repurchase |  |                                       | 369,900   |   |                                      |   |           |  |   | 369,900   |   |  |      | 996,000    |            |  |   |          |  |   | 996,000    |  
|Junior subordinated debentures                 |  |                                       | 176,800   |   |                                      |   | 89,500     |  |   | 266,300   |   |  |      | 297,400    |            |  |   | 237,700   |  |   | 535,100    |  
|                                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Total interest-bearing liabilities             |  |                                       | 2,475,700 |   |                                      |   | 1,398,100  |  |   | 3,873,800 |   |  |      | 7,266,700  |            |  |   | 3,889,600 |  |   | 11,156,300 |  
|                                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  
|Net interest income                            |  | $                                     | 2,966,500 |   |                                      | $ | 263,200    |  | $ | 3,229,700 |   |  | $    | 8,869,400  |            |  | $ | 1,476,400 |  | $ | 10,345,800 |  
|                                               |  |                                       |           |   |                                      |   |            |  |   |           |   |  |      |            |            |  |   |           |  |   |            |  

Provision for Loan Losses

We made provisions for loan losses of $1.1 million and $2.8 million, respectively, for the three and nine months ended September 30, 2006 as compared to provisions of $0.8 million and $1.7 million for the
comparable periods of 2005.

We assess the adequacy of the Allowance for Loan Losses (Allowance) each calendar quarter.
Classified loans (loans assigned point values of 710) are assigned specific reserve percentages based on point value. Loans that are not classified (loans assigned risk point values of less than 7) are subdivided into pools of similar loans by
loan type and are assigned reserve percentages based on the loan type. We determine the reserve percentage by first examining actual loss history for each type of loan, then adjust that percentage by several factors including changes in lending
policies; changes in national and local economic conditions; changes in experience, ability and depth of lending management and staff; changes in trend of past due and classified loans; changes in external factors such as competition and legal and
regulatory requirements; and other relevant factors. Reserve estimates are totaled and any shortage is charged to current period operations and credited to the Allowance.

The credit quality of our loans will be influenced by underlying trends in the economic cycle, particularly in Southern California, and other factors, which are 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. Additionally, 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.



18



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##### Table of Contents

Non-Interest Income

Non-interest income primarily includes service charges on deposit accounts, net gains on sales of loans and loan broker fees for referring loans to other lenders. Non-interest income decreased by 11.1% and 5.9% for
the three and nine months ended September 30, 2006 as compared to the same period in 2005 primarily due to decreases in gain on sales of loans and loan broker fees offset somewhat by increases in service charges. The amount of gains from the
sale 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.

The following table identifies the components of and the percentage changes for the periods indicated:

NON-INTEREST INCOME



|                           |  |                                  |         |      |                                 |               |  |       |      |  |      |           |               |   |           |  |       |   
|-------------------------- |  | -------------------------------- | ------- | ---- | ------------------------------- | ------------- |  | ----- | ---- |  | ---- | --------- | ------------- | - | --------- |  | ----- | --
|                           |  | Three Months Ended September 30, |         |      | Nine Months Ended September 30, |              
|                           |  | 2006                             |         | 2005 |                                 | PercentChange |  |       | 2006 |  | 2005 |           | PercentChange |  
|Service charges            |  | $                                | 328,700 |      | $                               | 217,300       |  | 51.3  | %    |  | $    | 877,000   |               | $ | 653,000   |  | 34.3  | % 
|Gain on sale of loans, net |  |                                  | 220,900 |      |                                 | 248,400       |  | (11.1 | )%   |  |      | 408,300   |               |   | 546,400   |  | (25.3 | )%
|Loan broker fee income     |  |                                  | 81,400  |      |                                 | 196,500       |  | (58.6 | )%   |  |      | 281,400   |               |   | 567,400   |  | (50.4 | )%
|Other                      |  |                                  | 85,400  |      |                                 | 144,000       |  | (40.7 | )%   |  |      | 489,500   |               |   | 418,300   |  | 17.0  | % 
|                           |  |                                  |         |      |                                 |               |  |       |      |  |      |           |               |   |           |  |       |   
|Total                      |  | $                                | 716,400 |      | $                               | 806,200       |  | (11.1 | )%   |  | $    | 2,056,200 |               | $ | 2,185,100 |  | (5.9  | )%
|                           |  |                                  |         |      |                                 |               |  |       |      |  |      |           |               |   |           |  |       |   

Non-Interest Expense

Salary and related benefits increased by 62% and 69%, respectively, from the three and nine months ended September 30, 2005 to the three and nine months ended September 30, 2006. This increase was due
primarily to an increase in the number of employees due to the growth of the Company. The increase in the size and profitability of the Company also resulted in an increase in incentive and bonus accruals for 2006. At September 30, 2006, the
Company employed 129 full-time employees, compared with 94 full-time employees at September 30, 2005.

Occupancy and equipment
expenses increased by 23% and 30%, respectively, from the three and nine months ended September 30, 2005 to the three and nine months ended September 30, 2006. This increase was due to increased rent expense, the amortization of leasehold
improvements and the depreciation of office furniture and equipment for the new Documentation Servicing, Central Operations and Loan Servicing Departments as well as amortization of leasehold improvements and the depreciation of office furniture and
equipment related to the Real Estate Industries Division and the remodel of our executive offices.

Professional fees increased 144% and
82%, respectively, from the three and nine months ended September 30, 2005 to the three and nine months ended September 30, 2006 primarily due to the increase in consulting fees related to the Document Servicing and Loan Servicing
Departments and to personnel development.

Data processing expenses remained relatively stable from the three months ended
September 30, 2005 to the three months ended September 30, 2006, and increased 16% from the nine months ended September 30, 2005 to the nine months ended September 30, 2006 consistent with our growth in assets and the number of
customers.

Other operating expenses increased 36% and 64%, respectively, from the three and nine months ended September 30, 2005 to
the three and nine months ended September 30, 2006 primarily due to increases in advertising expense, training and recruiting expense, and amortization of software licenses.

FINANCIAL CONDITION

Regulatory Capital

At September 30, 2006, Bancshares and the Banks Tier 1 capital, which is comprised of shareholders equity as modified by certain
regulatory adjustments, were $67.5 million and $77.3 million, respectively. Our regulatory capital increased since December 31, 2005 as a result of net earnings as well as proceeds from the issuance of $10.3 million of junior subordinated
debentures of which $10.0 million was contributed as capital to the Bank. At September 30, 2006, Bancshares and the Bank met all applicable regulatory capital requirements and the Bank was well capitalized as defined under
applicable regulations.



19



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##### Table of Contents

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, 2006

(dollars in
thousands)



|                                         |  |        |        |       |                             |   |        |                       |        |  |       |        |  |       |        |  |        |  
|---------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | --------------------- | ------ |  | ----- | ------ |  | ----- | ------ |  | ------ | -
|                                         |  | Actual |        |       | To Be AdequatelyCapitalized |   |        | To Be WellCapitalized |       
|                                         |  | Amount |        | Ratio |                             |   | Amount |                       | Ratio  |  |       | Amount |  | Ratio |       
|Bancshares                               |  |        |        |       |                             |   |        |                       |        |  |       |        |  |       |        |  |        |  
|Total Capital (to risk-weighted assets)  |  | $      | 85,755 |       | 12.3                        | % |        | $                     | 55,767 |  | >=8.0 | %      |  |       | N/A    |  | N/A    |  
|Tier 1 Capital (to risk-weighted assets) |  | $      | 67,459 |       | 9.7                         | % |        | $                     | 27,883 |  | >=4.0 | %      |  |       | N/A    |  | N/A    |  
|Tier 1 Capital (to average assets)       |  | $      | 67,459 |       | 8.3                         | % |        | $                     | 32,590 |  | >=4.0 | %      |  |       | N/A    |  | N/A    |  
|Bank                                     |  |        |        |       |                             |   |        |                       |        |  |       |        |  |       |        |  |        |  
|Total Capital (to risk-weighted assets)  |  | $      | 85,465 |       | 12.3                        | % |        | $                     | 55,720 |  | >=8.0 | %      |  | $     | 69,650 |  | >=10.0 | %
|Tier 1 Capital (to risk-weighted assets) |  | $      | 77,323 |       | 11.1                        | % |        | $                     | 27,860 |  | >=4.0 | %      |  | $     | 41,790 |  | >=6.0  | %
|Tier 1 Capital (to average assets)       |  | $      | 77,323 |       | 9.5                         | % |        | $                     | 32,590 |  | >=4.0 | %      |  | $     | 40,738 |  | >=5.0  | %

Liquidity and Cash Flow

Our objective in managing our liquidity is to maintain cash flow adequate to fund our operations and meet obligations and other commitments on a timely and cost effective basis. We manage this objective through the
selection of asset and liability maturity mixes. Our liquidity position is enhanced by our ability to raise additional funds as needed through available borrowings or accessing deposits nationwide through our money desk.

Deposits provide most of our funds. This relatively stable and low-cost source of funds has, along with preferred stock and shareholders equity,
provided 85% and 87%, respectively, of our funding as a percentage of average total assets during the nine months ended September 30, 2006 and 2005.

Secondary sources of liquidity include borrowing arrangements with the Federal Reserve Board (FRB) and the Federal Home Loan Bank (FHLB). Borrowings from the FRB are short-term and must be
collateralized by pledged securities or loans. As a member of the FHLB system, the Bank may obtain advances from the FHLB pursuant to various credit programs offered from time to time. Credit limitations are based on the assessment by the FHLB of
the Banks creditworthiness, including an adequate level of net worth, reasonable prospects of future earnings, sources of funds sufficient to meet the scheduled interest payments, lack of financial or managerial deficiencies and other factors.
Such advances may be obtained pursuant to several different credit programs, and each program has its own rate, commitment fees and range of maturities. Funds borrowed from the FHLB must be collateralized either by pledged securities or by
assignment of notes and may be for terms of one day to several years. As of September 30, 2006, we had $45.0 million outstanding FHLB advances and had no outstanding borrowings from the FRB.

We also have liquidity as a net seller of overnight funds. During the nine months ended September 30, 2006, we had an average balance of $27.5
million in overnight funds sold representing 3.6% of total average assets.

Commencing in December 2005, we entered into repurchase
agreements with a number of entities controlled by one individual that had previously maintained a large amount of deposits with us in money market and non-interest bearing demand accounts that exceeded FDIC insurance limits. Under this arrangement,
funds in excess of a certain threshold in these accounts were swept into securities sold under agreements to repurchase (repurchase agreements). On September 22, 2006, a new agreement was entered into under an Irrevocable Standby
Letter of Credit issued by FHLB to the customer in the amount of $75 million. This Letter of Credit was designed to replace the repurchase agreements and continue to reduce the risk to the entities maintaining deposits in excess of the amounts
insured by the FDIC. The Letter of Credit and the FHLB advances are collateralized by $16.7 million in investment securities and $201.2 million in loans and expires on September 23, 2008.

Cash Flow from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2006 increased by $0.9 million as compared to the same period in 2005 primarily due to an increase in net earnings.



20



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##### Table of Contents

Cash Flow from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2006 decreased by $21.9 million as compared to the same period in 2005
primarily due to a lesser amount of loan growth which was offset by the purchase of additional securities.

Cash Flows from Financing
Activities

Net cash provided by financing activities for the nine months ended September 30, 2006 decreased by $14.5 million as
compared to the same period in 2005 primarily due to a decrease in securities sold under agreements to repurchase and a decrease in net deposit growth offset by an increase in FHLB advances.

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, 2006 |           |                      | December 31, 2005 |  
|                                     |  | Book Value         |           | WeightedAverageYield |                   |   | Book Value |   | WeightedAverageYield | 
|Time deposits maturing:              |  |                    |           |                      |                   |   |            |   |                      |  |      |  
|Within one year                      |  | $                  | 2,081,800 |                      | 4.31              | % |            |   | 7,956,500            |  | 3.20 | %
|After one year but within five years |  |                    | 294,300   |                      | 4.41              | % |            |   | 288,400              |  | 4.61 | %
|                                     |  |                    |           |                      |                   |   |            |   |                      |  |      |  
|Total time deposits                  |  | $                  | 2,376,100 |                      | 4.33              | % |            | $ | 8,244,900            |  | 3.25 | %
|                                     |  |                    |           |                      |                   |   |            |   |                      |  |      |  

The following table provides certain information regarding our investment securities at the dates
indicated. Expected maturities will differ from contractual maturities, particularly with respect to collateralized mortgage obligations and mortgage backed securities, because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. We had no tax-exempt securities during the quarters ended September 30, 2006 or 2005.

INVESTMENT SECURITIES



|                                                                   |  |                    |             |                      |                   |   |            |   |                      |  |      |  
|------------------------------------------------------------------ |  | ------------------ | ----------- | -------------------- | ----------------- | - | ---------- | - | -------------------- |  | ---- | -
|                                                                   |  | September 30, 2006 |             |                      | December 31, 2005 |  
|                                                                   |  | Book Value         |             | WeightedAverageYield |                   |   | Book Value |   | WeightedAverageYield | 
|Investment securities maturing:                                    |  |                    |             |                      |                   |   |            |   |                      |  |      |  
|Within one year                                                    |  | $                  | 30,514,100  |                      | 3.92              | % |            | $ | 11,003,800           |  | 3.45 | %
|After one year but within five years                               |  |                    | 33,986,900  |                      | 5.35              | % |            |   | 27,613,400           |  | 4.43 | %
|After five years                                                   |  |                    | 5,002,600   |                      | 5.81              | % |            |   |                     |  |     |  
|Collateralized mortgage obligations and mortgage-backed securities |  |                    | 36,026,600  |                      | 4.46              | % |            |   | 36,861,800           |  | 4.27 | %
|                                                                   |  |                    |             |                      |                   |   |            |   |                      |  |      |  
|Total investment securities                                        |  | $                  | 105,530,200 |                      | 4.65              | % |            | $ | 75,479,000           |  | 4.21 | %
|                                                                   |  |                    |             |                      |                   |   |            |   |                      |  |      |  

Our present strategy is to stagger the maturities of our investment securities to meet our overall
liquidity requirements. At September 30, 2006, we classified all our investment securities as held to maturity as we intend to hold the securities to maturity.



21



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##### Table of Contents

At September 30, 2006, securities with an amortized cost of $19.0 million were pledged at the
Federal Reserve to secure a discount line and at FHLB against borrowings and the irrevocable standby letter of credit. At December 31, 2005, securities with an amortized cost of $55.3 million were pledged at the Federal Reserve to secure a
discount line and at Wells Fargo Bank to secure repurchase agreements with one of the Banks depositors.

The amortized cost and
estimated fair values of securities held to maturity at the dates indicated are as follows:

FAIR VALUE OF INVESTMENT SECURITIES



|                                                                    |  |                |             |                      |   |                       |  |                     |           |  |   |            
|------------------------------------------------------------------- |  | -------------- | ----------- | -------------------- | - | --------------------- |  | ------------------- | --------- |  | - | -----------
|                                                                    |  | Amortized Cost |             | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Estimated FairValue
|September 30, 2006                                                  |  |                |             |                      |   |                       |  |                     |           |  |   |            
|U.S. Agency securities                                              |  | $              | 59,905,800  |                      | $ | 23,000                |  | $                   | 190,500   |  | $ | 59,738,300 
|Corporate bonds                                                     |  |                | 9,597,800   |                      |   |                      |  |                     | 308,600   |  |   | 9,289,200  
|Collateralized mortgage obligations and mortgage-backed securities  |  |                | 36,026,600  |                      |   | 99,600                |  |                     | 408,700   |  |   | 35,717,500 
|                                                                    |  |                |             |                      |   |                       |  |                     |           |  |   |            
|                                                                    |  | $              | 105,530,200 |                      | $ | 122,600               |  | $                   | 907,800   |  | $ | 104,745,000
|                                                                    |  |                |             |                      |   |                       |  |                     |           |  |   |            
|                                                                    |  |                |             |                     
|                                                                    |  | Amortized Cost |             | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Estimated FairValue
|December 31, 2005                                                   |  |                |             |                      |   |                       |  |                     |           |  |   |            
|U.S. Agency securities                                              |  | $              | 26,946,200  |                      | $ | 4,300                 |  | $                   | 353,200   |  | $ | 26,597,300 
|Corporate bonds                                                     |  |                | 11,671,000  |                      |   |                      |  |                     | 922,300   |  |   | 10,748,700 
|Collateralized mortgage obligations and mortgage-backed securities: |  |                |             |                      |   |                       |  |                     |           |  |   |            
|Ginnie Mae mortgage-backed security                                 |  |                | 5,016,600   |                      |   |                      |  |                     | 69,700    |  |   | 4,946,900  
|Fannie Mae mortgage-backed security                                 |  |                | 4,745,900   |                      |   |                      |  |                     | 1,500     |  |   | 4,744,400  
|Other                                                               |  |                | 27,099,300  |                      |   |                      |  |                     | 403,000   |  |   | 26,696,300 
|                                                                    |  |                |             |                      |   |                       |  |                     |           |  |   |            
|                                                                    |  | $              | 75,479,000  |                      | $ | 4,300                 |  | $                   | 1,749,700 |  | $ | 73,733,600 
|                                                                    |  |                |             |                      |   |                       |  |                     |           |  |   |            

Unrealized losses and fair value, aggregated by investment category and length of time that
individual securities have been in an unrealized loss position, at September 30, 2006, are summarized as follows:

UNREALIZED LOSSES
ON INVESTMENT SECURITIES



|                                                                   |  |                     |            |                   |   |            |  |                 |            |            |   |                 |  |   |            |  |   |        
|------------------------------------------------------------------ |  | ------------------- | ---------- | ----------------- | - | ---------- |  | --------------- | ---------- | ---------- | - | --------------- |  | - | ---------- |  | - | -------
|                                                                   |  | Less than 12 Months |            | 12 Months or More |   | Total     
|                                                                   |  | Fair value          |            | Unrealized loss   |   | Fair value |  | Unrealized loss |            | Fair value |   | Unrealized loss
|U.S. Agency securities                                             |  | $                   | 32,872,400 |                   | $ | 45,500     |  | $               | 21,842,800 |            | $ | 145,000         |  | $ | 54,715,200 |  | $ | 190,500
|Corporate bonds                                                    |  |                     |           |                   |   |           |  |                 | 9,289,200  |            |   | 308,600         |  |   | 9,289,200  |  |   | 308,600
|Collateralized mortgage obligations and mortgage-backed securities |  |                     | 3,641,200  |                   |   | 1,700      |  |                 | 27,115,000 |            |   | 407,000         |  |   | 30,756,200 |  |   | 408,700
|                                                                   |  |                     |            |                   |   |            |  |                 |            |            |   |                 |  |   |            |  |   |        
|                                                                   |  | $                   | 36,513,600 |                   | $ | 47,200     |  | $               | 58,247,000 |            | $ | 860,600         |  | $ | 94,760,600 |  | $ | 907,800
|                                                                   |  |                     |            |                   |   |            |  |                 |            |            |   |                 |  |   |            |  |   |        

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 our 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.

The corporate bonds consist primarily of securities issued by General Motors Acceptance Corporation and Ford Motor Credit Company. These securities are
rated as less than investment grade at September 30, 2006. Because these securities mature within the next two and one-half years, we believe that we will fully recover its principal investment and does not consider these investments to be
other than temporarily impaired at September 30, 2006.



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Loans

Our present lending strategy is to attract small-to mid-sized business borrowers by offering a variety of commercial and real estate loan products and a full range of other banking services coupled with highly personalized service. We offer
secured and unsecured commercial term loans and lines of credit, construction loans for individual and tract single family homes and for commercial and multifamily properties, accounts receivable and equipment loans, SBA loans and home equity lines
of credit. We often tailor our loan products to meet the specific needs of our borrowers. Our primary lending area includes six Southern California counties: Los Angeles, Orange, Riverside, San Diego, San Bernardino, and Ventura.

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

LOAN PORTFOLIO COMPOSITION



|                                 |  |                    |             |   |                   |       |   |                   |   |             |                 |  |       |  
|-------------------------------- |  | ------------------ | ----------- | - | ----------------- | ----- | - | ----------------- | - | ----------- | --------------- |  | ----- | -
|                                 |  | September 30, 2006 |             |   | December 31, 2005 |      
|                                 |  | AmountOutstanding  |             |   | Percent ofTotal   |       |   | AmountOutstanding |   |             | Percent ofTotal | 
|Commercial loans                 |  | $                  | 184,595,700 |   |                   | 27.7  | % |                   | $ | 151,881,600 |                 |  | 27.4  | %
|Construction loans               |  |                    | 254,105,000 |   |                   | 38.1  |   |                   |   | 195,761,200 |                 |  | 35.3  |  
|Real estate loans                |  |                    | 202,547,400 |   |                   | 30.4  |   |                   |   | 182,937,000 |                 |  | 33.0  |  
|Other loans                      |  |                    | 25,511,300  |   |                   | 3.8   |   |                   |   | 23,550,700  |                 |  | 4.3   |  
|                                 |  |                    |             |   |                   |       |   |                   |   |             |                 |  |       |  
|Gross loans                      |  |                    | 666,759,400 |   |                   | 100.0 | % |                   |   | 554,130,500 |                 |  | 100.0 | %
|                                 |  |                    |             |   |                   |       |   |                   |   |             |                 |  |       |  
|Less  Net deferred loan fees    |  |                    | (3,692,000  | ) |                   |       |   |                   |   | (3,260,100  | )               |  |       |  
|Less  Allowance for loan losses |  |                    | (8,142,200  | ) |                   |       |   |                   |   | (6,051,000  | )               |  |       |  
|                                 |  |                    |             |   |                   |       |   |                   |   |             |                 |  |       |  
|Net loans                        |  | $                  | 654,925,200 |   |                   |       |   |                   | $ | 544,819,400 |                 |  |       |  
|                                 |  |                    |             |   |                   |       |   |                   |   |             |                 |  |       |  

At September 30, 2006, we had outstanding construction loans to developers for tract projects
and single homes for sale to unidentified buyers totaling $125.6 million, representing 18.9% of our loan portfolio, and additional commitments for these projects in the amount of $95.6 million. These types of loans generally have greater risks than
loans on completed homes, multifamily and commercial properties.

Our strategy has been to diversify the construction loan portfolio and
limit our level of these loans, particularly the more speculative types, as a percentage of total assets and Tier 1 capital. During 2005 and 2006, we had significantly increased the amount of construction loans, both in dollar amounts and as a
percentage of our total loans. This increase in loans was partially due to projects which were delayed due to the near record rainfall in Southern California during the first part of 2005 as well a continued demand for construction loan financing
during 2006. The amount of outstanding construction loans exceeded the limits established by the Company at September 30, 2006 and at December 31, 2005. However, the Company plans to meet the concentration limits by December 31, 2006
through loan participations, loan sales and anticipated payoffs on completed projects.

At September 30, 2006 and December 31,
2005, qualifying loans with an outstanding balance of $201.2 and $119.1 million, respectively, were pledged to secure FHLB advances and a Standby Letter of Credit.

Non-Performing Assets

Non-performing assets consist of non-performing loans and other real estate owned. Non-performing
loans are (i) loans which have been placed on non-accrual status; (ii) loans which are contractually past due 90 days or more with respect to principal or interest, and have not been restructured or placed on non-accrual status, and are
accruing interest as described below; and (iii) troubled debt restructurings (TDRs). Other real estate owned consists of real properties securing loans on which we have taken title in partial or complete satisfaction of the loan.



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The following table sets forth information about non-performing assets at the dates indicated:

NON-PERFORMING ASSETS



|                                        |  |                   |           |                  |   |          
|--------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                        |  | September 30,2006 |           | December 31,2005
|Non-accrual loans                       |  | $                 | 2,012,700 |                  | $ | 694,600  
|Accruing loans past due 90 days or more |  |                   |          |                  |   |         
|Troubled debt restructuring             |  |                   |          |                  |   | 570,900  
|Other real estate owned                 |  |                   |          |                  |   |         
|                                        |  |                   |           |                  |   |          
|Balance at end of period                |  | $                 | 2,012,700 |                  | $ | 1,265,500
|                                        |  |                   |           |                  |   |          

Nonperforming assets increased from $1.3 million at December 31, 2005 to $2.0 million at
September 30, 2006. The troubled debt restructuring loan at December 31, 2005 was charged off during the second quarter of 2006 due to financial difficulties of the borrower.

Cash collections on non-performing loans totaled $977,400 during the nine months ended September 30, 2006 of which $950,700 was applied to principal
and $26,700 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 $159,200 and $205,000, respectively, for the nine months ended September 30, 2006 and 2005.

Impaired Loans

An impaired loan is a
loan which management determines is probable that we will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. Impaired loans can include non-performing loans, although not all
impaired loans will be non-performing loans.

We determine impaired loans by a periodic evaluation on an individual loan basis. At
September 30, 2006 and December 31, 2005, we had classified $1.5 million and $2.0 million, respectively, of our loans as impaired for which a $0.2 million reserve was assigned for each period.

Changes in 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,
|                               |  | 2006                            |            |   | 2005
|Balance at beginning of period |  | $                               | 6,051,000  |   |      | $ | 3,477,900
|Charge-offs                    |  |                                 | (1,228,900 | ) |      |   |         
|Recoveries                     |  |                                 | 369,200    |   |      |   | 25,300   
|                               |  |                                 |            |   |      |   |          
|Net (charge-offs)/recoveries   |  |                                 | (859,700   | ) |      |   | 25,300   
|Additional provisions          |  |                                 | 2,813,000  |   |      |   | 1,727,000
|Other adjustments              |  |                                 | 137,900    |   |      |   | 38,200   
|                               |  |                                 |            |   |      |   |          
|Balance at end of period       |  | $                               | 8,142,200  |   |      | $ | 5,268,400
|                               |  |                                 |            |   |      |   |          

Charge-offs for the nine months ended September 30, 2006 include $0.6 million of troubled
debt restructuring noted above and $0.5 million related to a business which failed during the second quarter of 2006. The provision for loan losses increased from $1.7 million at September 30, 2005 to $2.8 million at September 30, 2006.
This increase is primarily attributable to a 42.8% increase in loans from September 30, 2005 to September 30, 2006.



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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, 2006, we had undisbursed loan commitments of $275.2 million.

Standby letters of credit and financial guarantees are
conditional commitments issued to secure the financial performance of a customer to a third party. These are issued primarily to support public and private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer
is essentially the same as that involved in extending a loan to that customer. We hold certificates of deposit and other collateral of at least 100% of the notional amount as support for letters of credit for which we deem collateral to be
necessary. At September 30, 2006, we had outstanding standby letters of credit with a potential $4.4 million of obligations maturing at various dates through 2008.

Deposits

Total deposits increased from $531.3 million at December 31, 2005 to $707.1 million at
September 30, 2006. This increase was primarily due to a $51.4 million increase in noninterest bearing demand deposits, a $51.6 million increase in savings and money market deposits and a $73.2 million increase in certificates of deposit. These
increases in deposits resulted from additional emphasis on core deposits as well as a Company-wide incentive compensation program for deposit growth, which we used to fund the increase in our loan and investment portfolios and to increase our
liquidity.

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

SOURCE OF DEPOSITS



|           |  |                    |             |                 |                   |   |            |   |                 |  |       |  
|---------- |  | ------------------ | ----------- | --------------- | ----------------- | - | ---------- | - | --------------- |  | ----- | -
|           |  | September 30, 2006 |             |                 | December 31, 2005 |  
|           |  | Book Value         |             | Percent ofTotal |                   |   | Book Value |   | Percent ofTotal | 
|Branches   |  | $                  | 478,874,900 |                 | 67.7              | % |            | $ | 330,079,600     |  | 62.1  | %
|Money desk |  |                    | 78,697,500  |                 | 11.1              |   |            |   | 75,382,800      |  | 14.2  |  
|Brokered   |  |                    | 149,525,100 |                 | 21.2              |   |            |   | 125,846,700     |  | 23.7  |  
|           |  |                    |             |                 |                   |   |            |   |                 |  |       |  
|Total      |  | $                  | 707,097,500 |                 | 100.0             | % |            | $ | 531,309,100     |  | 100.0 | %
|           |  |                    |             |                 |                   |   |            |   |                 |  |       |  

Our money desk attracts primarily certificates of deposit from institutional investors nationwide
by telephone. We also engage brokers to place certificates of deposit for their customers. During 2006, the certificates of deposit obtained through our money desk or deposit brokers generally had maturities ranging from one to five years. We limit
the amount of money desk and broker deposits that are scheduled to mature in any one calendar month. In addition, we have historically maintained an appropriate level of liquidity specifically to counter any concurrent deposit reduction that might
occur.

In recent years, the interest rates on certificates of deposit obtained through deposit brokers generally have been lower than the
interest rates then offered to local customers for certificates of deposit with comparable maturities. We believe this is due to the highly competitive nature of Southern California market for deposits and, in particular, the difficulty smaller
banks with one or few branch offices have in competing for deposits with larger banks, savings associations and credit unions with multiple offices.

Banks that are not well capitalized under the FDIC prompt corrective action rules may not accept brokered deposits without the prior approval of the FDIC. In addition, we believe that if the Bank is not
well capitalized, we will have greater difficulty obtaining certificates of deposit through our money desk and may have to pay higher interest rates to continue to attract those deposits. Accordingly, the failure of the Bank to remain
well capitalized could have a material adverse affect on us.

The aggregate amount of the certificates of deposit in
denominations of $100,000 or more at September 30, 2006 was approximately $229.5 million. Interest expense on such deposits was approximately $7.2 million for the nine months ended September 30, 2006.



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##### Table of Contents

The approximate scheduled maturities of certificates of deposit at September 30, 2006 were as
follows:

MATURITIES OF CERTIFICATES OF DEPOSIT



|                                     |  |           |            
|------------------------------------ |  | --------- | -----------
|Maturities                           |  | Amount(1)
|Three months or less                 |  | $         | 35,359,000 
|Over three and through twelve months |  |           | 119,918,700
|Over twelve months                   |  |           | 158,508,100
|                                     |  |           |            
|Total                                |  | $         | 313,785,800
|                                     |  |           |            

---

|(1) | Excludes time deposits included in IRA accounts.
|--- | ------------------------------------------------

One customer represents a number of entities that represent a significant amount of deposits and borrowings to us. The average daily balance of these deposits and borrowings was $55.9 million during the nine months ended September 30,
2006, and was $53.9 million at September 30, 2006. Because these funds greatly exceed the FDIC deposit insurance limits, we have provided additional security for these funds. Prior to September 23, 2006, we provided this security by
sweeping the funds into overnight repurchase agreements that were in essence collateralized borrowings. See Securities Sold Under Repurchase Agreements. Commencing September 23, 2006, we provided this additional security through a
letter of credit issued by the FHLB of San Francisco up to $75 million. This letter of credit is collateralized by $201.2 million in loans and $16.7 million in investment securities and expires on September 23, 2008 (which collateral also
secures our FHLB advances). As a result, at September 30, 2006 all of this customers funds with us were in demand or money market accounts and immediately available for withdrawal.

We monitor our relationship with this customer closely, and while we have no reason to believe the customer presently intends to significantly reduce or
terminate the relationship, we believe we will have adequate liquidity to fund any consequential withdrawals. However, if we do not have adequate liquidity at the time of a withdrawal demand, it is possible that some or all the securities and loans
collateralizing the letter of credit would be liquidated, and we would incur losses if the proceeds from the liquidation were less than the book value of the securities and the loans.

Borrowed Funds

FHLB Advances. At September 30, 2006, we had $40.0 million of long-term
advances and $5.0 million of short-term advances from the FHLB of which $10 million were new borrowings during the third quarter of 2006. These advances were collateralized by certain qualifying loans with a carrying value of $201.2 million and
securities with a carrying value of $16.7 million. This collateral secures both the FHLB advances as well as the Letter of Credit issued by FHLB. (See Securities Sold Under Agreements to Repurchase below for additional discussion). All
except $10 million of these advances bear interest at a rate of the prime lending rate (8.25% at September 30, 2006) less an average of 2.80%. The remaining FHLB advance of $10 million which was borrowed on August 2, 2006 bears a fixed
interest rate of 5.31%. Interest is payable monthly, quarterly or semi-annually with principal and any accrued interest due at maturity.

The table below sets forth the amounts, interest rates, and the maturity dates of FHLB advances at September 30, 2006:

FHLB ADVANCES



|                 |  |                     |  |              
|---------------- |  | ------------------- |  | -------------
|Principal Amount |  | Interest rate       |  | Maturity date
|$    5,000,000   |  | Prime minus 2.83%   |  | December 2006
|10,000,000       |  | Prime minus 2.83%   |  | January 2009 
|10,000,000       |  | Prime minus 2.80%   |  | December 2009
|10,000,000       |  | Prime minus 2.74%   |  | January 2010 
|10,000,000       |  | Fixed rate of 5.31% |  | August 2008  
|                 |  |                     |  |              
|$  45,000,000    |  |                     |  |              
|                 |  |                     |  |              

Junior Subordinated Debentures. In October 2002, Bancshares issued $7,217,000 of junior
subordinated debentures to Alliance Bancshares California Capital Trust I, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities to provide additional regulatory capital. This capital has a
relatively low cost as interest payments on the debentures are deductible for income tax purposes. The Trust purchased the debentures with the proceeds of the sale of its common trust securities to Bancshares for $217,000 and trust preferred
securities in a private placement for $7,000,000. The debentures and trust preferred securities have generally identical terms, including that they mature in 2032, are redeemable at Bancshares option commencing October 2007 at par, and require
quarterly distributions/interest payments at a rate which adjusts quarterly at the three-month LIBOR rate plus 3.45% (the rate was 8.86% at September 30, 2006).



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##### Table of Contents

In February 2005, Bancshares issued $10,310,000 of junior subordinated debentures to Alliance Bancshares
California Capital Trust II, a Delaware business trust that was formed for the exclusive purpose of issuing trust preferred securities to provide additional regulatory capital. The Trust purchased the debentures with the proceeds of the sale of its
common trust securities to Bancshares for $310,000 and trust preferred securities in a private placement for $10,000,000. The debentures and trust preferred securities have generally identical terms, including that they mature in 2034, are
redeemable at Bancshares option commencing December 2009 at par, and require quarterly distributions/interest payments at a rate which adjusts quarterly at the three-month LIBOR rate plus 1.90% (the rate was 7.30% at September 30, 2006).

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 debentures and trust preferred securities have generally identical terms, including that they mature in 2036, are redeemable at Bancshares
option commencing June 2011 at par, and require quarterly distributions/interest payments at a rate which adjusts quarterly at the three-month LIBOR rate plus 1.50% (the rate was 6.89% at September 30, 2006).

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

Securities Sold under Agreements to Repurchase.One customer represents a number of entities that have deposit accounts that
greatly exceed the FDIC deposit insurance limit. To provide additional security for these borrowings, in fiscal year 2006 through September 22, 2006, we swept the funds in these deposit accounts that exceeded the FDIC insurance limit into
overnight repurchase agreements. These repurchase agreements were in essence overnight borrowings by us collateralized by certain of our investment securities that were 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, 2006, the average daily balance of these repurchase agreements was $47.5 million. On September 22, 2006, we entered into a new arrangement to provide
security for these funds through a letter of credit issued by the FHLB of San Francisco up to $75 million. See Deposits. As a result, at September 30, 2006, we have no repurchase agreements.

Subsequent Event

Repurchase Agreement. On
November 7, 2006, we entered into a repurchase agreement in the amount of $20 million. This agreement is collateralized by various collateral mortgage obligations and mortgage-backed securities with an amortized cost of $25.5 million. Interest
is payable on a quarterly basis and adjusts quarterly at the rate of the three-month LIBOR minus 1.00% (the rate was 4.37% at November 7, 2006) until November 2008 at which time it converts to a fixed rate of 4.54%. The agreement has a maturity
date of November 2016 and is callable by the holder at any time after November 7, 2008.



|ITEM | 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|---- | -------------------------------------------------------------

Based on our business, market risk is primarily limited to interest rate risk which is the impact that changes in interest rates would have on future earnings. Our Asset Liability Management Committee (ALCO) manages
interest rate risk, including interest rate sensitivity and the repricing characteristics of assets and liabilities. The principal objective of ALCO 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. The Company is considered to be asset sensitive as of September 30, 2006.

An asset sensitive gap means an
excess of interest sensitive assets over interest sensitive liabilities, whereas a liability sensitive gap means an excess of interest sensitive liabilities over interest sensitive assets. In a changing rate environment, a mismatched gap position
generally indicates that changes in the income from interest earning assets will not be completely proportionate to changes in the cost of interest bearing liabilities, resulting in net interest income volatility. This risk can be reduced by various
strategies, including the administration of liability costs and the reinvestment of asset maturities.



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##### Table of Contents

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

RATE SENSITIVITY

September 30, 2006



|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|--------------------------------------------------- |  | ------------------- | ----------- | - | ------------------------------- | - | ----------- | ------------------------------- |  | - | --------------- | - |  | ----- | ----------- | - |  | - | ----------- | -
|                                                    |  | Three MonthsOr Less |             |   | Over ThreeThrough Twelve Months |   |             | Over One YearThrough Five Years |  |   | Over Five Years |   |  | Total |            
|Assets                                              |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Federal funds sold                                  |  | $                   | 31,955,000  |   |                                 | $ |            |                                 |  | $ |                |   |  | $     |            |   |  | $ | 31,955,000  |  
|Time deposits with other financial institutions     |  |                     | 1,893,300   |   |                                 |   | 188,500     |                                 |  |   | 294,300         |   |  |       |            |   |  |   | 2,376,100   |  
|Securities held to maturity                         |  |                     | 13,998,700  |   |                                 |   | 25,545,500  |                                 |  |   | 65,986,000      |   |  |       |            |   |  |   | 105,530,200 |  
|Loans, gross                                        |  |                     | 462,790,000 |   |                                 |   | 66,033,900  |                                 |  |   | 111,705,700     |   |  |       | 25,300,300  |   |  |   | 665,829,900 |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Total ratesensitive assets                         |  |                     | 510,637,000 |   |                                 |   | 91,767,900  |                                 |  |   | 177,986,000     |   |  |       | 25,300,300  |   |  |   | 805,691,200 |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Liabilities:                                        |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Interest bearing demand deposits                    |  |                     | 8,608,500   |   |                                 |   |            |                                 |  |   |                |   |  |       |            |   |  |   | 8,608,500   |  
|Savings and money market                            |  |                     | 216,945,500 |   |                                 |   |            |                                 |  |   |                |   |  |       |            |   |  |   | 216,945,500 |  
|Certificates of deposit                             |  |                     | 35,945,900  |   |                                 |   | 121,095,600 |                                 |  |   | 166,697,000     |   |  |       |             |   |  |   | 323,738,500 |  
|FHLB advances                                       |  |                     | 35,000,000  |   |                                 |   |            |                                 |  |   | 10,000,000      |   |  |       |            |   |  |   | 45,000,000  |  
|Junior subordinated debentures                      |  |                     | 27,837,000  |   |                                 |   |            |                                 |  |   |                |   |  |       |            |   |  |   | 27,837,000  |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Total rate sensitive liabilities                    |  |                     | 324,336,900 |   |                                 |   | 121,095,600 |                                 |  |   | 176,697,000     |   |  |       |            |   |  |   | 622,129,500 |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Interval Gaps:                                      |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Interest rate sensitivity gap                       |  | $                   | 186,300,100 |   |                                 | $ | (29,327,700 | )                               |  | $ | 1,289,000       |   |  | $     | 25,300,300  |   |  | $ | 183,561,700 |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Rate sensitive assets to rate sensitive liabilities |  |                     | 157.4       | % |                                 |   | 75.8        | %                               |  |   | 100.7           | % |  |       | N/A         |   |  |   | 129.5       | %
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Cumulative Gaps:                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Cumulative interest rate sensitivity gap            |  | $                   | 186,300,100 |   |                                 | $ | 156,972,400 |                                 |  | $ | 158,261,400     |   |  | $     | 183,561,700 |   |  | $ | 183,561,700 |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Rate sensitive assets to rate sensitive liabilities |  |                     | 157.4       | % |                                 |   | 135.2       | %                               |  |   | 125.4           | % |  |       | 129.5       | % |  |   | 129.5       | %
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|% of rate sensitive assets in period                |  |                     | 63.4        | % |                                 |   | 74.8        | %                               |  |   | 96.9            | % |  |       | 100         | % |  |   |             |  
|                                                    |  |                     |             |   |                                 |   |             |                                 |  |   |                 |   |  |       |             |   |  |   |             |  



|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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##### Table of Contents

PART II  OTHER INFORMATION



|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 14, 2006 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 14, 2006 pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002.



29



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##### Table of Contents

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 14, 2006 |  | ALLIANCE BANCSHARES CALIFORNIA
|                        |  |                               
|                        |  | By:                            |  | /s/ Daniel L. Erickson                              
|                        |  |                                |  | Daniel L. Erickson                                  
|                        |  |                                |  | Executive Vice President and Chief Financial
Officer



30