##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-33455
 ALLIANCE BANCSHARES CALIFORNIA
 (Exact name of Registrant as specified in its charter)
 California
    
    91-2124567(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)100 Corporate Pointe
    
    90230Culver City, California
    
    (Zip Code)(Address of principal executive offices)
 (310) 410-9281
(Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed, since last year)
 þ o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ




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##### 



ALLIANCE BANCSHARES CALIFORNIA
 QUARTERLY REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2008
 TABLE OF CONTENTS
 Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Condition at September 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30,
2008 and 2007
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
    
    
    5Consolidated Statements of Shareholders Equity for the nine months ended September 30,
2008 and 2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37Part II. Other InformationItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults Upon Senior Securities
    
    
    38Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 5. Other Information
    
    
    38Item 6. Exhibits
    
    
    39Signatures
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 September 30, 2008
    
    
    December 31, 2007(Unaudited)(Dollars in thousands)AssetsCash and due from banks
    
    $
    20,968
    
    
    $
    17,325Federal funds sold
    
    
    
    
    
    
    26,925Total cash and cash equivalents
    
    
    20,968
    
    
    
    44,250Time deposits with other financial institutions
    
    
    7,539
    
    
    
    1,251Securities
held to maturity, fair market value $146,605 at
September 30, 2008; $106,282 at December 31, 2007
    
    
    148,892
    
    
    
    105,946Loans held for sale
    
    
    3,064
    
    
    
    Loans, net of the allowance for loan losses of $19,850 at
September 30, 2008; $15,284 at December 31, 2007
    
    
    888,376
    
    
    
    887,652Equipment and leasehold improvements, net
    
    
    4,883
    
    
    
    4,795Accrued interest receivable and other assets
    
    
    38,944
    
    
    
    22,709Total assets
    
    $
    1,112,666
    
    
    $
    1,066,603Liabilities, Redeemable Preferred Stock and Shareholders EquityDeposits:Non-interest bearing demand
    
    $
    101,046
    
    
    $
    147,242Interest bearing:Demand
    
    
    8,002
    
    
    
    9,834Savings and money market
    
    
    79,519
    
    
    
    197,076Certificates of deposit
    
    
    669,057
    
    
    
    506,180Total deposits
    
    
    857,624
    
    
    
    860,332Accrued interest payable and other liabilities
    
    
    5,015
    
    
    
    6,271Federal funds purchased
    
    
    10,000
    
    
    
    Securities sold under agreements to repurchase
    
    
    99,594
    
    
    
    35,364FHLB advances
    
    
    85,000
    
    
    
    80,000Junior subordinated debentures
    
    
    27,837
    
    
    
    27,837Total liabilities
    
    
    1,085,070
    
    
    
    1,009,804Commitments and contingencies
    
    
    
    
    
    
    Redeemable
Preferred Stock (Note 9)
    
    
    
    
    
    
    19,016Shareholders Equity:Serial preferred stock, no par value:Authorized - 20,000,000 shares7%
Series A Non-Cumulative Convertible Non-Voting: Authorized and outstanding - 733,050 shares at
September 30, 2008
    
    
    7,697
    
    
    
    6.82%
Series B Non-Cumulative Convertible Non-Voting: 
Authorized and outstanding  665,096 shares at
September 30, 2008
    
    
    11,285
    
    
    
    Common stock, no par value:Authorized - 20,000,000 shares; Outstanding -
6,179,979 shares at September 30, 2008 and 6,177,979 shares at December
31, 2007
    
    
    6,756
    
    
    
    6,722Additional Paid in Capital
    
    
    1,479
    
    
    
    1,110Undivided profits
    
    
    379
    
    
    
    29,951Total shareholders equity
    
    
    27,596
    
    
    
    37,783Total liabilities, redeemable preferred stock and
shareholders equity
    
    $
    1,112,666
    
    
    $
    1,066,603
  3




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands except earnings per share)Interest Income:Interest and fees on loans
    
    $
    14,011
    
    
    $
    18,398
    
    
    $
    45,656
    
    
    $
    54,143Interest on time deposits with other
financial institutions
    
    
    17
    
    
    
    14
    
    
    
    50
    
    
    
    53Interest on securities held to maturity
    
    
    1,801
    
    
    
    1,383
    
    
    
    4,793
    
    
    
    3,872Interest on federal funds sold
    
    
    189
    
    
    
    489
    
    
    
    724
    
    
    
    1,656Total interest income
    
    
    16,018
    
    
    
    20,284
    
    
    
    51,223
    
    
    
    59,724Interest Expense:Interest on deposits
    
    
    7,823
    
    
    
    8,042
    
    
    
    23,464
    
    
    
    22,671Interest on federal funds purchased
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Interest on FHLB advances
    
    
    547
    
    
    
    762
    
    
    
    1,810
    
    
    
    2,119Interest on securities sold under
repurchase agreements
    
    
    575
    
    
    
    271
    
    
    
    1,319
    
    
    
    744Interest on junior subordinated
debentures
    
    
    339
    
    
    
    522
    
    
    
    1,132
    
    
    
    1,542Total interest expense
    
    
    9,286
    
    
    
    9,597
    
    
    
    27,727
    
    
    
    27,076Net interest income before
provision for loan losses
    
    
    6,732
    
    
    
    10,687
    
    
    
    23,496
    
    
    
    32,648Provision for Loan Losses
    
    
    6,438
    
    
    
    1,060
    
    
    
    36,048
    
    
    
    3,199Net interest income (expense)
    
    
    294
    
    
    
    9,627
    
    
    
    (12,552
    )
    
    
    29,449Non-Interest Income
    
    
    633
    
    
    
    1,462
    
    
    
    2,375
    
    
    
    2,857Non-Interest Expense:Salaries and related benefits
    
    
    3,275
    
    
    
    4,588
    
    
    
    10,978
    
    
    
    13,000Occupancy and equipment expenses
    
    
    1,073
    
    
    
    932
    
    
    
    3,209
    
    
    
    2,812Professional fees
    
    
    543
    
    
    
    415
    
    
    
    1,378
    
    
    
    1,122Data processing
    
    
    281
    
    
    
    186
    
    
    
    755
    
    
    
    617Other operating expense
    
    
    2,020
    
    
    
    1,379
    
    
    
    4,677
    
    
    
    4,265Total non-interest expense
    
    
    7,192
    
    
    
    7,500
    
    
    
    20,997
    
    
    
    21,816Earnings (Losses) Before Income Tax
Expense (Benefit)
    
    
    (6,265
    )
    
    
    3,589
    
    
    
    (31,174
    )
    
    
    10,490Income tax expense (benefit)
    
    
    7,606
    
    
    
    1,599
    
    
    
    (2,585
    )
    
    
    4,466Net Earnings (Loss)
    
    $
    (13,872
    )
    
    $
    1,990
    
    
    $
    (28,589
    )
    
    $
    6,024Earnings (loss) per Common Share:Basic earnings (loss) per share
    
    $
    (2.30
    )
    
    $
    0.27
    
    
    $
    (4.79
    )
    
    $
    0.82Diluted earnings (loss) per share
    
    $
    (2.30
    )
    
    $
    0.26
    
    
    $
    (4.79
    )
    
    $
    0.79
  4




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##### Table of Contents



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




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Unaudited)
 For the Nine Months Ended September 30, 2008 and 2007
 Common Stock
    
    
    AdditionalNumber of
    
    
    
    
    
    
    Paid In
    
    
    UndividedShares
    
    
    Amount
    
    
    Capital
    
    
    Profits
    
    
    Total(Dollars and shares in thousands)Balance, December 31, 2006
    
    
    6,152
    
    
    $
    6,600
    
    
    $
    502
    
    
    $
    27,165
    
    
    $
    34,267Stock options exercised
    
    
    20
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    112Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (984
    )
    
    
    (984
    )Tax benefit on non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    118Compensation expense on stock options
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    337Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,024
    
    
    
    6,024Balance, September 30, 2007
    
    
    6,172
    
    
    $
    6,712
    
    
    $
    957
    
    
    $
    32,205
    
    
    $
    39,874
 Preferred Stock
    
    
    Common Stock
    
    
    AdditionalNumber of
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Paid In
    
    
    UndividedShares
    
    
    Amount
    
    
    of Shares
    
    
    Amount
    
    
    Capital
    
    
    Profits
    
    
    Total(Dollars and shares in thousands)Balance, December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    6,178
    
    
    $
    6,722
    
    
    $
    1,110
    
    
    $
    29,951
    
    
    $
    37,783Reclassification of
Preferred Stock from
Mezzanine capital to
shareholders equity
    
    
    1,400
    
    
    
    19,016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,016Conversion of Preferred
Stock into Common Stock
    
    
    (2
    )
    
    
    (34
    )
    
    
    2
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    Dividends paid on
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (983
    )
    
    
    (983
    )Compensation expense on
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    
    
    
    
    369Net (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,589
    )
    
    
    (28,589
    )Balance, September 30, 2008
    
    
    1,398
    
    
    $
    18,982
    
    
    
    6,180
    
    
    $
    6,756
    
    
    $
    1,479
    
    
    $
    379
    
    
    $
    27,596
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##### Table of Contents



ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2008
(Unaudited)
 1. Nature of Business and Significant Accounting Policies
 Organization
     Use of Estimates
  Income Taxes
  Accounting for Uncertainty in Income Taxes
  2. Going Concern and Regulatory Actions
 Going Concern
   Regulatory Actions
    7




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##### Table of Contents



Other Real Estate Owned
  Equity Compensation Plans
  Weighted AverageWeighted Average
    
    Remaining
    
    Aggregate IntrinsicShares
    
    Exercise Price
    
    Contractual Life
    
    Value2008Outstanding at December 31, 2007
    
    
    490,600
    
    
    $
    11.32Granted
    
    
    5,000
    
    
    $
    3.05Exercised
    
    
    100
    
    
    $
    6.10Forfeited
    
    
    37,000
    
    
    $
    12.65Outstanding at September 30, 2008
    
    
    458,500
    
    
    $
    11.12
    
    
    5.83
    years
    
    $
    32,800Vested or expected to vest at
September 30, 2008
    
    
    440,892
    
    
    $
    11.00
    
    
    
    5.77
    
    
    $
    22,240Options exercisable at September
30, 2008
    
    
    254,500
    
    
    $
    8.65
    
    
    
    4.66
    
    
    $
    32,800
  3. Allowance for Loan Losses
  CHANGES IN ALLOWANCES FOR LOAN LOSSES
 Nine Months Ended September 30,2008
    
    
    2007(Dollars in thousands)Balance at beginning of period
    
    $
    15,284
    
    
    $
    9,195Charge-offs
    
    
    (32,474
    )
    
    
    (1,643
    )Recoveries
    
    
    1,195
    
    
    
    166Net charge-offs
    
    
    (31,279
    )
    
    
    (1,477
    )Provision for loan losses
    
    
    36,048
    
    
    
    3,199Other adjustments
    
    
    (203
    )
    
    
    145Balance at end of period
    
    $
    19,850
    
    
    $
    11,062
 8




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##### Table of Contents



4. Earnings per Share
  Per ShareThree Months Ended September 30, 2008
    
    Net loss
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic and diluted loss per share:Net loss
    
    $
    (13,872
    )Cash dividends on preferred stock
    
    
    (328
    )Net loss attributable to common shareholders
    
    $
    (14,200
    )
    
    
    6,179,283
    
    
    $
    (2.30
    )
 Per ShareThree Months Ended September 30, 2007
    
    Net Earnings
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic earnings per share:Net earnings
    
    $
    1,990Cash dividends on preferred stock
    
    
    (328
    )Net earnings available to common shareholders
    
    
    1,662
    
    
    
    6,169,488
    
    
    $
    0.27Preferred stock dividend
    
    
    328Effect of exercise of options
    
    
    
    
    
    
    87,774Effect of conversion of Series A preferred stock
    
    
    
    
    
    
    733,050Effect of conversion of Series B preferred stock
    
    
    
    
    
    
    667,096Diluted earnings per share:Net earnings available to common shareholders
    
    $
    1,990
    
    
    
    7,657,408
    
    
    $
    0.26
  Per ShareNine Months Ended September 30, 2008
    
    Net Earnings
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic and diluted loss per share:Net loss
    
    $
    (28,589
    )Cash dividends on preferred stock
    
    
    (983
    )Net loss attributable to common shareholders
    
    $
    (29,573
    )
    
    
    6,178,378
    
    
    $
    (4.79
    )
 Per ShareNine Months Ended September 30, 2007
    
    Net Earnings
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic earnings per share:Net earnings
    
    $
    6,024Cash dividends on preferred stock
    
    
    (984
    )Net earnings available to common shareholders
    
    
    5,040
    
    
    
    6,163,638
    
    
    $
    0.82Preferred stock dividend
    
    
    984Effect of exercise of options
    
    
    
    
    
    
    83,542Effect of conversion of Series A preferred stock
    
    
    
    
    
    
    733,050Effect of conversion of Series B preferred stock
    
    
    
    
    
    
    667,096Diluted earnings per share:Net earnings available to common shareholders
    
    $
    6,024
    
    
    
    7,647,326
    
    
    $
    0.79
 9




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##### Table of Contents



5. Stock Options
     Stock OptionCompensationExpense(Dollars in thousands)Remainder of 2008
    
    $
    1082009
    
    
    4062010
    
    
    3072011
    
    
    1752012
    
    
    48Total
    
    $
    1,044
   Nine Months Ended September 30,2008
    
    2007Risk-free rate
    
    
    3.56
    %
    
    
    4.81
    %Expected term
    
    6.5 years
    
    6.25 yearsExpected volatility
    
    
    39.30
    %
    
    
    36.04
    %
 6. Operating Segments
 Disclosures about Segments of an Enterprise and Related Information,
  10




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##### Table of Contents



Regional
    
    
    Real EstateBanking
    
    
    IndustriesThree Months Ended September 30
    
    Centers
    
    

Division
    
    
    SBA
    
    
    Other
    
    

Total(Dollars in thousands)2008Interest income
    
    $
    8,843
    
    
    $
    3,195
    
    
    $
    659
    
    
    $
    3,321
    
    
    $
    16,018Credit for funds provided
    
    
    5,755
    
    
    
    146
    
    
    
    26
    
    
    
    (5,927
    )
    
    
    Total interest income
    
    
    14,598
    
    
    
    3,341
    
    
    
    685
    
    
    
    2,606
    
    
    
    16,018Interest expense
    
    
    2,931
    
    
    
    
    
    
    
    
    
    
    
    6,354
    
    
    
    9,286Charge for funds used
    
    
    6,275
    
    
    
    2,444
    
    
    
    369
    
    
    
    (9,088
    )
    
    
    Total interest expense
    
    
    9,206
    
    
    
    2,444
    
    
    
    369
    
    
    
    (2,733
    )
    
    
    9,286Net interest income
    
    
    5,392
    
    
    
    897
    
    
    
    316
    
    
    
    127
    
    
    
    6,732Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,438
    
    
    
    6,438Net interest income (loss) after provision for
loan losses
    
    
    5,392
    
    
    
    897
    
    
    
    316
    
    
    
    (6,311
    )
    
    
    294Non-interest income
    
    
    309
    
    
    
    10
    
    
    
    53
    
    
    
    261
    
    
    
    633Non-interest expense
    
    
    2,270
    
    
    
    340
    
    
    
    293
    
    
    
    4,289
    
    
    
    7,192Net
contribution to earnings (loss) before tax expense
    
    $
    3,431
    
    
    $
    567
    
    
    $
    76
    
    
    $
    (10,339
    )
    
    $
    (6,265
    )
 Regional
    
    
    Real EstateBanking
    
    
    IndustriesThree Months Ended September 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2007Interest income
    
    $
    8,181
    
    
    $
    8,478
    
    
    $
    1,061
    
    
    $
    2,564
    
    
    $
    20,284Credit for funds provided
    
    
    7,056
    
    
    
    425
    
    
    
    45
    
    
    
    (7,526
    )
    
    
    Total interest income
    
    
    15,237
    
    
    
    8,903
    
    
    
    1,106
    
    
    
    (4,962
    )
    
    
    20,284Interest expense
    
    
    4,155
    
    
    
    
    
    
    
    6
    
    
    
    5,436
    
    
    
    9,597Charge for funds used
    
    
    5,258
    
    
    
    4,471
    
    
    
    455
    
    
    
    (10,184
    )
    
    
    
 11




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##### Table of Contents



Regional
    
    
    Real EstateBanking
    
    
    IndustriesThree Months Ended September 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)Total interest expense
    
    
    9,413
    
    
    
    4,471
    
    
    
    461
    
    
    
    (4,748
    )
    
    
    9,597Net interest income
    
    
    5,824
    
    
    
    4,432
    
    
    
    645
    
    
    
    (214
    )
    
    
    10,687Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060
    
    
    
    1,060Net interest income (loss) after provision for loan losses
    
    
    5,824
    
    
    
    4,432
    
    
    
    645
    
    
    
    (1,274
    )
    
    
    9,627Non-interest income
    
    
    194
    
    
    
    205
    
    
    
    135
    
    
    
    928
    
    
    
    1,462Non-interest expense
    
    
    2,756
    
    
    
    704
    
    
    
    344
    
    
    
    3,696
    
    
    
    7,500Net contribution to earnings before tax expense
    
    $
    3,262
    
    
    $
    3,933
    
    
    $
    436
    
    
    $
    (4,042
    )
    
    $
    3,589
 Regional
    
    
    Real EstateBanking
    
    
    IndustriesNine Months Ended September 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2008Interest income
    
    $
    26,563
    
    
    $
    14,394
    
    
    $
    2,289
    
    
    $
    7,977
    
    
    $
    51,223Credit for funds provided
    
    
    19,455
    
    
    
    846
    
    
    
    93
    
    
    
    (20,394
    )
    
    
    Total interest income
    
    
    46,018
    
    
    
    15,240
    
    
    
    2,382
    
    
    
    (12,417
    )
    
    
    51,223Interest expense
    
    
    9,506
    
    
    
    
    
    
    
    
    
    
    
    18,221
    
    
    
    27,727Charge for funds used
    
    
    18,437
    
    
    
    10,680
    
    
    
    1,120
    
    
    
    (30,237
    )
    
    
    Total interest expense
    
    
    27,943
    
    
    
    10,680
    
    
    
    1,120
    
    
    
    (12,016
    )
    
    
    27,727Net interest income
    
    
    18,075
    
    
    
    4,560
    
    
    
    1,262
    
    
    
    (401
    )
    
    
    23,496Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,048
    
    
    
    36,048Net interest income (loss) after provision for
loan losses
    
    
    18,075
    
    
    
    4,560
    
    
    
    1,262
    
    
    
    (36,449
    )
    
    
    (12,552
    )Non-interest income
    
    
    1,024
    
    
    
    355
    
    
    
    350
    
    
    
    646
    
    
    
    2,375Non-interest expense
    
    
    7,286
    
    
    
    1,923
    
    
    
    918
    
    
    
    10,870
    
    
    
    20,997Net contribution to earnings (loss) before tax expense
    
    $
    11,813
    
    
    $
    2,992
    
    
    $
    694
    
    
    $
    (46,673
    )
    
    $
    (31,174
    )
 Regional
    
    
    Real EstateBanking
    
    
    IndustriesNine Months Ended September 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2007Interest income
    
    $
    22,969
    
    
    $
    26,190
    
    
    $
    3,116
    
    
    $
    7,449
    
    
    $
    59,724Credit for funds provided
    
    
    20,010
    
    
    
    1,265
    
    
    
    126
    
    
    
    (21,401
    )
    
    
    Total interest income
    
    
    42,979
    
    
    
    27,455
    
    
    
    3,242
    
    
    
    (13,952
    )
    
    
    59,724Interest expense
    
    
    11,418
    
    
    
    
    
    
    
    1
    
    
    
    15,657
    
    
    
    27,076Charge for funds used
    
    
    14,341
    
    
    
    13,375
    
    
    
    1,290
    
    
    
    (29,006
    )
    
    
    Total interest expense
    
    
    25,759
    
    
    
    13,375
    
    
    
    1,291
    
    
    
    (13,349
    )
    
    
    27,076Net interest income
    
    
    17,220
    
    
    
    14,080
    
    
    
    1,951
    
    
    
    (603
    )
    
    
    32,648Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,199
    
    
    
    3,199Net interest income after provision for loan losses
    
    
    17,220
    
    
    
    14,080
    
    
    
    1,951
    
    
    
    (3,802
    )
    
    
    29,449Non-interest income
    
    
    717
    
    
    
    362
    
    
    
    495
    
    
    
    1,283
    
    
    
    2,857Non-interest expense
    
    
    7,527
    
    
    
    1,944
    
    
    
    1,124
    
    
    
    11,221
    
    
    
    21,816Net contribution to earnings before tax expense
    
    $
    10,410
    
    
    $
    12,498
    
    
    $
    1,322
    
    
    $
    (13,740
    )
    
    $
    10,490Segment assets as of:September 30, 2008
    
    $
    542,674
    
    
    $
    197,612
    
    
    $
    33,929
    
    
    $
    338,451
    
    
    $
    1,112,666December 31, 2007
    
    $
    489,666
    
    
    $
    357,087
    
    
    $
    32,575
    
    
    $
    187,275
    
    
    $
    1,066,603
  12




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##### Table of Contents



7. Recent Accounting Pronouncements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS 115 Accounting for Certain Investments in Debt
and Equity Securities
 8. Fair Value Measurements
   
    
    Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
    
    Level 2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the
financial instrument.
    
    Level 3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
    13




---



##### Table of Contents



Assets
 Fair Value on a Recurring Basis
  Fair Value Measurements UsingQuoted Prices
    
    SignificantIn Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(Dollars in thousands)Securities held to maturity
    
    $
    146,605
    
    
    
    
    
    
    $
    146,605
    
    
    
    
  Fair Value on a Nonrecurring Basis
  Fair Value Measurements UsingQuoted Prices
    
    SignificantIn Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(Dollars in thousands)Impaired loans
    
    $
    124,526
    
    
    
    
    
    
    
    
    
    
    $
    124,526
   ImpairedLoans(In Thousands)Beginning balance, July 1, 2008
    
    $
    137,929Additions to Impaired Loans
    
    
    19,571Sales or transfers
    
    
    (41,586
    )Fair market value adjustment, net
    
    
    (8,612
    )Ending balance September 30, 2008
    
    $
    124,526
 ImpairedLoans(In Thousands)Beginning balance, January 1, 2008
    
    $
    42,287Additions to Impaired Loans
    
    
    129,906Sales or transfers
    
    
    (52,863
    )Fair market value adjustment, net
    
    
    (5,196
    )Ending balance September 30, 2008
    
    $
    124,526
 14




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##### Table of Contents



Loans held for sale
  9. Amendment of Preferred Stock
  10. Subsequent Event
  15




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Forward-Looking Information
  Overview
      16




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Return on average assets (1)
    
    
    (4.85
    )%
    
    
    0.80
    %
    
    
    (3.99
    )%
    
    
    0.84
    %Return on average shareholders equity (1)
    
    
    (134.5
    )%
    
    
    20.15
    %
    
    
    (67.91
    )%
    
    
    21.64
    %Average equity to average assets
    
    
    3.60
    %
    
    
    4.43
    %
    
    
    4.62
    %
    
    
    4.71
    %
 
 (1)
    
    Annualized 17




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##### Table of Contents



RESULTS OF OPERATIONS  Three months and nine months ended September 30, 2008 and 2007
 Net Interest Income
  Three Months Ended September 30,
    
    Nine Months Ended September 30,Percent
    
    
    
    
    
    
    
    
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(Unaudited)(Dollars in thousands)Interest income
    
    $
    16,018
    
    
    $
    20,284
    
    
    
    (21.0
    )%
    
    $
    51,223
    
    
    $
    59,724
    
    
    
    (14.2
    )%Interest expense
    
    
    9,286
    
    
    
    9,597
    
    
    
    (3.2
    )%
    
    
    27,727
    
    
    
    27,076
    
    
    
    2.4
    %Net interest income
before provision
for loan losses
    
    
    6,732
    
    
    
    10,687
    
    
    
    (37.0
    )%
    
    
    23,496
    
    
    
    32,648
    
    
    
    (28.0
    )%Net interest margin
    
    
    2.42
    %
    
    
    4.43
    %
    
    
    (45.4
    )%
    
    
    2.88
    %
    
    
    4.71
    %
    
    
    (38.9
    )%
     18




---



##### Table of Contents



19




---



##### Table of Contents



ANALYSIS OF NET INTEREST INCOME
 Three Months ended September 30,2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    Interest
    
    
    Rates
    
    
    Average
    
    
    Interest
    
    
    RatesBalance
    
    
    Inc./Exp.(1)
    
    
    Earned/Paid(3)
    
    
    Balance
    
    
    Inc./Exp.(1)
    
    
    Earned/Paid(3)(Dollars in thousands)Interest earning assets:Federal funds sold
    
    $
    40,287
    
    
    $
    189
    
    
    
    1.87
    %
    
    $
    39,326
    
    
    $
    489
    
    
    
    4.93
    %Time deposits
    
    
    2,814
    
    
    
    17
    
    
    
    2.40
    %
    
    
    1,606
    
    
    
    14
    
    
    
    3.46
    %Securities
    
    
    131,713
    
    
    
    1,801
    
    
    
    5.44
    %
    
    
    100,001
    
    
    
    1,383
    
    
    
    5.49
    %Loans (2)
    
    
    932,858
    
    
    
    14,011
    
    
    
    5.98
    %
    
    
    815,389
    
    
    
    18,398
    
    
    
    8.95
    %Total interest earning assets
    
    
    1,107,672
    
    
    
    16,018
    
    
    
    5.75
    %
    
    
    956,322
    
    
    
    20,284
    
    
    
    8.42
    %Non-interest earning assets
    
    
    30,615
    
    
    
    
    
    
    
    
    
    
    
    31,560Total assets
    
    $
    1,138,287
    
    
    
    
    
    
    
    
    
    
    $
    987,882Interest bearing liabilities:Interest bearing demand deposits
    
    $
    8,828
    
    
    
    26
    
    
    
    1.17
    %
    
    $
    18,505
    
    
    
    72
    
    
    
    1.54
    %Savings and money market deposits
    
    
    138,390
    
    
    
    780
    
    
    
    2.24
    %
    
    
    212,414
    
    
    
    2,217
    
    
    
    4.14
    %Certificates of deposit
    
    
    632,459
    
    
    
    7,017
    
    
    
    4.41
    %
    
    
    438,747
    
    
    
    5,753
    
    
    
    5.20
    %Federal funds purchased
    
    
    889
    
    
    
    2
    
    
    
    0.89
    %
    
    
    
    
    
    
    
    
    
    
    FHLB advances:Short-term
    
    
    42,730
    
    
    
    335
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    Long-term
    
    
    30,000
    
    
    
    212
    
    
    
    2.81
    %
    
    
    55,406
    
    
    
    762
    
    
    
    5.46
    %Securities sold under repurchase
agreements
    
    
    91,944
    
    
    
    575
    
    
    
    2.49
    %
    
    
    24,600
    
    
    
    271
    
    
    
    4.37
    %Junior subordinated debentures
    
    
    27,837
    
    
    
    339
    
    
    
    4.84
    %
    
    
    27,837
    
    
    
    522
    
    
    
    7.44
    %Total interest bearing liabilities
    
    
    973,077
    
    
    
    9,286
    
    
    
    3.80
    %
    
    
    777,509
    
    
    
    9,597
    
    
    
    4.90
    %Non-interest bearing liabilities
    
    
    124,192
    
    
    
    
    
    
    
    
    
    
    
    152,176Total liabilities
    
    
    1,097,269
    
    
    
    
    
    
    
    
    
    
    
    929,685Redeemable preferred stock and
shareholders equity
    
    
    41,018
    
    
    
    
    
    
    
    
    
    
    
    58,197Total liabilities and
shareholders equity
    
    $
    1,138,287
    
    
    
    
    
    
    
    
    
    
    $
    987,882Net interest income
    
    
    
    
    
    $
    6,732
    
    
    
    
    
    
    
    
    
    
    $
    10,687Interest rate spread
    
    
    
    
    
    
    
    
    
    
    1.96
    %
    
    
    
    
    
    
    
    
    
    
    3.52
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.42
    %
    
    
    
    
    
    
    
    
    
    
    4.43
    %
 
 (1)
    
    Interest income on loans includes loan fees of $0.4 million in 2008 and $0.9 million
in 2007.(2)
    
    Loans include nonaccrual loans with an average balance of
$89.7 million in 2008 and
$22.3 million in 2007.(3)
    
    Annualized 20




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##### Table of Contents



Nine Months ended September 30,2008
    
    
    2007Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    Interest
    
    
    Rates
    
    
    Average
    
    
    Interest
    
    
    RatesBalance
    
    
    Inc./Exp.(1)
    
    
    Earned/Paid(3)
    
    
    Balance
    
    
    Inc./Exp.(1)
    
    
    Earned/Paid(3)(Dollars in thousands)Interest earning assets:Federal funds sold
    
    $
    41,092
    
    
    $
    724
    
    
    
    2.35
    %
    
    $
    43,240
    
    
    $
    1,656
    
    
    
    5.21
    %Time deposits
    
    
    2,337
    
    
    
    50
    
    
    
    2.86
    %
    
    
    1,882
    
    
    
    53
    
    
    
    3.77
    %Securities
    
    
    118,745
    
    
    
    4,793
    
    
    
    5.39
    %
    
    
    96,591
    
    
    
    3,872
    
    
    
    5.36
    %Loans (2)
    
    
    927,196
    
    
    
    45,656
    
    
    
    6.58
    %
    
    
    784,074
    
    
    
    54,143
    
    
    
    9.23
    %Total interest earning assets
    
    
    1,089,370
    
    
    
    51,223
    
    
    
    6.28
    %
    
    
    925,787
    
    
    
    59,724
    
    
    
    8.62
    %Non-interest earning assets
    
    
    32,165
    
    
    
    
    
    
    
    
    
    
    
    30,405Total assets
    
    $
    1,121,535
    
    
    
    
    
    
    
    
    
    
    $
    956,192Interest bearing liabilities:Interest bearing demand deposits
    
    $
    9,850
    
    
    
    99
    
    
    
    1.34
    %
    
    $
    16,352
    
    
    
    188
    
    
    
    1.54
    %Savings and money market
deposits
    
    
    186,650
    
    
    
    3,561
    
    
    
    2.55
    %
    
    
    202,914
    
    
    
    6,358
    
    
    
    4.19
    %Certificates of deposit
    
    
    565,598
    
    
    
    19,804
    
    
    
    4.68
    %
    
    
    416,930
    
    
    
    16,125
    
    
    
    5.17
    %Federal funds purchased
    
    
    296
    
    
    
    2
    
    
    
    0.90
    %
    
    
    
    
    
    
    
    
    
    
    FHLB advances:Short-term
    
    
    41,396
    
    
    
    695
    
    
    
    2.24
    %
    
    
    
    
    
    
    
    
    
    
    Long-term
    
    
    30,000
    
    
    
    1,115
    
    
    
    4.96
    %
    
    
    51,997
    
    
    
    2,119
    
    
    
    5.45
    %Securities sold under
repurchase agreements
    
    
    66,916
    
    
    
    1,319
    
    
    
    2.63
    %
    
    
    22,408
    
    
    
    744
    
    
    
    4.44
    %Junior subordinated debentures
    
    
    27,837
    
    
    
    1,132
    
    
    
    5.43
    %
    
    
    27,837
    
    
    
    1,542
    
    
    
    7.41
    %Total interest bearing liabilities
    
    
    928,543
    
    
    
    27,727
    
    
    
    3.99
    %
    
    
    738,438
    
    
    
    27,076
    
    
    
    4.90
    %Non-interest bearing liabilities
    
    
    141,124
    
    
    
    
    
    
    
    
    
    
    
    161,523Total liabilities
    
    
    1,069,667
    
    
    
    
    
    
    
    
    
    
    
    899,961Redeemable preferred stock and
shareholders equity
    
    
    51,868
    
    
    
    
    
    
    
    
    
    
    
    56,231Total liabilities and
shareholders equity
    
    $
    1,121,535
    
    
    
    
    
    
    
    
    
    
    $
    956,192Net interest income
    
    
    
    
    
    $
    23,496
    
    
    
    
    
    
    
    
    
    
    $
    32,648Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.29
    %
    
    
    
    
    
    
    
    
    
    
    3.72
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.88
    %
    
    
    
    
    
    
    
    
    
    
    4.71
    %
 
 (1)
    
    Interest income on loans includes loan fees of $1.4 million in 2008 and $3.4 million
in 2007.(2)
    
    Loans include nonaccrual loans with an average balance of $107.7 million in 2008 and
$31.7 million in 2007.(3)
    
    Annualized 21




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##### Table of Contents



ANALYSIS OF CHANGE IN NET INTEREST INCOME
 Three Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2008Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)Due To Change In
    
    
    
    
    
    
    Due To Change InVolume
    
    
    Rate
    
    
    Net Change
    
    
    Volume
    
    
    Rate
    
    
    Net Change(Dollars in thousands)Interest income:Federal funds sold
    
    $
    12
    
    
    $
    (312
    )
    
    $
    (300
    )
    
    $
    (79
    )
    
    $
    (854
    )
    
    $
    (933
    )Time deposits
    
    
    8
    
    
    
    (5
    )
    
    
    3
    
    
    
    11
    
    
    
    (14
    )
    
    
    (3
    )Securities
    
    
    434
    
    
    
    (16
    )
    
    
    418
    
    
    
    894
    
    
    
    27
    
    
    
    921Loans
    
    
    2,384
    
    
    
    (6,771
    )
    
    
    (4,387
    )
    
    
    8,781
    
    
    
    (17,267
    )
    
    
    (8,486
    )Total interest
earning assets
    
    
    2,838
    
    
    
    (7,104
    )
    
    
    (4,266
    )
    
    
    9,607
    
    
    
    (18,108
    )
    
    
    (8,501
    )Interest expense:Interest bearing demand
    
    
    (31
    )
    
    
    (15
    )
    
    
    (46
    )
    
    
    (68
    )
    
    
    (21
    )
    
    
    (89
    )Savings and money
market
    
    
    (619
    )
    
    
    (818
    )
    
    
    (1,437
    )
    
    
    (476
    )
    
    
    (2,321
    )
    
    
    (2,797
    )Certificates of deposit
    
    
    2,250
    
    
    
    (986
    )
    
    
    1,264
    
    
    
    5,320
    
    
    
    (1,641
    )
    
    
    3,679Federal funds purchased
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    2FHLB advances:Short-term
    
    
    335
    
    
    
    
    
    
    
    335
    
    
    
    695
    
    
    
    
    
    
    
    695Long-term
    
    
    (267
    )
    
    
    (283
    )
    
    
    (550
    )
    
    
    (830
    )
    
    
    (174
    )
    
    
    (1,004
    )Securities sold under
agreements to
repurchase
    
    
    465
    
    
    
    (161
    )
    
    
    304
    
    
    
    979
    
    
    
    (404
    )
    
    
    575Junior subordinated
debentures
    
    
    
    
    
    
    (183
    )
    
    
    (183
    )
    
    
    
    
    
    
    (410
    )
    
    
    (410
    )Total interest
bearing liabilities
    
    
    2,134
    
    
    
    (2,445
    )
    
    
    (311
    )
    
    
    5,621
    
    
    
    (4,970
    )
    
    
    650Net interest income
    
    $
    704
    
    
    $
    (4,659
    )
    
    $
    (3,955
    )
    
    $
    3,986
    
    
    $
    (13,138
    )
    
    $
    (9,152
    )
 22




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Provision for Loan Losses
     23




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##### Table of Contents



Non-Interest Income
  NON-INTEREST INCOME
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(Dollars in thousands)Service charges
    
    $
    452
    
    
    $
    294
    
    
    
    53.7
    %
    
    $
    1,168
    
    
    $
    861
    
    
    
    35.7
    %Gain on sale of
loans, net
    
    
    (18
    )
    
    
    772
    
    
    
    (102.3
    )%
    
    
    134
    
    
    
    1,008
    
    
    
    (86.7
    )%Loan broker fee
income
    
    
    
    
    
    
    45
    
    
    
    (100.0
    )%
    
    
    159
    
    
    
    174
    
    
    
    (8.6
    )%Other
    
    
    199
    
    
    
    351
    
    
    
    (43.3
    )%
    
    
    914
    
    
    
    814
    
    
    
    12.3
    %Total
    
    $
    633
    
    
    $
    1,462
    
    
    
    (56.7
    )%
    
    $
    2,375
    
    
    $
    2,857
    
    
    
    (16.9
    )%
   Non-Interest Expense
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(Dollars in thousands)Salaries and
related benefits
    
    $
    3,275
    
    
    $
    4,588
    
    
    
    (28.6
    )%
    
    $
    10,978
    
    
    $
    13,000
    
    
    
    (15.6
    )%Occupancy and
equipment
    
    
    1,073
    
    
    
    932
    
    
    
    15.1
    %
    
    
    3,209
    
    
    
    2,812
    
    
    
    14.1
    %Professional fees
    
    
    543
    
    
    
    415
    
    
    
    30.8
    %
    
    
    1,378
    
    
    
    1,122
    
    
    
    22.8
    %Data processing
    
    
    281
    
    
    
    186
    
    
    
    51.1
    %
    
    
    755
    
    
    
    617
    
    
    
    22.4
    %Other operating
expense
    
    
    2,020
    
    
    
    1,379
    
    
    
    46.5
    %
    
    
    4,677
    
    
    
    4,265
    
    
    
    (9.7
    )%Total
    
    $
    7,192
    
    
    $
    7,500
    
    
    
    (4.1
    )%
    
    $
    20,997
    
    
    $
    21,816
    
    
    
    (3.8
    )%
   24




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##### Table of Contents



25




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##### Table of Contents



FINANCIAL CONDITION
 Regulatory Capital
  REGULATORY CAPITAL
September 30, 2008
 To Be Adequately
    
    To Be WellActual
    
    Capitalized
    
    CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)BancsharesTotal Capital (to risk-weighted
assets)
    
    $
    66,441
    
    
    
    7.01
    %
    
    $
    75,827
    
    
    
    >=8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk-weighted
assets)
    
    $
    36,645
    
    
    
    3.87
    %
    
    $
    37,914
    
    
    
    >=4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to average assets)
    
    $
    36,645
    
    
    
    3.22
    %
    
    $
    45,485
    
    
    
    >=4.0
    %
    
    
    N/A
    
    
    
    N/ABankTotal Capital (to risk-weighted
assets)
    
    $
    66,383
    
    
    
    7.01
    %
    
    $
    75,745
    
    
    
    >=8.0
    %
    
    $
    94,682
    
    
    
    >=10.0
    %Tier 1 Capital (to risk-weighted
assets)
    
    $
    54,439
    
    
    
    5.75
    %
    
    $
    37,873
    
    
    
    >=4.0
    %
    
    $
    56,809
    
    
    
    >=6.0
    %Tier 1 Capital (to average assets)
    
    $
    54,439
    
    
    
    4.79
    %
    
    $
    45,485
    
    
    
    >=4.0
    %
    
    $
    56,856
    
    
    
    >=5.0
    %
  Liquidity and Cash Flow
  
 26




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##### Table of Contents



Cash Flow from Operating Activities
  Cash Flow from Investing Activities
  Cash Flows from Financing Activities
  27




---



##### Table of Contents



Rate Sensitivity
    RATE SENSITIVITYSeptember 30, 2008(Dollars in thousands)Over Three
    
    
    Over OneThree
    
    
    Through
    
    
    Year
    
    
    OverMonths
    
    
    Twelve
    
    
    Through
    
    
    FiveOr Less
    
    
    Months
    
    
    Five Years
    
    
    Years
    
    
    TotalAssetsFederal funds sold
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Time deposits with other financial
institutions
    
    
    6,341
    
    
    
    1,000
    
    
    
    198
    
    
    
    
    
    
    
    7,539Securities held to maturity
    
    
    1,998
    
    
    
    22,887
    
    
    
    995
    
    
    
    123,012
    
    
    
    148,892Loans, gross
    
    
    399,232
    
    
    
    66,936
    
    
    
    293,653
    
    
    
    149,642
    
    
    
    909,463Total rate-sensitive assets
    
    $
    407,571
    
    
    $
    90,823
    
    
    $
    294,846
    
    
    $
    272,654
    
    
    $
    1,065,894Liabilities:Interest bearing demand deposits
    
    $
    8,002
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,002Savings and money market
    
    
    79,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,519Certificates of deposit
    
    
    89,337
    
    
    
    370,182
    
    
    
    209,538
    
    
    
    
    
    
    
    669,057Federal funds purchased
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000FHLB advances
    
    
    50,000
    
    
    
    25,000
    
    
    
    10,000
    
    
    
    
    
    
    
    85,000Securities sold under agreements to
repurchase
    
    
    99,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,594Junior subordinated debentures
    
    
    27,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,837Total rate sensitive liabilities
    
    $
    364,289
    
    
    $
    395,182
    
    
    $
    219,538
    
    
    $
    
    
    
    $
    979,009Interval Gaps:Interest rate sensitivity gap
    
    $
    43,282
    
    
    $
    (304,359
    )
    
    $
    75,308
    
    
    $
    272,654
    
    
    $
    86,885Rate sensitive assets to rate
sensitive liabilities
    
    
    111.9
    %
    
    
    23.0
    %
    
    
    134.3
    %
    
    
    N/A
    
    
    
    110.0
    %Cumulative Gaps:Cumulative interest rate
sensitivity gap
    
    $
    43,282
    
    
    $
    (261,077
    )
    
    $
    (185,769
    )
    
    $
    86,955
    
    
    $
    86,955Rate sensitive assets to rate
sensitive liabilities
    
    
    111.9
    %
    
    
    65.6
    %
    
    
    81.0
    %
    
    
    108.9
    %
    
    
    108.9
    %% of rate sensitive assets in period
    
    
    38.2
    %
    
    
    46.8
    %
    
    
    74.4
    %
    
    
    100.0
    %
    
    
    N/A
 28




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##### Table of Contents



Investments in Time Deposits and Securities
  TIME DEPOSIT INVESTMENTS
 September 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageBook Value
    
    
    Yield
    
    
    Book Value
    
    
    Yield(Dollars in thousands)Time deposits maturing:Within one year
    
    $
    7,341
    
    
    
    2.18
    %
    
    
    1,053
    
    
    
    3.78
    %After one year but within five years
    
    
    198
    
    
    
    4.00
    %
    
    
    198
    
    
    
    4.00
    %Total time deposits
    
    $
    7,539
    
    
    
    2.23
    %
    
    $
    1,251
    
    
    
    3.82
    %
  INVESTMENT SECURITIES
 September 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageBook Value
    
    
    Yield
    
    
    Book Value
    
    
    Yield(Dollars in thousands)Investment securities maturing:Within one year
    
    $
    24,885
    
    
    
    1.89
    %
    
    $
    7,994
    
    
    
    5.20
    %After one year but within five years
    
    
    995
    
    
    
    4.13
    %
    
    
    8,492
    
    
    
    5.02
    %Collateralized mortgage obligations
and mortgage-backed securities
    
    
    123,012
    
    
    
    5.59
    %
    
    
    89,460
    
    
    
    5.44
    %Total investment securities
    
    $
    148,892
    
    
    
    4.96
    %
    
    $
    105,946
    
    
    
    5.38
    %
    FAIR VALUE OF INVESTMENT SECURITIES
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Estimated FairAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)September 30, 2008U.S. Agency securities
    
    $
    995
    
    
    $
    4
    
    
    $
    
    
    
    $
    999Corporate bonds
    
    
    4,002
    
    
    
    
    
    
    
    224
    
    
    
    3,778Treasury bills
    
    
    20,883
    
    
    
    2
    
    
    
    8
    
    
    
    20,877Collateralized
mortgage obligations
and mortgage-backed
securities
    
    
    123,012
    
    
    
    1,013
    
    
    
    3,074
    
    
    
    120,951$
    148,892
    
    
    $
    1,019
    
    
    $
    3,306
    
    
    $
    146,605
 29




---



##### Table of Contents



Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Estimated FairAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)December 31, 2007U.S. Agency securities
    
    $
    10,477
    
    
    $
    26
    
    
    $
    
    
    
    $
    10,503Corporate bonds
    
    
    6,009
    
    
    
    
    
    
    
    143
    
    
    
    5,866Collateralized
mortgage obligations
and mortgage-backed
securities
    
    
    89,460
    
    
    
    834
    
    
    
    381
    
    
    
    89,913$
    105,946
    
    
    $
    860
    
    
    $
    524
    
    
    $
    106,282
  UNREALIZED LOSSES ON INVESTMENT SECURITIES
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair value
    
    
    loss
    
    
    Fair value
    
    
    loss
    
    
    Fair value
    
    
    loss(Dollars in thousands)Treasury bills
    
    
    19,877
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    19,877
    
    
    
    8Corporate bonds
    
    $
    
    
    
    $
    
    
    
    $
    2,778
    
    
    $
    224
    
    
    $
    2,778
    
    
    $
    224Collateralized
mortgage
obligations and
mortgage-backed
securities
    
    
    35,105
    
    
    
    1,419
    
    
    
    17,537
    
    
    
    1,655
    
    
    
    52,642
    
    
    
    3,074$
    54,982
    
    
    $
    1,427
    
    
    $
    20,315
    
    
    $
    1,879
    
    
    $
    75,297
    
    
    $
    3,306
    Loans
  30




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##### Table of Contents



LOAN PORTFOLIO COMPOSITION
 September 30, 2008
    
    
    December 31, 2007Amount
    
    
    Percent of
    
    
    Amount
    
    
    Percent ofOutstanding
    
    
    Total
    
    
    Outstanding
    
    
    Total(Dollars in thousands)Commercial loans
    
    $
    278,178
    
    
    
    30.6
    %
    
    $
    262,374
    
    
    
    29.0
    %Construction loans
    
    
    183,216
    
    
    
    20.2
    
    
    
    272,279
    
    
    
    30.1Real estate loans
    
    
    427,864
    
    
    
    47.1
    
    
    
    358,907
    
    
    
    39.7Other loans
    
    
    20,205
    
    
    
    2.1
    
    
    
    11,075
    
    
    
    1.2909,463
    
    
    
    100.0
    %
    
    
    904,635
    
    
    
    100.0
    %Less  Deferred loan fees, net
    
    
    (1,237
    )
    
    
    
    
    
    
    (1,699
    )Less  Allowance for loan losses
    
    
    (19,850
    )
    
    
    
    
    
    
    (15,284
    )Net loans
    
    $
    888,376
    
    
    
    
    
    
    $
    887,652
 .
   LOAN MATURITIES
 September 30, 2008After One YearOne Year or
    
    
    Through FiveLess
    
    
    Years
    
    
    After Five Years
    
    
    Total(Dollars in thousands)Commercial loans
    
    $
    129,081
    
    
    $
    106,461
    
    
    $
    42,636
    
    
    $
    278,178Construction loans
    
    
    151,806
    
    
    
    19,969
    
    
    
    11,441
    
    
    
    183,216Real estate loans
    
    
    42,608
    
    
    
    124,517
    
    
    
    254,611
    
    
    
    427,864Other loans
    
    
    3,878
    
    
    
    6,345
    
    
    
    9,982
    
    
    
    20,205$
    327,373
    
    
    $
    257,292
    
    
    $
    318,670
    
    
    $
    909,463
 Non-performing Assets
   September 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Non-accrual loans
    
    $
    95,153
    
    
    $
    28,774Accruing loans past due 90 days or more
    
    
    1,343
    
    
    
    Troubled debt restructurings
    
    
    4,993
    
    
    
    Other real estate owned
    
    
    16,608
    
    
    
    1,100Balance at end of period
    
    $
    118,097
    
    
    $
    29,874
 31




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##### Table of Contents



IMPAIRED LOANS
 As of and for
    
    
    As of and forthe nine
    
    
    the twelvemonths ended
    
    
    months endedSeptember 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Impaired loans with a valuation allowance
    
    $
    24,930
    
    
    $
    16,863Impaired loans without a valuation allowance
    
    
    80,693
    
    
    
    28,124Total Impaired loans
    
    $
    105,623
    
    
    $
    44,987Valuation allowance related to impaired loans
    
    $
    1,995
    
    
    $
    2,700Average recorded investment in impaired loans
    
    $
    185,418
    
    
    $
    54,238Cash collections applied to reduce principal balance
    
    $
    44,283
    
    
    $
    12,137Interest income recognized on cash collections
    
    $
    1,159
    
    
    $
    3,485
 Changes in Allowance for Loan Losses
  32




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##### Table of Contents



Off-Balance Sheet Credit Commitments and Contingent Obligations
   Deposits
   SOURCE OF DEPOSITS
 September 30, 2008
    
    
    December 31, 2007Percent of
    
    
    
    
    
    
    Percent ofAmount
    
    
    Total
    
    
    Amount
    
    
    Total(Dollars in thousands)Regional Bank Centers
    
    $
    321,701
    
    
    
    37.5
    %
    
    $
    494,184
    
    
    
    57.4
    %Money desk
    
    
    160,916
    
    
    
    18.8
    
    
    
    101,060
    
    
    
    11.7Brokered
    
    
    336,562
    
    
    
    39.2
    
    
    
    197,159
    
    
    
    22.9Internet
    
    
    38,445
    
    
    
    4.5
    
    
    
    67,929
    
    
    
    8.0Total
    
    $
    857,624
    
    
    
    100.0
    %
    
    $
    860,332
    
    
    
    100.0
    %
     33




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##### Table of Contents



CERTIFICATES OF DEPOSIT
 Certificate of Deposit Maturing:
    
    Amount(1)(Dollars in thousands)Three months or less
    
    $
    82,808Over three and through twelve months
    
    
    361,478Over twelve months
    
    
    194,475Total
    
    $
    638,761
 
 (1)
    
    Excludes time deposits included in IRA accounts. Borrowed Funds
 FHLB Advances
  FHLB ADVANCES
 Principal Amount
    
    Interest rate
    
    Maturity date(Dollars in thousands)$10,000
    
    Fixed at 4.54%
    
    October 200810,000
    
    Prime minus 2.87%
    
    December 200810,000
    
    Prime minus 2.83%
    
    January 200925,000
    
    Fixed at 2.85%
    
    September 200910,000
    
    Prime minus 2.80%
    
    December 200910,000
    
    Fixed at 3.86%
    
    December 200910,000
    
    Prime minus 2.74%
    
    January 2010$85,000
 34




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##### Table of Contents



Junior Subordinated Debentures
     Securities Sold Under Agreements to Repurchase.
  35




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##### Table of Contents



36




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
     37




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  38




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##### Table of Contents



ITEM 6. EXHIBITS
 31.1
    
    Section 302 CEO Certification31.2
    
    Section 302 CFO Certification32.1
    
    Certificate by Curtis S. Reis, Chairman and Chief Executive Officer
of the Company dated November 19, 2008 pursuant to 18 U.S.C. § 1350,
as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate by Daniel L. Erickson, Executive Vice President and Chief
Financial Officer of the Company dated November 19, 2008 pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002.
 39




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##### Table of Contents



SIGNATURES
  DATE: November 19, 2008
    ALLIANCE BANCSHARES CALIFORNIABy:
    /s/ Daniel L. EricksonDaniel L. EricksonExecutive Vice President and Chief
Financial Officer 40




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    Section 302 CEO Certification31.2
    
    Section 302 CFO Certification32.1
    
    Certificate by Curtis S. Reis, Chairman and Chief Executive Officer of
the Company dated November 19, 2008 pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate by Daniel L. Erickson, Executive Vice President and Chief
Financial Officer of the Company dated November 19, 2008 pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002.