##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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 JUNE 30, 2008
 TABLE OF CONTENTS
 Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Condition at June 30, 2008 and December 31, 2007
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2008
and 2007
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
    
    5Consolidated Statements of Shareholders Equity for the six months ended June 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
    
    35Item 4. Controls and Procedures
    
    35Part II. Other InformationItem 1. Legal Proceedings
    
    37Item 1A. Risk Factors
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 3. Defaults Upon Senior Securities
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    37Item 5. Other Information
    
    38Item 6. Exhibits
    
    39Signatures
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 June 30, 2008
    
    
    December 31, 2007(Unaudited)(Dollars in thousands)AssetsCash and due from banks
    
    $
    23,822
    
    
    $
    17,325Federal funds sold
    
    
    39,460
    
    
    
    26,925Total cash and cash equivalents
    
    
    63,282
    
    
    
    44,250Time deposits with other financial institutions
    
    
    2,015
    
    
    
    1,251Securities held to maturity, fair market value $117,251 at June 30, 2008; $106,282
at December 31, 2007
    
    
    117,516
    
    
    
    105,946Loans held for sale
    
    
    2,983
    
    
    
    Loans, net of the allowance for loan losses of $18,491 at June 30, 2008; $15,284 at
December 31, 2007
    
    
    899,145
    
    
    
    887,652Equipment and leasehold improvements, net
    
    
    4,510
    
    
    
    4,795Accrued interest receivable and other assets
    
    
    30,337
    
    
    
    22,709Total assets
    
    $
    1,119,788
    
    
    $
    1,066,603Liabilities, Redeemable Preferred Stock and Shareholders EquityDeposits:Non-interest bearing demand
    
    $
    150,578
    
    
    $
    147,242Interest bearing:Demand
    
    
    8,619
    
    
    
    9,834Savings and money market
    
    
    191,554
    
    
    
    197,076Certificates of deposit
    
    
    553,774
    
    
    
    506,180Total deposits
    
    
    904,525
    
    
    
    860,332Accrued interest payable and other liabilities
    
    
    4,833
    
    
    
    6,271Securities sold under agreements to repurchase
    
    
    70,908
    
    
    
    35,364FHLB advances
    
    
    70,000
    
    
    
    80,000Junior subordinated debentures
    
    
    27,837
    
    
    
    27,837Total liabilities
    
    
    1,078,103
    
    
    
    1,009,804Commitments and contingencies
    
    
    
    
    
    
    Redeemable Preferred Stock (Note 8)
    
    
    
    
    
    
    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 June 30, 2008
    
    
    7,6976.82%
Series B Non-Cumulative Convertible Non-Voting: Authorized and outstanding - 667,096 shares at June 30, 2008
    
    
    11,319Common stock, no par value:Authorized - 20,000,000 shares; Outstanding - 6,177,979 shares at June
30, 2008 and December 31, 2007
    
    
    6,722
    
    
    
    6,722Additional Paid in Capital
    
    
    1,369
    
    
    
    1,110Undivided profits
    
    
    14,578
    
    
    
    29,951Total shareholders equity
    
    
    41,685
    
    
    
    37,783Total liabilities, redeemable preferred stock and shareholders equity
    
    $
    1,119,788
    
    
    $
    1,066,603
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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands except earnings per share)Interest Income:Interest and fees on loans
    
    $
    14,454
    
    
    $
    18,240
    
    
    $
    31,646
    
    
    $
    35,745Interest on time deposits with other financial
institutions
    
    
    17
    
    
    
    20
    
    
    
    33
    
    
    
    39Interest on securities held to maturity
    
    
    1,547
    
    
    
    1,246
    
    
    
    2,992
    
    
    
    2,489Interest on federal funds sold
    
    
    216
    
    
    
    759
    
    
    
    534
    
    
    
    1,167Total interest income
    
    
    16,234
    
    
    
    20,265
    
    
    
    35,205
    
    
    
    39,440Interest Expense:Interest on deposits
    
    
    7,616
    
    
    
    7,642
    
    
    
    15,641
    
    
    
    14,629Interest on FHLB advances
    
    
    574
    
    
    
    679
    
    
    
    1,262
    
    
    
    1,357Interest on securities sold under repurchase agreements
    
    
    336
    
    
    
    253
    
    
    
    746
    
    
    
    473Interest on junior subordinated debentures
    
    
    339
    
    
    
    512
    
    
    
    792
    
    
    
    1,020Total interest expense
    
    
    8,865
    
    
    
    9,086
    
    
    
    18,441
    
    
    
    17,479Net interest income before provision for loan losses
    
    
    7,369
    
    
    
    11,179
    
    
    
    16,764
    
    
    
    21,961Provision for Loan Losses
    
    
    27,800
    
    
    
    1,074
    
    
    
    29,610
    
    
    
    2,139Net interest income (expense)
    
    
    (20,431
    )
    
    
    10,105
    
    
    
    (12,846
    )
    
    
    19,822Non-Interest Income
    
    
    1,122
    
    
    
    774
    
    
    
    1,742
    
    
    
    1,395Non-Interest Expense:Salaries and related benefits
    
    
    3,546
    
    
    
    4,239
    
    
    
    7,702
    
    
    
    8,412Occupancy and equipment expenses
    
    
    1,055
    
    
    
    935
    
    
    
    2,136
    
    
    
    1,880Professional fees
    
    
    476
    
    
    
    419
    
    
    
    840
    
    
    
    707Data processing
    
    
    248
    
    
    
    220
    
    
    
    475
    
    
    
    431Other operating expense
    
    
    1,348
    
    
    
    1,473
    
    
    
    2,651
    
    
    
    2,886Total non-interest expense
    
    
    6,673
    
    
    
    7,286
    
    
    
    13,804
    
    
    
    14,316Earnings (Losses) Before Income Tax Expense (benefit)
    
    
    (25,982
    )
    
    
    3,593
    
    
    
    (24,908
    )
    
    
    6,901Income tax expense (benefit)
    
    
    (10,692
    )
    
    
    1,428
    
    
    
    (10,191
    )
    
    
    2,867Net Earnings (Loss)
    
    $
    (15,290
    )
    
    $
    2,165
    
    
    $
    (14,717
    )
    
    $
    4,034Earnings
(loss) per Common Share:Basic earnings (loss) per share
    
    $
    (2.53
    )
    
    $
    0.30
    
    
    $
    (2.49
    )
    
    $
    0.55Diluted earnings (loss) per share
    
    $
    (2.53
    )
    
    $
    0.28
    
    
    $
    (2.49
    )
    
    $
    0.53
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CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months Ended June 30,2008
    
    
    2007(Dollars in thousands)Cash Flows from Operating Activities:Net earnings (loss)
    
    $
    (14,717
    )
    
    $
    4,034Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:Net amortization of discounts and premiums on securities held to maturity
    
    
    215
    
    
    
    60Depreciation and amortization
    
    
    788
    
    
    
    692Provision for loan losses
    
    
    29,610
    
    
    
    2,139Compensation expense on stock options
    
    
    259
    
    
    
    207Excess tax benefit from share based payment arrangements
    
    
    
    
    
    
    (109
    )Net gains on sales of loans held for sale
    
    
    (152
    )
    
    
    (236
    )Proceeds from sales of loans held for sale
    
    
    13,325
    
    
    
    8,168Originations of loans held for sale
    
    
    (16,156
    )
    
    
    (6,504
    )(Increase) decrease in accrued interest receivable and other assets
    
    
    (8,044
    )
    
    
    443Decrease in accrued interest payable and other liabilities
    
    
    (1,438
    )
    
    
    (2,151
    )Net cash provided by operating activities
    
    
    3,690
    
    
    
    6,743Cash Flows from Investing Activities:Net (increase) decrease in:Time deposits with other financial institutions
    
    
    (764
    )
    
    
    1,349Loans
    
    
    (41,103
    )
    
    
    (129,731
    )Purchase of equipment and leasehold improvements
    
    
    (701
    )
    
    
    (1,041
    )Redemption of FHLB stock
    
    
    
    
    
    
    237Purchase of FHLB stock
    
    
    (100
    )
    
    
    (628
    )Purchase of securities held to maturity
    
    
    (34,882
    )
    
    
    (33,208
    )Proceeds from maturities of securities held to maturity
    
    
    23,097
    
    
    
    37,158Proceeds from sale of Other real estate owned
    
    
    714
    
    
    
    Net cash used in investing activities
    
    
    (53,739
    )
    
    
    (125,864
    )Cash Flows from Financing Activities:Net increase (decrease) in:Demand deposits
    
    
    3,336
    
    
    
    (3,387
    )Interest bearing demand deposits
    
    
    (1,215
    )
    
    
    4,986Savings and money market deposits
    
    
    (5,522
    )
    
    
    21,811Certificates of deposit
    
    
    47,594
    
    
    
    62,390Excess tax benefit from share based payment arrangements
    
    
    
    
    
    
    109(Payments on) proceeds from increase in FHLB Advances
    
    
    (10,000
    )
    
    
    20,000Increase in securities sold under agreements to repurchase
    
    
    35,544
    
    
    
    2,099Proceeds from stock options exercised
    
    
    
    
    
    
    79Dividends paid on preferred stock
    
    
    (656
    )
    
    
    (656
    )Net cash provided by financing activities
    
    
    69,081
    
    
    
    107,431Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    19,032
    
    
    
    (11,690
    )Cash and Cash Equivalents, Beginning of Period
    
    
    44,250
    
    
    
    47,542Cash and Cash Equivalents, End of Period
    
    $
    63,282
    
    
    $
    35,852Supplemental Disclosure of Noncash Investing and Financing Activities
Transfer from loans to loans held for sale
    
    $
    
    
    
    $
    45,150Supplemental Disclosure of Cash Flow InformationCash paid during the period for:Interest
    
    $
    17,342
    
    
    $
    17,103Income taxes
    
    
    370
    
    
    
    3,117
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Unaudited)
 For the Six Months Ended June 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
    
    
    15
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    79Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (656
    )
    
    
    (656
    )Tax benefit on non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Compensation expense on stock options
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,034
    
    
    
    4,034Balance, June 30, 2007
    
    
    6,167
    
    
    $
    6,679
    
    
    $
    818
    
    
    $
    30,543
    
    
    $
    38,040
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,016Dividends paid on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (656
    )
    
    
    (656
    )Compensation expense on stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    
    
    
    
    259Net (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,717
    )
    
    
    (14,717
    )Balance, June 30, 2008
    
    
    1,400
    
    
    $
    19,016
    
    
    
    6,178
    
    
    $
    6,722
    
    
    $
    1,369
    
    
    $
    14,578
    
    
    $
    41,685
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ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 June 30, 2008
(Unaudited)
 1. Nature of Business and Significant Accounting Policies
 Organization
     Use of Estimates
  Income Taxes
  Accounting for Uncertainty in Income Taxes
 7




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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
    
    
    10,000
    
    
    $
    11.03Outstanding at June 30, 2008
    
    
    485,500
    
    
    $
    11.24
    
    
    
    6.15
    years
    
    $
    74,440Vested or expected to vest at June
30, 2008
    
    
    469,063
    
    
    $
    11.15
    
    
    
    6.11
    
    
    $
    74,440Options exercisable at June 30, 2008
    
    
    253,600
    
    
    $
    8.91
    
    
    
    5.08
    
    
    $
    74,440
  8




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2. Allowance for Loan Losses
  CHANGES IN ALLOWANCES FOR LOAN LOSSES
 Six Months Ended June 30,2008
    
    
    2007(Dollars in thousands)Balance at beginning of period
    
    $
    15,284
    
    
    $
    9,195Charge-offs
    
    
    (26,989
    )
    
    
    (282
    )Recoveries
    
    
    809
    
    
    
    128Net charge-offs
    
    
    (26,180
    )
    
    
    (154
    )Provision
for loan losses
    
    
    29,610
    
    
    
    2,139Other adjustments
    
    
    (223
    )
    
    
    62Balance at end of period
    
    $
    18,491
    
    
    $
    11,242
 3. Earnings per Share
  Per ShareThree Months Ended June 30, 2008
    
    Net loss
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic and diluted loss per share:Net loss
    
    $
    (15,290
    )Cash dividends on preferred stock
    
    
    (328
    )Net loss attributable to common shareholders
    
    
    (15,618
    )
    
    
    6,177,961
    
    
    $
    (2.53
    )
 Per ShareThree Months Ended June 30, 2007
    
    Net Earnings
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic earnings per share:Net earnings
    
    $
    2,165Cash dividends on preferred stock
    
    
    (328
    )Net earnings available to common shareholders
    
    
    1,837
    
    
    
    6,166,538
    
    
    $
    0.30Preferred stock dividend
    
    
    328Effect of exercise of options and warrants
    
    
    
    
    
    
    68,923Effect 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
    
    $
    2,165
    
    
    
    7,635,607
    
    
    $
    0.28
  Per ShareSix Months Ended June 30, 2008
    
    Net Earnings
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic and diluted loss per share:Net loss
    
    $
    (14,717
    )Cash dividends on preferred stock
    
    
    (656
    )Net loss attributable to common shareholders
    
    
    (15,373
    )
    
    
    6,177,920
    
    
    $
    (2.49
    )
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Per ShareSix Months Ended June 30, 2007
    
    Net Earnings
    
    
    Shares
    
    
    Amount(Dollars in thousands)Basic earnings per share:Net earnings
    
    $
    4,034Cash dividends on preferred stock
    
    
    (656
    )Net earnings available to common shareholders
    
    
    3,378
    
    
    
    6,160,664
    
    
    $
    0.55Preferred stock dividend
    
    
    656Effect of exercise of options and warrants
    
    
    
    
    
    
    70,080Effect 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
    
    $
    4,034
    
    
    
    7,630,890
    
    
    $
    0.53
 4. Stock Options
     Stock OptionCompensationExpense(Dollars in thousands)Remainder of 2008
    
    $
    2452009
    
    
    4582010
    
    
    3402011
    
    
    1882012
    
    
    53Total
    
    $
    1,284
   Six Months Ended June 30,2008
    
    2007Risk-free rate
    
    
    3.56
    %
    
    
    4.81
    %Expected term
    
    6.5 years
    
    4 - 6.5 yearsExpected volatility
    
    
    39.30
    %
    
    
    36.04
    %
 10




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5. Operating Segments
 Disclosures about Segments of an Enterprise and Related Information,
    11




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##### Table of Contents



Regional
    
    
    Real EstateBanking
    
    
    IndustriesThree Months Ended June 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2008Interest income
    
    $
    8,939
    
    
    $
    4,212
    
    
    $
    787
    
    
    $
    2,296
    
    
    $
    16,234Credit for funds provided
    
    
    6,599
    
    
    
    329
    
    
    
    34
    
    
    
    (6,962
    )
    
    
    Total interest income
    
    
    15,538
    
    
    
    4,541
    
    
    
    821
    
    
    
    (4,666
    )
    
    
    16,234Interest expense
    
    
    2,927
    
    
    
    
    
    
    
    
    
    
    
    5,938
    
    
    
    8,865Charge for funds used
    
    
    6,072
    
    
    
    4,004
    
    
    
    377
    
    
    
    (10,453
    )
    
    
    Total interest expense
    
    
    8,999
    
    
    
    4,004
    
    
    
    377
    
    
    
    (4,515
    )
    
    
    8,865Net interest income
    
    
    6,539
    
    
    
    537
    
    
    
    444
    
    
    
    (151
    )
    
    
    7,369Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,800
    
    
    
    27,800Net interest income (loss) after provision for
loan losses
    
    
    6,539
    
    
    
    537
    
    
    
    444
    
    
    
    (27,951
    )
    
    
    (20,431
    )Non-interest income
    
    
    422
    
    
    
    277
    
    
    
    233
    
    
    
    190
    
    
    
    1,122Non-interest expense
    
    
    2,352
    
    
    
    827
    
    
    
    279
    
    
    
    3,215
    
    
    
    6,673Net contribution to earnings before tax expense
    
    $
    4,609
    
    
    $
    (13
    )
    
    $
    398
    
    
    $
    (30,976
    )
    
    $
    (25,982
    )
 Regional
    
    
    Real EstateBanking
    
    
    IndustriesThree Months Ended June 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2007Interest income
    
    $
    7,828
    
    
    $
    8,486
    
    
    $
    1,047
    
    
    $
    2,904
    
    
    $
    20,265Credit for funds provided
    
    
    6,746
    
    
    
    412
    
    
    
    41
    
    
    
    (7,199
    )
    
    
    Total interest income
    
    
    14,574
    
    
    
    8,898
    
    
    
    1,088
    
    
    
    (4,295
    )
    
    
    20,265Interest expense
    
    
    3,739
    
    
    
    
    
    
    
    1
    
    
    
    5,346
    
    
    
    9,086Charge for funds used
    
    
    4,781
    
    
    
    4,479
    
    
    
    426
    
    
    
    (9,686
    )
    
    
    Total interest expense
    
    
    8,520
    
    
    
    4,479
    
    
    
    427
    
    
    
    (4,340
    )
    
    
    9,086Net interest income
    
    
    6,054
    
    
    
    4,419
    
    
    
    661
    
    
    
    45
    
    
    
    11,179Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,074
    
    
    
    1,074Net interest income (loss) after provision for
loan losses
    
    
    6,054
    
    
    
    4,419
    
    
    
    661
    
    
    
    (1,029
    )
    
    
    10,105Non-interest income
    
    
    239
    
    
    
    113
    
    
    
    236
    
    
    
    186
    
    
    
    774Non-interest expense
    
    
    2,373
    
    
    
    652
    
    
    
    378
    
    
    
    3,883
    
    
    
    7,286Net contribution to earnings before tax expense
    
    $
    3,920
    
    
    $
    3,880
    
    
    $
    519
    
    
    $
    (4,726
    )
    
    $
    3,593
 Regional
    
    
    Real EstateBanking
    
    
    IndustriesSix Months Ended June 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2008Interest income
    
    $
    17,720
    
    
    $
    11,199
    
    
    $
    1,630
    
    
    $
    4,656
    
    
    $
    35,205Credit for funds provided
    
    
    13,700
    
    
    
    700
    
    
    
    67
    
    
    
    (14,467
    )
    
    
    Total interest income
    
    
    31,420
    
    
    
    11,899
    
    
    
    1,697
    
    
    
    (9,811
    )
    
    
    35,205Interest expense
    
    
    6,575
    
    
    
    
    
    
    
    
    
    
    
    11,866
    
    
    
    18,441Charge for funds used
    
    
    12,162
    
    
    
    8,236
    
    
    
    751
    
    
    
    (21,149
    )
    
    
    Total interest expense
    
    
    18,737
    
    
    
    8,236
    
    
    
    751
    
    
    
    (9,283
    )
    
    
    18,441Net interest income
    
    
    12,683
    
    
    
    3,663
    
    
    
    946
    
    
    
    (528
    )
    
    
    16,764Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,610
    
    
    
    29,610Net interest
income (loss) after provision for loan losses
    
    
    12,683
    
    
    
    3,663
    
    
    
    946
    
    
    
    (30,138
    )
    
    
    (12,846
    )Non-interest income
    
    
    715
    
    
    
    345
    
    
    
    297
    
    
    
    385
    
    
    
    1,742Non-interest expense
    
    
    5,016
    
    
    
    1,583
    
    
    
    624
    
    
    
    6,581
    
    
    
    13,804Net contribution to earnings before tax expense
    
    $
    8,382
    
    
    $
    2,425
    
    
    $
    619
    
    
    $
    (36,334
    )
    
    $
    (24,908
    )
 12




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##### Table of Contents



Regional
    
    
    Real EstateBanking
    
    
    IndustriesSix Months Ended June 30
    
    Centers
    
    
    Division
    
    
    SBA
    
    
    Other
    
    
    Total(Dollars in thousands)2007Interest income
    
    $
    14,788
    
    
    $
    17,712
    
    
    $
    2,055
    
    
    $
    4,885
    
    
    $
    39,440Credit for funds provided
    
    
    12,954
    
    
    
    840
    
    
    
    81
    
    
    
    (13,875
    )
    
    
    Total interest income
    
    
    27,742
    
    
    
    18,552
    
    
    
    2,136
    
    
    
    (8,990
    )
    
    
    39,440Interest expense
    
    
    7,263
    
    
    
    
    
    
    
    1
    
    
    
    10,215
    
    
    
    17,479Charge for funds used
    
    
    9,083
    
    
    
    8,904
    
    
    
    835
    
    
    
    (18,822
    )
    
    
    Total interest expense
    
    
    16,346
    
    
    
    8,904
    
    
    
    836
    
    
    
    (8,607
    )
    
    
    17,479Net interest income
    
    
    11,396
    
    
    
    9,648
    
    
    
    1,300
    
    
    
    (383
    )
    
    
    21,961Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,139
    
    
    
    2,139Net interest income after provision for loan losses
    
    
    11,396
    
    
    
    9,648
    
    
    
    1,300
    
    
    
    (2,522
    )
    
    
    19,822Non-interest income
    
    
    523
    
    
    
    157
    
    
    
    360
    
    
    
    355
    
    
    
    1,395Non-interest expense
    
    
    4,771
    
    
    
    1,240
    
    
    
    780
    
    
    
    7,525
    
    
    
    14,316Net contribution to earnings before tax expense
    
    $
    7,148
    
    
    $
    8,565
    
    
    $
    880
    
    
    $
    (9,692
    )
    
    $
    6,901Segment assets as of:June 30, 2008
    
    $
    534,183
    
    
    $
    328,537
    
    
    $
    34,035
    
    
    $
    223,033
    
    
    $
    1,119,788December 31, 2007
    
    $
    489,666
    
    
    $
    357,087
    
    
    $
    32,575
    
    
    $
    187,275
    
    
    $
    1,066,603
  6. 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
 Fair Value Measurements
 7. Fair Value Measurements
  13




---



##### Table of Contents



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.
    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
    
    $
    117,251
    
    
    
    
    
    
    $
    117,251
    
    
    
    
  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
    
    $
    137,929
    
    
    
    
    
    
    
    
    
    
    $
    137,929
 14




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##### Table of Contents



Loans held for sale
  8. Amendment of Preferred Stock
  15




---



##### Table of Contents



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




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##### Table of Contents



.
       17




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Return on average assets (1)
    
    
    (5.43
    )%
    
    
    0.89
    %
    
    
    (2.66
    )%
    
    
    0.87
    %Return on average shareholders equity (1)
    
    
    (107.24
    )%
    
    
    23.56
    %
    
    
    (51.39
    )%
    
    
    22.45
    %Average equity to average assets
    
    
    5.07
    %
    
    
    4.74
    %
    
    
    5.17
    %
    
    
    4.86
    %
 
 (1)
    
    Annualized 18




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##### Table of Contents



RESULTS OF OPERATIONS  Three months and six months ended June 30, 2008 and 2007
 Net Interest Income
  Three Months Ended June 30,
    
    Six Months Ended June 30,Percent
    
    
    
    
    
    
    
    
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(Unaudited)(Dollars in thousands)Interest income
    
    $
    16,234
    
    
    $
    20,265
    
    
    
    (19.9
    )%
    
    $
    35,205
    
    
    $
    39,440
    
    
    
    (10.7
    )%Interest expense
    
    
    8,865
    
    
    
    9,086
    
    
    
    (2.4
    )%
    
    
    18,441
    
    
    
    17,479
    
    
    
    5.5
    %Net interest income
before provision
for loan losses
    
    
    7,369
    
    
    
    11,179
    
    
    
    (34.1
    )%
    
    
    16,764
    
    
    
    21,961
    
    
    
    (23.7
    )%Net interest margin
    
    
    2.69
    %
    
    
    4.74
    %
    
    
    (43.2
    )%
    
    
    3.12
    %
    
    
    4.86
    %
    
    
    (35.8
    )%
     19




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##### Table of Contents



20




---



##### Table of Contents



ANALYSIS OF NET INTEREST INCOME
 Three Months ended June 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
    
    $
    43,564
    
    
    $
    216
    
    
    
    1.99
    %
    
    $
    57,510
    
    
    $
    759
    
    
    
    5.29
    %Time deposits
    
    
    2,310
    
    
    
    17
    
    
    
    2.89
    %
    
    
    1,972
    
    
    
    20
    
    
    
    4.07
    %Securities
    
    
    114,942
    
    
    
    1,547
    
    
    
    5.41
    %
    
    
    93,083
    
    
    
    1,246
    
    
    
    5.37
    %Loans (2)
    
    
    939,419
    
    
    
    14,454
    
    
    
    6.19
    %
    
    
    793,548
    
    
    
    18,240
    
    
    
    9.22
    %Total interest earning assets
    
    
    1,100,235
    
    
    
    16,234
    
    
    
    5.93
    %
    
    
    946,113
    
    
    
    20,265
    
    
    
    8.59
    %Non-interest earning assets
    
    
    31,870
    
    
    
    
    
    
    
    
    
    
    
    29,210Total assets
    
    $
    1,132,105
    
    
    
    
    
    
    
    
    
    
    $
    975,323Interest bearing liabilities:Interest bearing demand deposits
    
    $
    9,943
    
    
    
    30
    
    
    
    1.21
    %
    
    $
    16,452
    
    
    
    63
    
    
    
    1.54
    %Savings and money market
deposits
    
    
    204,601
    
    
    
    1,190
    
    
    
    2.34
    %
    
    
    200,330
    
    
    
    2,090
    
    
    
    4.18
    %Certificates of deposit
    
    
    549,942
    
    
    
    6,396
    
    
    
    4.68
    %
    
    
    424,501
    
    
    
    5,489
    
    
    
    5.19
    %FHLB advances:Short-term
    
    
    40,903
    
    
    
    361
    
    
    
    3.55
    %
    
    
    
    
    
    
    
    
    
    
    Long-term
    
    
    30,000
    
    
    
    213
    
    
    
    2.85
    %
    
    
    50,566
    
    
    
    679
    
    
    
    5.39
    %Securities sold under
repurchase agreements
    
    
    63,243
    
    
    
    336
    
    
    
    2.13
    %
    
    
    22,386
    
    
    
    253
    
    
    
    4.53
    %Junior subordinated debentures
    
    
    27,837
    
    
    
    339
    
    
    
    4.90
    %
    
    
    27,837
    
    
    
    512
    
    
    
    7.38
    %Total interest bearing liabilities
    
    
    926,469
    
    
    
    8,865
    
    
    
    3.85
    %
    
    
    742,072
    
    
    
    9,086
    
    
    
    4.91
    %Non-interest bearing liabilities
    
    
    148,290
    
    
    
    
    
    
    
    
    
    
    
    177,379Total liabilities
    
    
    1,074,759
    
    
    
    
    
    
    
    
    
    
    
    919,451Redeemable preferred stock and
shareholders equity
    
    
    57,346
    
    
    
    
    
    
    
    
    
    
    
    55,872Total liabilities and
shareholders equity
    
    $
    1,132,105
    
    
    
    
    
    
    
    
    
    
    $
    975,323Net interest income
    
    
    
    
    
    $
    7,369
    
    
    
    
    
    
    
    
    
    
    $
    11,179Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.09
    %
    
    
    
    
    
    
    
    
    
    
    3.68
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.69
    %
    
    
    
    
    
    
    
    
    
    
    4.74
    %
 
 (1)
    
    Interest income on loans includes loan fees of $0.5 million in 2008 and $1.2 million
in 2007.(2)
    
    Loans include nonaccrual loans with an average balance of $99.3 million in 2008 and
$23.0 million in 2007.(3)
    
    Annualized 21




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##### Table of Contents



Six Months ended June 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
    
    $
    41,495
    
    
    $
    534
    
    
    
    2.59
    %
    
    $
    45,198
    
    
    $
    1,167
    
    
    
    5.21
    %Time deposits
    
    
    2,099
    
    
    
    33
    
    
    
    3.14
    %
    
    
    2,019
    
    
    
    39
    
    
    
    3.90
    %Securities
    
    
    112,261
    
    
    
    2,992
    
    
    
    5.36
    %
    
    
    94,886
    
    
    
    2,489
    
    
    
    5.29
    %Loans (2)
    
    
    924,364
    
    
    
    31,646
    
    
    
    6.88
    %
    
    
    768,416
    
    
    
    35,745
    
    
    
    9.38
    %Total interest earning assets
    
    
    1,080,219
    
    
    
    35,205
    
    
    
    6.55
    %
    
    
    910,519
    
    
    
    39,440
    
    
    
    8.73
    %Non-interest earning assets
    
    
    33,240
    
    
    
    
    
    
    
    
    
    
    
    29,828Total assets
    
    $
    1,113,459
    
    
    
    
    
    
    
    
    
    
    $
    940,347Interest bearing liabilities:Interest bearing demand deposits
    
    $
    10,361
    
    
    
    74
    
    
    
    1.43
    %
    
    $
    15,276
    
    
    
    117
    
    
    
    1.54
    %Savings and money market
deposits
    
    
    210,780
    
    
    
    2,781
    
    
    
    2.65
    %
    
    
    198,162
    
    
    
    4,141
    
    
    
    4.21
    %Certificates of deposit
    
    
    532,168
    
    
    
    12,786
    
    
    
    4.83
    %
    
    
    406,020
    
    
    
    10,371
    
    
    
    5.15
    %FHLB advances:Short-term
    
    
    40,728
    
    
    
    778
    
    
    
    3.84
    %
    
    
    
    
    
    
    
    
    
    
    Long-term
    
    
    30,000
    
    
    
    484
    
    
    
    3.24
    %
    
    
    50,292
    
    
    
    1,357
    
    
    
    5.44
    %Securities sold under
repurchase agreements
    
    
    54,402
    
    
    
    746
    
    
    
    2.76
    %
    
    
    21,320
    
    
    
    473
    
    
    
    4.47
    %Junior subordinated debentures
    
    
    27,837
    
    
    
    792
    
    
    
    5.72
    %
    
    
    27,837
    
    
    
    1,020
    
    
    
    7.39
    %Total interest bearing liabilities
    
    
    906,276
    
    
    
    18,441
    
    
    
    4.09
    %
    
    
    718,907
    
    
    
    17,479
    
    
    
    4.90
    %Non-interest bearing liabilities
    
    
    149,590
    
    
    
    
    
    
    
    
    
    
    
    166,192Total liabilities
    
    
    1,055,866
    
    
    
    
    
    
    
    
    
    
    
    885,099Redeemable preferred stock and
shareholders equity
    
    
    57,593
    
    
    
    
    
    
    
    
    
    
    
    55,248Total liabilities and
shareholders equity
    
    $
    1,113,459
    
    
    
    
    
    
    
    
    
    
    $
    940,347Net interest income
    
    
    
    
    
    $
    16,764
    
    
    
    
    
    
    
    
    
    
    $
    21,961Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.46
    %
    
    
    
    
    
    
    
    
    
    
    3.83
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    4.86
    %
 
 (1)
    
    Interest income on loans includes loan fees of $1.1 million in 2008 and $2.5 million
in 2007.(2)
    
    Loans include nonaccrual loans with an average balance of $116.7 million in 2008 and
$20.8 million in 2007.(3)
    
    Annualized  ANALYSIS OF CHANGE IN NET INTEREST INCOME
 Three Months Ended June 30, 2008
    
    
    Six Months Ended June 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
    
    $
    (152
    )
    
    $
    (391
    )
    
    $
    (543
    )
    
    $
    (89
    )
    
    $
    (544
    )
    
    $
    (633
    )Time deposits
    
    
    3
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    2
    
    
    
    (8
    )
    
    
    (6
    )Securities
    
    
    294
    
    
    
    7
    
    
    
    301
    
    
    
    462
    
    
    
    41
    
    
    
    503Loans
    
    
    2,957
    
    
    
    (6,743
    )
    
    
    (3,786
    )
    
    
    6,422
    
    
    
    (10,521
    )
    
    
    (4,099
    )Total interest earning assets
    
    
    3,102
    
    
    
    (7,133
    )
    
    
    (4,031
    )
    
    
    6,797
    
    
    
    (11,032
    )
    
    
    (4,235
    )Interest expense:Interest bearing demand
    
    
    (21
    )
    
    
    (12
    )
    
    
    (33
    )
    
    
    (35
    )
    
    
    (8
    )
    
    
    (43
    )Savings and money market
    
    
    44
    
    
    
    (944
    )
    
    
    (900
    )
    
    
    249
    
    
    
    (1,609
    )
    
    
    (1,360
    )Certificates of deposit
    
    
    1,500
    
    
    
    (593
    )
    
    
    907
    
    
    
    3,061
    
    
    
    (646
    )
    
    
    2,415FHLB advances:Short-term
    
    
    361
    
    
    
    
    
    
    
    361
    
    
    
    778
    
    
    
    
    
    
    
    778Long-term
    
    
    (216
    )
    
    
    (250
    )
    
    
    (466
    )
    
    
    (437
    )
    
    
    (436
    )
    
    
    (873
    )Securities sold under agreements to repurchase
    
    
    272
    
    
    
    (189
    )
    
    
    83
    
    
    
    509
    
    
    
    (236
    )
    
    
    273Junior subordinated debentures
    
    
    
    
    
    
    (173
    )
    
    
    (173
    )
    
    
    
    
    
    
    (228
    )
    
    
    (228
    )Total interest bearing liabilities
    
    
    1,940
    
    
    
    (2,161
    )
    
    
    221
    
    
    
    4,125
    
    
    
    (3,163
    )
    
    
    962Net interest income
    
    $
    1,164
    
    
    $
    (4,879
    )
    
    $
    (3,715
    )
    
    $
    2,672
    
    
    $
    (7,869
    )
    
    $
    (5,197
    )
 22




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##### Table of Contents



Provision for Loan Losses
    Non-Interest Income
  NON-INTEREST INCOME
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(Dollars in thousands)Service charges
    
    $
    417
    
    
    $
    281
    
    
    
    48.4
    %
    
    $
    716
    
    
    $
    567
    
    
    
    26.3
    %Gain on sale of loans, net
    
    
    106
    
    
    
    184
    
    
    
    (42.4
    )%
    
    
    152
    
    
    
    236
    
    
    
    (35.6
    )%Loan broker fee income
    
    
    126
    
    
    
    47
    
    
    
    168.1
    %
    
    
    159
    
    
    
    129
    
    
    
    23.3
    %Other
    
    
    473
    
    
    
    262
    
    
    
    80.5
    %
    
    
    715
    
    
    
    463
    
    
    
    54.4
    %Total
    
    $
    1,122
    
    
    $
    774
    
    
    
    45.0
    %
    
    $
    1,742
    
    
    $
    1,395
    
    
    
    24.9
    %
 23




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##### Table of Contents



Non-Interest Expense
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,Percent
    
    
    
    
    
    
    
    
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(Dollars in thousands)Salaries and related benefits
    
    $
    3,546
    
    
    $
    4,239
    
    
    
    (16.3
    )%
    
    $
    7,702
    
    
    $
    8,412
    
    
    
    (8.4
    )%Occupancy and equipment
    
    
    1,055
    
    
    
    935
    
    
    
    12.8
    %
    
    
    2,136
    
    
    
    1,880
    
    
    
    13.6
    %Professional fees
    
    
    476
    
    
    
    419
    
    
    
    13.6
    %
    
    
    840
    
    
    
    707
    
    
    
    18.8
    %Data processing
    
    
    249
    
    
    
    238
    
    
    
    4.6
    %
    
    
    475
    
    
    
    431
    
    
    
    10.2
    %Other operating expense
    
    
    1,348
    
    
    
    1,272
    
    
    
    6.0
    %
    
    
    2,651
    
    
    
    2,886
    
    
    
    (8.1
    )%Total
    
    $
    6,673
    
    
    $
    7,286
    
    
    
    (8.4
    )%
    
    $
    13,804
    
    
    $
    14,316
    
    
    
    (3.6
    )%
     24




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##### Table of Contents



FINANCIAL CONDITION
 Regulatory Capital
  REGULATORY CAPITAL
June 30, 2008
 To Be Adequately
    
    
    To Be WellActual
    
    
    Capitalized
    
    
    CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)BancsharesTotal Capital (to
risk-weighted
assets)
    
    $
    80,543
    
    
    
    8.45
    %
    
    $
    76,283
    
    
    
    >=8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to
risk-weighted
assets)
    
    $
    55,391
    
    
    
    5.81
    %
    
    $
    38,141
    
    
    
    >=4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to
average assets)
    
    $
    55,391
    
    
    
    4.90
    %
    
    $
    45,246
    
    
    
    >=4.0
    %
    
    
    N/A
    
    
    
    N/ABankTotal Capital (to
risk-weighted
assets)
    
    $
    80,252
    
    
    
    8.43
    %
    
    $
    76,180
    
    
    
    >=8.0
    %
    
    $
    95,225
    
    
    
    >=10.0
    %Tier 1 Capital (to
risk-weighted
assets)
    
    $
    68,268
    
    
    
    7.17
    %
    
    $
    38,090
    
    
    
    >=4.0
    %
    
    $
    57,135
    
    
    
    >=6.0
    %Tier 1 Capital (to
average assets)
    
    $
    68,268
    
    
    
    6.04
    %
    
    $
    45,246
    
    
    
    >=4.0
    %
    
    $
    56,557
    
    
    
    >=5.0
    %
   Liquidity and Cash Flow
   25




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##### Table of Contents



Cash Flow from Operating Activities
  Cash Flow from Investing Activities
  Cash Flows from Financing Activities
  Rate Sensitivity
   26




---



##### Table of Contents



RATE SENSITIVITY
June 30, 2008
(Dollars in thousands)
 Over Three
    
    
    Over OneThree
    
    
    Through
    
    
    Year
    
    
    OverMonths
    
    
    Twelve
    
    
    Through
    
    
    FiveOr Less
    
    
    Months
    
    
    Five Years
    
    
    Years
    
    
    TotalAssetsFederal funds sold
    
    $
    39,460
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    39,460Time deposits with other financial
institutions
    
    
    717
    
    
    
    1,100
    
    
    
    198
    
    
    
    
    
    
    
    2,015Securities held to maturity
    
    
    
    
    
    
    4,004
    
    
    
    995
    
    
    
    112,517
    
    
    
    117,516Loans, gross
    
    
    392,946
    
    
    
    82,615
    
    
    
    298,471
    
    
    
    145,215
    
    
    
    919,247Total rate-sensitive assets
    
    $
    433,123
    
    
    $
    87,719
    
    
    $
    299,664
    
    
    $
    257,732
    
    
    $
    1,078,238Liabilities:Interest bearing demand deposits
    
    $
    8,619
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,619Savings and money market
    
    
    191,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,554Certificates of deposit
    
    
    87,406
    
    
    
    262,926
    
    
    
    203,442
    
    
    
    
    
    
    
    553,774FHLB advances
    
    
    50,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    70,000Securities sold under agreements to
repurchase
    
    
    70,908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,908Junior subordinated debentures
    
    
    27,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,837Total rate sensitive liabilities
    
    $
    436,324
    
    
    $
    272,926
    
    
    $
    213,442
    
    
    $
    
    
    
    $
    922,692Interval Gaps:Interest rate sensitivity gap
    
    $
    (3,201
    )
    
    
    ($185,207
    )
    
    $
    86,222
    
    
    $
    257,732
    
    
    $
    155,546Rate sensitive assets to rate sensitive
liabilities
    
    
    99.3
    %
    
    
    32.1
    %
    
    
    140.4
    %
    
    
    N/A
    
    
    
    116.9
    %Cumulative Gaps:Cumulative interest rate sensitivity gap
    
    $
    (3,201
    )
    
    
    ($188,408
    )
    
    $
    (102,186
    )
    
    $
    155,546
    
    
    $
    155,546Rate sensitive assets to rate sensitive
liabilities
    
    
    99.3
    %
    
    
    73.4
    %
    
    
    88.9
    %
    
    
    116.9
    %
    
    
    116.9
    %% of rate sensitive assets in period
    
    
    40.2
    %
    
    
    48.3
    %
    
    
    76.1
    %
    
    
    100.0
    %
    
    
    N/A
 Investments in Time Deposits and Securities
  TIME DEPOSIT INVESTMENTS
 June 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageBook Value
    
    
    Yield
    
    
    Book Value
    
    
    Yield(Dollars in thousands)Time deposits maturing:Within one year
    
    $
    1,817
    
    
    
    3.06
    %
    
    
    1,053
    
    
    
    3.78
    %After one year but within five years
    
    
    198
    
    
    
    4.00
    %
    
    
    198
    
    
    
    4.00
    %Total time deposits
    
    $
    2,015
    
    
    
    3.15
    %
    
    $
    1,251
    
    
    
    3.82
    %
 27




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##### Table of Contents



INVESTMENT SECURITIES
 June 30, 2008
    
    
    December 31, 2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageBook Value
    
    
    Yield
    
    
    Book Value
    
    
    Yield(Dollars in thousands)Investment securities maturing:Within one year
    
    $
    4,004
    
    
    
    5.29
    %
    
    $
    7,994
    
    
    
    5.20
    %After one year but within five years
    
    
    995
    
    
    
    4.13
    %
    
    
    8,492
    
    
    
    5.02
    %Collateralized mortgage obligations
and mortgage-backed securities
    
    
    112,517
    
    
    
    5.60
    %
    
    
    89,460
    
    
    
    5.44
    %Total investment securities
    
    $
    117,516
    
    
    
    5.57
    %
    
    $
    105,946
    
    
    
    5.38
    %
    FAIR VALUE OF INVESTMENT SECURITIES
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Estimated FairAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)June 30, 2008U.S. Agency securities
    
    $
    995
    
    
    $
    1
    
    
    $
    
    
    
    $
    996Corporate bonds
    
    
    4,004
    
    
    
    
    
    
    
    117
    
    
    
    3,887Collateralized
mortgage obligations
and mortgage-backed
securities:
    
    
    112,517
    
    
    
    885
    
    
    
    1,034
    
    
    
    112,368$
    117,516
    
    
    $
    886
    
    
    $
    1,151
    
    
    $
    117,251
 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
 28




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##### Table of Contents



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)Corporate bonds
    
    $
    
    
    
    $
    
    
    
    $
    2,885
    
    
    $
    117
    
    
    $
    2,885
    
    
    $
    117Collateralized
mortgage
obligations and
mortgage-backed
securities
    
    
    36,955
    
    
    
    440
    
    
    
    18,023
    
    
    
    594
    
    
    
    54,978
    
    
    
    1,034$
    36,955
    
    
    $
    440
    
    
    $
    20,908
    
    
    $
    711
    
    
    $
    57,863
    
    
    $
    1,151
    Loans
  29




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##### Table of Contents



LOAN PORTFOLIO COMPOSITION
 June 30, 2008
    
    
    December 31, 2007Amount
    
    
    Percent of
    
    
    Amount
    
    
    Percent ofOutstanding
    
    
    Total
    
    
    Outstanding
    
    
    Total(Dollars in thousands)Commercial loans
    
    $
    254,318
    
    
    
    27.6
    %
    
    $
    262,374
    
    
    
    29.0
    %Construction loans
    
    
    208,435
    
    
    
    22.7
    
    
    
    272,279
    
    
    
    30.1Real estate loans
    
    
    440,191
    
    
    
    47.9
    
    
    
    358,907
    
    
    
    39.7Other loans
    
    
    16,303
    
    
    
    1.8
    
    
    
    11,075
    
    
    
    1.2919,247
    
    
    
    100.0
    %
    
    
    904,635
    
    
    
    100.0
    %Less  Deferred loan fees, net
    
    
    (1,611
    )
    
    
    
    
    
    
    (1,699
    )Less  Allowance for loan losses
    
    
    (18,491
    )
    
    
    
    
    
    
    (15,284
    )Net loans
    
    $
    899,145
    
    
    
    
    
    
    $
    887,652
 .
   LOAN MATURITIES
 June 30, 2008After One YearOne Year or
    
    
    Through FiveLess
    
    
    Years
    
    
    After Five Years
    
    
    Total(Dollars in thousands)Commercial loans
    
    $
    122,471
    
    
    $
    112,769
    
    
    $
    19,078
    
    
    $
    254,318Construction loans
    
    
    185,926
    
    
    
    21,178
    
    
    
    1,331
    
    
    
    208,435Real estate loans
    
    
    55,397
    
    
    
    169,132
    
    
    
    215,662
    
    
    
    440,191Other loans
    
    
    2,221
    
    
    
    6,887
    
    
    
    7,195
    
    
    
    16,303$
    366,015
    
    
    $
    309,966
    
    
    $
    243,266
    
    
    $
    919,247
 NON-PERFORMING ASSETS
   June 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Non-accrual loans
    
    $
    88,768
    
    
    $
    28,774Accruing loans past due 90 days or more
    
    
    350
    
    
    
    Troubled debt restructuring
    
    
    4,296
    
    
    
    Other real estate owned
    
    
    
    
    
    
    1,100Balance at end of period
    
    $
    93,414
    
    
    $
    29,874
 30




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31




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##### Table of Contents



IMPAIRED LOANS
  As of and for
    
    
    As of and forthe six
    
    
    the twelvemonths ended
    
    
    months endedJune 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Impaired loans with a valuation allowance
    
    $
    2,687
    
    
    $
    16,863Impaired loans without a valuation allowance
    
    
    135,241
    
    
    
    28,124Total Impaired loans
    
    $
    137,929
    
    
    $
    44,987Valuation allowance related to impaired loans
    
    $
    1,182
    
    
    $
    2,700Average recorded investment in impaired loans
    
    $
    183,360
    
    
    $
    54,238Cash collections applied to reduce principal balance
    
    $
    21,572
    
    
    $
    12,137Interest income recognized on cash collections
    
    $
    665
    
    
    $
    3,485
 Changes in Allowance for Loan Losses
  Off-Balance Sheet Credit Commitments and Contingent Obligations
   Deposits
  32




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##### Table of Contents



SOURCE OF DEPOSITS
 June 30, 2008
    
    
    December 31, 2007Percent of
    
    
    
    
    
    
    Percent ofAmount
    
    
    Total
    
    
    Amount
    
    
    Total(Dollars in thousands)Regional Bank Centers
    
    $
    492,535
    
    
    
    54.5
    %
    
    $
    494,184
    
    
    
    57.4
    %Money desk
    
    
    112,508
    
    
    
    12.4
    
    
    
    101,060
    
    
    
    11.7Brokered
    
    
    258,812
    
    
    
    28.6
    
    
    
    197,159
    
    
    
    22.9Internet
    
    
    40,670
    
    
    
    4.5
    
    
    
    67,929
    
    
    
    8.0Total
    
    $
    904,525
    
    
    
    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
    
    $
    85,276Over three and through twelve months
    
    
    249,607Over twelve months
    
    
    186,226Total
    
    $
    521,109
 
 (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 5.31%
    
    August 200810,000
    
    Fixed at 4.54%
    
    October 200810,000
    
    Prime minus 2.87%
    
    December 200810,000
    
    Prime minus 2.83%
    
    January 200910,000
    
    Prime minus 2.80%
    
    December 200910,000
    
    Fixed at 3.86%
    
    December 200910,000
    
    Prime minus 2.74%
    
    January 2010$70,000
 Junior Subordinated Debentures
  34




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##### Table of Contents



Securities Sold Under Agreements to Repurchase.
     
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  35




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36




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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
  (1)
    
    Election of Directors. Set forth below is the name of each Director that was
nominated and elected at the Annual Meeting and the respective numbers of votes cast for
their election and the respective number of votes withheld. As the election was
uncontested, there were no broker non-votes.
 Name
    
    Votes For
    
    WithheldMichael L. Abrams
    
    
    5,644,011
    
    
    
    13,866Robert H. Bothner
    
    
    5,643,811
    
    
    
    14,066Lyn S. Caron
    
    
    5,640,811
    
    
    
    17,066Willie D. Davis
    
    
    5,641,811
    
    
    
    16,066Daniel T. Jackson
    
    
    5,643,011
    
    
    
    14,866Curtis S. Reis
    
    
    5,644,011
    
    
    
    13,866D. Gregory Scott
    
    
    5,644,011
    
    
    
    13,866Andrew A. Talley
    
    
    5,644,011
    
    
    
    13,866Robert H. Thompson
    
    
    5,644,011
    
    
    
    13,866
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(2)
    
    Ratification of Independent Public Accountants. The shareholders ratified the
selection of McGladrey & Pullen, LLP as the Companys independent public accountants for
fiscal 2008 by the following vote
 Votes For
    
    Votes Against
    
    Abstain5,649,377
    
    
    1,200
    
    
    
    7,300
 (3)
    
    Amendment of Series A Certificate of Determination.The shareholders ratified
the amendment of Series A Certificate of Determination
  Votes For
    
    Votes Against
    
    Abstain5,606,077
    
    
    12,100
    
    
    
    39,700
  Votes For
    
    
    
    
    
    Votes Against
    
    Abstain485,200
    
    
    (66.19
    %)
    
    
    10,000
    
    
    
    12,500
 (4)
    
    Amendment of Series B Certificate of Determination.The shareholders ratified
the amendment of Series B Certificate of Determination
  Votes For
    
    Votes Against
    
    Abstain5,606,077
    
    
    15,300
    
    
    
    38,900
  Votes For
    
    
    
    
    
    Votes Against
    
    Abstain360,704
    
    
    (54.07
    %)
    
    
    3,000
    
    
    
    10,000
 
 ITEM 5. OTHER INFORMATION
  38




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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 August 14, 2008 pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate by Daniel L. Erickson, Executive Vice President and Chief
Financial Officer of the Company dated August 14, 2008 pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002.
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SIGNATURES
  DATE: August 14, 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 August 14, 2008 pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate by Daniel L. Erickson, Executive Vice President and Chief
Financial Officer of the Company dated August 14, 2008 pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002.