##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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(Mark One)

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



For the quarterly period ended June 30, 2004



OR



| ̈ | 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



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ALLIANCE BANCSHARES CALIFORNIA

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 91-2124567                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                             |  |           
|-------------------------------------------- |  | ----------
|100 Corporate Pointe Culver City, California |  | 90230     
|(Address of principal executive offices)     |  | (Zip Code)



(310) 410-9281

(Registrants telephone number, including area code)





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



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



APPLICABLE ONLY TO CORPORATE ISSUERS:



State the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



4,622,679 shares of Common Stock as of July 31, 2004



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##### Table of Contents

ALLIANCE BANCSHARES CALIFORNIA



QUARTERLY REPORT ON FORM 10-QSB

FOR

THE QUARTER ENDED JUNE 30, 2004



TABLE OF CONTENTS



|           |  |                       |  |                                                                                                 |  |         
|---------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------
|           |  |                       |  |                                                                                                 |  | Page No.
|           |  |                      
|Part I.    |  | Financial Information |  |                                                                                                
|           |  |                       | 
|           |  | Item 1.               |  | Financial Statements                                                                            |  |         
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Financial Condition at June 30, 2004 and December 31, 2003           |  | 3       
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 |  | 4       
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003           |  | 5       
|           |  |                       | 
|           |  |                       |  | Notes to Consolidated Financial Statements                                                      |  | 6       
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis or Plan of Operation                                       |  | 10      
|           |  |                       | 
|           |  | Item 3.               |  | Controls and Procedures                                                                         |  | 25      
|           |  |                      
|Part II.   |  | Other Information     |  |                                                                                                
|           |  |                       | 
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                             |  | 26      
|           |  |                       | 
|           |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                |  | 26      
|           |  |                      
|Signatures |  |                       |  | 27                                                                                             



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



|                                                                                                              |  |               |             |                  |   |            
|------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ---------------- | - | -----------
|                                                                                                              |  | June 30, 2004 |             | December 31,2003
|                                                                                                              |  | (Unaudited)   |             |                 
|Assets                                                                                                        |  |               |             |                  |   |            
|Cash and due from banks                                                                                       |  | $             | 15,620,500  |                  | $ | 10,674,000 
|Federal funds sold                                                                                            |  |               | 27,900,000  |                  |   | 25,165,000 
|                                                                                                              |  |               |             |                  |   |            
|Total cash and cash equivalents                                                                               |  |               | 43,520,500  |                  |   | 35,839,000 
|                                                                                                              |  |               |             |                  |   |            
|Time deposits with other financial institutions                                                               |  |               | 5,149,700   |                  |   | 4,008,700  
|Securities held to maturity, fair market value $60,521,200 at June 30, 2004; $36,547,000 at December 31, 2003 |  |               | 60,722,500  |                  |   | 36,314,400 
|Loans held for sale                                                                                           |  |               | 5,257,600   |                  |   | 6,097,000  
|Loans, net of the allowance for loan losses of $3,072,800 at June 30, 2004; $3,030,700 at December 31, 2003   |  |               | 223,933,400 |                  |   | 194,447,800
|Equipment and leasehold improvements, net                                                                     |  |               | 1,626,900   |                  |   | 1,149,100  
|Accrued interest receivable and other assets                                                                  |  |               | 5,597,700   |                  |   | 5,095,200  
|                                                                                                              |  |               |             |                  |   |            
|Total assets                                                                                                  |  | $             | 345,808,300 |                  | $ | 282,951,200
|                                                                                                              |  |               |             |                  |   |            
|Liabilities and Shareholders Equity                                                                          |  |               |             |                  |   |            
|                                                                                                              |  |              
|Deposits:                                                                                                     |  |               |             |                  |   |            
|Noninterest bearing demand                                                                                    |  | $             | 93,510,500  |                  | $ | 64,138,600 
|Interest bearing:                                                                                             |  |               |             |                  |   |            
|Demand                                                                                                        |  |               | 4,016,400   |                  |   | 4,397,400  
|Savings and money market                                                                                      |  |               | 125,094,300 |                  |   | 89,463,300 
|Certificates of deposit                                                                                       |  |               | 55,240,200  |                  |   | 66,714,000 
|                                                                                                              |  |               |             |                  |   |            
|Total deposits                                                                                                |  |               | 277,861,400 |                  |   | 224,713,300
|                                                                                                              |  |               |             |                  |   |            
|Accrued interest payable and other liabilities                                                                |  |               | 2,542,100   |                  |   | 1,921,500  
|FHLB advances                                                                                                 |  |               | 32,000,000  |                  |   | 32,000,000 
|Subordinated debentures                                                                                       |  |               | 2,450,000   |                  |   | 2,500,000  
|Guaranteed preferred beneficial interest in the Companys subordinated debentures                             |  |               | 7,217,000   |                  |   | 7,217,000  
|                                                                                                              |  |               |             |                  |   |            
|Total liabilities                                                                                             |  |               | 322,070,500 |                  |   | 268,351,800
|                                                                                                              |  |               |             |                  |   |            
|Commitments and contingencies                                                                                 |  |               |            |                  |   |           
|Shareholders equity:                                                                                         |  |               |             |                  |   |            
|Serial preferred stock, no par value:                                                                         |  |               |             |                  |   |            
|Authorized  20,000,000 shares                                                                                |  |               |             |                  |   |            
|7% Series A Non-Cumulative Convertible Non-Voting:                                                            |  |               |             |                  |   |            
|Authorized and outstanding  733,050 shares at June 30, 2004; None at December 31, 2003                       |  |               | 7,697,000   |                  |   |           
|Common stock, no par value:                                                                                   |  |               |             |                  |   |            
|Authorized - 20,000,000 shares                                                                                |  |               |             |                  |   |            
|Outstanding  4,622,679 shares at June 30, 2004 and 4,567,679 shares at December 31, 2003                     |  |               | 3,615,800   |                  |   | 3,525,800  
|Undivided profits                                                                                             |  |               | 12,425,000  |                  |   | 11,073,600 
|                                                                                                              |  |               |             |                  |   |            
|Total shareholders equity                                                                                    |  |               | 23,737,800  |                  |   | 14,599,400 
|                                                                                                              |  |               |             |                  |   |            
|Total liabilities and shareholders equity                                                                    |  | $             | 345,808,300 |                  | $ | 282,951,200
|                                                                                                              |  |               |             |                  |   |            



The accompanying notes are an integral
part of these statements.



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##### Table of Contents

Part I. Item 1. (continued)



CONSOLIDATED STATEMENTS OF OPERATIONS



(Unaudited)



|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|----------------------------------------------------------- |  | -------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                            |  | Three Months EndedJune 30, |           | Six Months Ended June 30,
|                                                            |  | 2004                       |           | 2003                      |   | 2004      |  | 2003
|Interest income:                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Interest and fees on loans                                  |  | $                          | 3,844,800 |                           | $ | 3,078,800 |  | $    | 7,397,800 |  | $ | 6,070,500
|Interest on time deposits with other financial institutions |  |                            | 18,300    |                           |   | 37,400    |  |      | 37,200    |  |   | 72,900   
|Interest on securities held to maturity                     |  |                            | 386,900   |                           |   | 254,200   |  |      | 719,800   |  |   | 585,400  
|Interest on federal funds sold                              |  |                            | 57,600    |                           |   | 51,400    |  |      | 135,300   |  |   | 111,300  
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Total interest income                                       |  |                            | 4,307,600 |                           |   | 3,421,800 |  |      | 8,290,100 |  |   | 6,840,100
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Interest expense:                                           |  |                            |           |                           |   |           |  |      |           |  |   |          
|Interest on deposits                                        |  |                            | 750,500   |                           |   | 837,200   |  |      | 1,482,800 |  |   | 1,727,200
|Interest on FHLB advances                                   |  |                            | 224,400   |                           |   | 221,300   |  |      | 448,900   |  |   | 381,300  
|Interest on subordinated debentures                         |  |                            | 51,000    |                           |   | 51,000    |  |      | 102,000   |  |   | 101,500  
|Interest on trust preferred securities                      |  |                            | 82,000    |                           |   | 84,200    |  |      | 164,800   |  |   | 171,500  
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Total interest expense                                      |  |                            | 1,107,900 |                           |   | 1,193,700 |  |      | 2,198,500 |  |   | 2,381,500
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Net interest income                                         |  |                            | 3,199,700 |                           |   | 2,228,100 |  |      | 6,091,600 |  |   | 4,458,600
|Provision for loan losses                                   |  |                            |          |                           |   | 350,000   |  |      | 450,000   |  |   | 775,000  
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Net interest income after provision for loan losses         |  |                            | 3,199,700 |                           |   | 1,878,100 |  |      | 5,641,600 |  |   | 3,683,600
|Non-interest income:                                        |  |                            |           |                           |   |           |  |      |           |  |   |          
|Service charges and fees                                    |  |                            | 245,700   |                           |   | 201,200   |  |      | 529,100   |  |   | 394,900  
|Net gains on sales of loans held for sale                   |  |                            | 100,900   |                           |   | 226,000   |  |      | 252,900   |  |   | 491,300  
|Broker fees on loans                                        |  |                            | 135,800   |                           |   | 266,800   |  |      | 409,600   |  |   | 506,000  
|Other non-interest income                                   |  |                            | 67,200    |                           |   | 17,700    |  |      | 290,400   |  |   | 49,900   
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Total non-interest income                                   |  |                            | 549,600   |                           |   | 711,700   |  |      | 1,482,000 |  |   | 1,442,100
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Non-interest expenses:                                      |  |                            |           |                           |   |           |  |      |           |  |   |          
|Salaries and related benefits                               |  |                            | 1,295,500 |                           |   | 673,900   |  |      | 2,548,000 |  |   | 1,372,500
|Occupancy and equipment expenses                            |  |                            | 335,800   |                           |   | 278,700   |  |      | 648,900   |  |   | 481,200  
|Professional fees                                           |  |                            | 169,400   |                           |   | 123,100   |  |      | 278,100   |  |   | 216,300  
|Data processing                                             |  |                            | 148,300   |                           |   | 111,800   |  |      | 286,600   |  |   | 217,900  
|Other operating expenses                                    |  |                            | 561,300   |                           |   | 512,100   |  |      | 1,112,600 |  |   | 1,038,100
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Total non-interest expense                                  |  |                            | 2,510,300 |                           |   | 1,699,600 |  |      | 4,874,200 |  |   | 3,326,000
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Earnings before income tax expense                          |  |                            | 1,239,000 |                           |   | 890,200   |  |      | 2,249,400 |  |   | 1,799,700
|Income tax expense                                          |  |                            | 493,000   |                           |   | 360,700   |  |      | 898,000   |  |   | 730,800  
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Net earnings                                                |  | $                          | 746,000   |                           | $ | 529,500   |  | $    | 1,351,400 |  | $ | 1,068,900
|                                                            |  |                            |           |                           |   |           |  |      |           |  |   |          
|Earnings per common share:                                  |  |                            |           |                           |   |           |  |      |           |  |   |          
|Basic earnings per share                                    |  | $                          | 0.16      |                           | $ | 0.12      |  | $    | 0.29      |  | $ | 0.24     
|Diluted earnings per share                                  |  | $                          | 0.11      |                           | $ | 0.09      |  | $    | 0.22      |  | $ | 0.19     



The accompanying notes are an integral
part of these statements



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##### Table of Contents

Part I. Item 1. (continued)



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited)



|                                                                                    |  |                           |             |   |      |   |             |  
|----------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                    |  | Six months ended June 30, |            
|                                                                                    |  | 2004                      |             |   | 2003 |  
|Cash Flows from Operating Activities:                                               |  |                           |             |   |      |   |             |  
|Net earnings                                                                        |  | $                         | 1,351,400   |   |      | $ | 1,068,900   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                           |             |   |      |   |             |  
|Net amortization of discounts and premiums on securities held to maturity           |  |                           | 157,700     |   |      |   | 302,900     |  
|Depreciation and amortization                                                       |  |                           | 186,200     |   |      |   | 161,700     |  
|Provision for loan losses                                                           |  |                           | 450,000     |   |      |   | 775,000     |  
|Net gains on sales of loans held for sale                                           |  |                           | (252,900    | ) |      |   | (491,300    | )
|Proceeds from sales of loans held for sale                                          |  |                           | 6,893,000   |   |      |   | 11,058,900  |  
|Originations of loans held for sale                                                 |  |                           | (5,800,700  | ) |      |   | (9,315,800  | )
|(Increase) decrease in accrued interest receivable and other assets                 |  |                           | (469,300    | ) |      |   | 73,000      |  
|Increase (decrease) in accrued interest payable and other liabilities               |  |                           | 620,600     |   |      |   | (63,300     | )
|                                                                                    |  |                           |             |   |      |   |             |  
|Net cash provided by operating activities                                           |  |                           | 3,136,000   |   |      |   | 3,570,000   |  
|                                                                                    |  |                           |             |   |      |   |             |  
|Cash Flows from Investing Activities:                                               |  |                           |             |   |      |   |             |  
|Net (increase) in:                                                                  |  |                           |             |   |      |   |             |  
|Time deposits with other financial institutions                                     |  |                           | (1,141,000  | ) |      |   | (666,400    | )
|Loans                                                                               |  |                           | (29,935,600 | ) |      |   | (29,218,500 | )
|Purchase of equipment and leasehold improvements                                    |  |                           | (664,000    | ) |      |   | (102,900    | )
|Purchase of FHLB stock                                                              |  |                           | (33,200     | ) |      |   | (750,000    | )
|Purchase of securities held to maturity                                             |  |                           | (33,995,900 | ) |      |   | (20,488,300 | )
|Proceeds from maturities of securities held to maturity                             |  |                           | 9,430,100   |   |      |   | 12,834,200  |  
|                                                                                    |  |                           |             |   |      |   |             |  
|Net cash used in investing activities                                               |  |                           | (56,339,600 | ) |      |   | (38,391,900 | )
|                                                                                    |  |                           |             |   |      |   |             |  
|Cash Flows from Financing Activities:                                               |  |                           |             |   |      |   |             |  
|Net increase (decrease) in:                                                         |  |                           |             |   |      |   |             |  
|Demand deposits                                                                     |  |                           | 29,371,900  |   |      |   | 5,214,700   |  
|Interest bearing demand deposits                                                    |  |                           | (381,000    | ) |      |   | 1,662,600   |  
|Savings and money market deposits                                                   |  |                           | 35,631,000  |   |      |   | 22,699,600  |  
|Certificates of deposit                                                             |  |                           | (11,473,800 | ) |      |   | 914,700     |  
|Proceeds from issuance of preferred stock                                           |  |                           | 7,697,000   |   |      |   |            |  
|Proceeds from stock options exercised                                               |  |                           | 40,000      |   |      |   | 8,000       |  
|FHLB advances                                                                       |  |                           |            |   |      |   | 10,000,000  |  
|                                                                                    |  |                           |             |   |      |   |             |  
|Net cash provided by financing activities                                           |  |                           | 60,885,100  |   |      |   | 40,499,600  |  
|                                                                                    |  |                           |             |   |      |   |             |  
|Net increase in cash and cash equivalents                                           |  |                           | 7,681,500   |   |      |   | 5,677,700   |  
|Cash and cash equivalents, beginning of period                                      |  |                           | 35,839,000  |   |      |   | 15,577,200  |  
|                                                                                    |  |                           |             |   |      |   |             |  
|Cash and cash equivalents, end of period                                            |  | $                         | 43,520,500  |   |      | $ | 21,254,900  |  
|                                                                                    |  |                           |             |   |      |   |             |  
|Supplemental disclosure of cash flow information                                    |  |                           |             |   |      |   |             |  
|Cash paid during the period for:                                                    |  |                           |             |   |      |   |             |  
|Interest                                                                            |  | $                         | 1,944,400   |   |      | $ | 2,182,300   |  
|Income taxes                                                                        |  |                           | 560,000     |   |      |   | 1,121,800   |  
|Supplemental disclosure of non-cash transactions                                    |  |                           |             |   |      |   |             |  
|Non-cash financing activities:                                                      |  |                           |             |   |      |   |             |  
|Reduction in subordinated debentures in exchange for 25,000 shares of common stock  |  | $                         | 50,000      |   |      |   |            |  



The accompanying notes are an integral
part of these statements.



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##### Table of Contents

Part I. Item 1. (continued)



ALLIANCE BANCSHARES CALIFORNIA AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)



1. Nature of Business and Significant Accounting Policies



Organization



The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and, therefore, do not
include all footnotes as would be necessary for a fair presentation of financial position, results of operations and changes in cash flows in conformity with accounting principles generally accepted in the United States of America. However, these
interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of the management, are necessary for a fair presentation of the results for the interim periods presented. These
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a basis consistent with, and should be read in conjunction with, the Companys audited
financial statements as of and for the year ended December 31, 2003 and the notes thereto included in the Companys Form 10-KSB filed under the Securities Exchange Act of 1934.



The results of operations for the three and six months ended June 30, 2004, are not necessarily indicative of the results of
operations that may be expected for any other interim period or for the year ending December 31, 2004.



The consolidated financial statements include the accounts of Alliance Bancshares California (Bancshares), its wholly owned subsidiary
Alliance Bank (the Bank) and Lexib Realcorp, an inactive wholly owned subsidiary of the Bank. Bancshares is a bank holding company which was incorporated in February 2000 in the State of California. The Bank is a California-chartered
bank that commenced operations in 1980. The Banks deposit accounts are insured by the Federal Deposit Insurance Corporation up to the maximum amount and under the terms allowed by federal regulations. References in these Notes to the
Company refer to Bancshares and its consolidated subsidiaries. Bancshares has another wholly owned subsidiary, Alliance Bancshares California Capital Trust I (the Trust), which it formed in 2002 to issue trust preferred
securities. This subsidiary has been deconsolidated retroactively to January 1, 2003 as a result of the implementation of FIN 46 and FASB interpretation No. 46R. As a result, the accompanying consolidated statements of financial condition include
the investment in the Trust of $217,000 in other assets. The impact of this change on the consolidated statements of operations was not significant.



Use of Estimates



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



Reclassifications



Certain amounts for 2003
have been reclassified to conform to the 2004 presentation. These reclassifications had no change to net earnings or shareholders equity previously reported.



Earnings Per Share



Basic earnings per share for each of the periods presented was computed by dividing net earnings by the weighted average number of shares of common stock
outstanding during each such period. The weighted average numbers of shares used in the basic earnings per share computations for the quarter and six months ended June 30, 2004 were 4,606,470 and 4,587,075, respectively, and for the quarter and six
months ended June 30, 2003 were 4,542,679 and 4,541,990, respectively. The weighted average numbers of shares used in the diluted earnings per share computations for the quarter and six months ended June 30, 2004 were 6,853,255 and 6,492,015,
respectively, and for the quarter ended June 30, 2003 were 6,049,357 and 6,031,283 respectively.



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##### Table of Contents

Basic and diluted earnings per share for the quarters ended June 30, 2004 and 2003 are computed as
follows:



|                                                |  |              |         |        |           |                 |   |     
|----------------------------------------------- |  | ------------ | ------- | ------ | --------- | --------------- | - | ----
|June 30, 2004                                   |  | Net Earnings |         | Shares |           | Per ShareAmount
|Net earnings                                    |  | $            | 746,000 |        |           |                 |   |     
|                                                |  |              |         |        |           |                 |   |     
|Basic earnings per share:                       |  |              |         |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 746,000 |        | 4,606,470 |                 | $ | 0.16
|Effect of conversion of subordinated debentures |  |              | 28,900  |        | 1,225,000 |                 |   |     
|Effect of exercise of options and warrants      |  |              |        |        | 288,735   |                 |   |     
|Effect of conversion of preferred stock         |  |              |        |        | 733,050   |                 |   |     
|                                                |  |              |         |        |           |                 |   |     
|Diluted earnings per share:                     |  |              |         |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 774,900 |        | 6,853,255 |                 | $ | 0.11
|                                                |  |              |         |        |           |                 |   |     
|                                                |  |              |        
|June 30, 2003                                   |  | Net Earnings |         | Shares |           | Per ShareAmount
|Net earnings                                    |  | $            | 529,500 |        |           |                 |   |     
|                                                |  |              |         |        |           |                 |   |     
|Basic earnings per share:                       |  |              |         |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 529,500 |        | 4,542,679 |                 | $ | 0.12
|Effect of conversion of subordinated debentures |  |              | 28,200  |        | 1,250,000 |                 |   |     
|Effect of exercise of options and warrants      |  |              |        |        | 256,678   |                 |   |     
|                                                |  |              |         |        |           |                 |   |     
|Diluted earnings per share:                     |  |              |         |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 557,700 |        | 6,049,357 |                 | $ | 0.09
|                                                |  |              |         |        |           |                 |   |     



Basic and diluted
earnings per share for the six months ended June 30, 2004 and 2003 are computed as follows:



|                                                |  |              |           |        |           |                 |   |     
|----------------------------------------------- |  | ------------ | --------- | ------ | --------- | --------------- | - | ----
|June 30, 2004                                   |  | Net Earnings |           | Shares |           | Per ShareAmount
|Net earnings                                    |  | $            | 1,351,400 |        |           |                 |   |     
|                                                |  |              |           |        |           |                 |   |     
|Basic earnings per share:                       |  |              |           |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 1,351,400 |        | 4,587,075 |                 | $ | 0.29
|Effect of conversion of subordinated debentures |  |              | 57,800    |        | 1,237,500 |                 |   |     
|Effect of exercise of options and warrants      |  |              |          |        | 296,888   |                 |   |     
|Effect of conversion of preferred stock         |  |              |          |        | 370,552   |                 |   |     
|                                                |  |              |           |        |           |                 |   |     
|Diluted earnings per share:                     |  |              |           |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 1,409,200 |        | 6,492,015 |                 | $ | 0.22
|                                                |  |              |           |        |           |                 |   |     



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##### Table of Contents

|                                                |  |              |           |        |           |                 |   |     
|----------------------------------------------- |  | ------------ | --------- | ------ | --------- | --------------- | - | ----
|June 30, 2003                                   |  | Net Earnings |           | Shares |           | Per ShareAmount
|Net earnings                                    |  | $            | 1,068,900 |        |           |                 |   |     
|                                                |  |              |           |        |           |                 |   |     
|Basic earnings per share:                       |  |              |           |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 1,068,900 |        | 4,541,990 |                 | $ | 0.24
|Effect of conversion of subordinated debentures |  |              | 57,500    |        | 1,250,000 |                 |   |     
|Effect of exercise of options and warrants      |  |              |           |        | 239,293   |                 |   |     
|                                                |  |              |           |        |           |                 |   |     
|Diluted earnings per share:                     |  |              |           |        |           |                 |   |     
|Net earnings available to common shareholders   |  | $            | 1,126,400 |        | 6,031,283 |                 | $ | 0.19
|                                                |  |              |           |        |           |                 |   |     



Equity Compensation
Plans



The Company accounts for stock-based awards to
employees and directors using the intrinsic value method, in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized in the consolidated financial statements
for employee and director stock arrangements. However, the required pro forma disclosures of the effects of all options granted on or after January 1, 1995, have been provided in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS 123 requires pro forma disclosures of net earnings and earnings per share as if the fair value based method of accounting for stock-based awards had been applied.
Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period. Had compensation cost for the Plan been determined based upon the fair value of the options
at the grant dates consistent with the method of SFAS 123, the Companys net earnings per share would have been reduced to the pro forma amounts indicated below:



|                                                                                                                       |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                       |  | Three Months EndedJune 30, |         |   | Six Months Ended June 30, |  
|                                                                                                                       |  | 2004                       |         |   | 2003                      |   |         | 2004 |  |   | 2003      |  
|Net earnings, as reported                                                                                              |  | $                          | 746,000 |   |                           | $ | 529,500 |      |  | $ | 1,351,400 |   |  | $ | 1,068,900 |  
|                                                                                                                       |  |                            |         |  
|Less - Total stock-based compensation expense determined under fair value method for all qualifying awards, net of tax |  |                            | (20,900 | ) |                           |   | (5,200  | )    |  |   | (35,000   | ) |  |   | (10,300   | )
|                                                                                                                       |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |           |  
|Pro forma net earnings                                                                                                 |  | $                          | 725,100 |   |                           | $ | 524,300 |      |  | $ | 1,316,400 |   |  | $ | 1,058,600 |  
|                                                                                                                       |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |           |  
|Earnings per share:                                                                                                    |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |           |  
|Basic:                                                                                                                 |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |           |  
|As reported                                                                                                            |  | $                          | 0.16    |   |                           | $ | 0.12    |      |  | $ | 0.29      |   |  | $ | 0.24      |  
|Pro forma                                                                                                              |  | $                          | 0.16    |   |                           | $ | 0.12    |      |  | $ | 0.29      |   |  | $ | 0.23      |  
|Diluted:                                                                                                               |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |           |  
|As reported                                                                                                            |  | $                          | 0.11    |   |                           | $ | 0.09    |      |  | $ | 0.22      |   |  | $ | 0.19      |  
|Pro forma                                                                                                              |  | $                          | 0.11    |   |                           | $ | 0.09    |      |  | $ | 0.21      |   |  | $ | 0.19      |  



The Companys
1996 Combined Incentive and Non-Qualified Stock Option Plan (the Plan) provides for the issuance of up to 800,000 shares of the Companys common stock upon exercise of incentive and non-qualified options. The Plan provides that each
option must have an exercise price not less than the fair market value of the stock at the date of grant or have a term not to exceed ten years (five years with respect to options granted to employees holding 10% or more of the voting stock of the
Company). Options vest in various increments of 20% per year to 100% per year.



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##### Table of Contents

2. Allowance for Loan Losses



The following table presents an analysis of changes in the allowance for loan losses during the periods indicated:



|                                      |  |                           |           |   |      |   |           |  
|------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|CHANGES IN ALLOWANCES FOR LOAN LOSSES | 
|                                      |  | Six months ended June 30, |          
|                                      |  | 2004                      |           |   | 2003 |  
|Balance at beginning of period        |  | $                         | 3,030,700 |   |      | $ | 1,982,900 |  
|                                      |  |                          
|Charge-offs                           |  |                           | (444,300  | ) |      |   | (509,800  | )
|Recoveries                            |  |                           | 36,400    |   |      |   | 48,500    |  
|                                      |  |                           |           |   |      |   |           |  
|Net charge-offs                       |  |                           | (407,900  | ) |      |   | (461,300  | )
|                                      |  |                          
|Additional provisions                 |  |                           | 450,000   |   |      |   | 775,000   |  
|                                      |  |                           |           |   |      |   |           |  
|Balance at end of period              |  | $                         | 3,072,800 |   |      | $ | 2,296,600 |  
|                                      |  |                           |           |   |      |   |           |  



3. Commitments and Contingencies



Commitments to extend credit are agreements to lend to a
customer as long as there is not a violation of any condition in the loan contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since we expect some commitments to expire without
being drawn upon, the total commitment amounts do not necessarily represent future loans. At June 30, 2004, we had undisbursed loan commitments of $107.3 million.



Standby letters of credit and financial guarantees are conditional commitments issued to secure the financial performance of
a customer to a third party. These are issued primarily to support public and private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer is essentially the same as that involved in extending a loan to that
customer. We hold certificates of deposit and other collateral of at least 100% of the notional amount as support for letters of credit for which we deem collateral to be necessary. At June 30, 2004, we had outstanding standby letters of credit with
a potential $2.5 million of obligations. These standby letters of credit will mature at various dates through 2006.



The Company is subject from time to time to various claims and lawsuits which arise primarily in the ordinary course of business. No material losses are
anticipated with respect to any existing matters.



At June 30,
2004, the Company had commitments for tenant improvements, furniture and equipment for branch expansion in the amount of $0.6 million.



4. Subsequent Events



Subsequent to June 30, 2004, the Company paid a cash dividend on the newly created Series A Non-Cumulative Perpetual Preferred Stock (the Series A
Preferred) in the amount of $137,600.



In addition, a
$2.6 million non-accrual real estate loan was paid off subsequent to June 30, 2004.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



Background



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



References in this Form 10-QSB to the Company, we or
us refer to Alliance California Bancshares (Bancshares) and its consolidated subsidiaries, including Alliance Bank (Bank).



Forward-Looking Information



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



Overview



We recorded consolidated earnings of $0.7 million ($0.16 basic and $0.11 diluted earnings per share) for the second quarter
of 2004 as compared to $0.5 million ($0.12 basic and $0.09 diluted earnings per share) for the second quarter of 2003. The increase in earnings was primarily due to an increase in net interest income and a $0.3 million decrease in the provision for
loan losses. The increase in earnings occurred notwithstanding an increase in non-interest expenses from $1.7 million for the three months ended June 30, 2003 to $2.5 million for the same period in 2004.



For the six months ended June 30, 2004, we generated consolidated earnings of
$1.4 million ($0.29 basic and $0.22 diluted earnings per share) as compared to $1.1 million ($0.24 basic and $0.19 diluted earnings per share) for the same period of 2003. The improvement in earnings in 2004 was due primarily to increases in net
interest income and a $0.3 million decrease in the provision for loan losses. The increase in earnings occurred notwithstanding an increase in non-interest expenses from $3.3 million for the six months ended June 30, 2003 to $4.9 million for the
same period in 2004.



We continued to grow, with consolidated
assets increasing from $283.0 million at December 31, 2003 to $346.8 million at June 30, 2004. Net loans grew from $200.5 million at December 31, 2003 to $229.2 million at June 30, 2004. Deposits grew from $224.7 million at December 31, 2003 to
$277.9 million at June 30, 2004. We enhanced our capital ratios through the issuance of 733,050 shares of a newly created Series A Non-Cumulative Perpetual Preferred Stock (the Series A Preferred) for $7.7 million.



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



|                                                 |  |                            |       |   |                          |   |       |      |  |   |      |   |  |   |      |  
|------------------------------------------------ |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                 |  | Three months endedJune 30, |       |   | Six months endedJune 30, |  
|                                                 |  | 2004                       |       |   | 2003                     |   |       | 2004 |  |   | 2003 |  
|Return on average assets (1)                     |  |                            | 0.94  | % |                          |   | 0.94  | %    |  |   | 0.88 | % |  |   | 0.96 | %
|Return on average shareholders equity (1)       |  |                            | 12.96 | % |                          |   | 16.30 | %    |  |   | 14.3 | % |  |   | 16.7 | %
|Net yield on average interest earning assets (1) |  |                            | 4.31  | % |                          |   | 4.05  | %    |  |   | 4.25 | % |  |   | 4.20 | %
|Earnings per common share:                       |  |                            |       |   |                          |   |       |      |  |   |      |   |  |   |      |  
|Basic earnings per share                         |  | $                          | 0.16  |   |                          | $ | 0.12  |      |  | $ | 0.29 |   |  | $ | 0.24 |  
|Diluted earnings per share                       |  | $                          | 0.11  |   |                          | $ | 0.09  |      |  | $ | 0.22 |   |  | $ | 0.19 |  

---

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



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##### Table of Contents

RESULTS OF OPERATIONS  Three and six months ended June 30, 2004 and 2003



Net Interest Income



We recorded interest income of $4.3 million and $8.3 million, respectively, for the quarter and six months ended June 30,
2004 as compared to $3.4 million and $6.8 million, respectively, for the quarter and six months ended June 30, 2003. Interest expense totaled $1.1 million and $2.2 million, respectively, for the quarter and six months ended June 30, 2004 as compared
to $1.2 million and $2.4 million, respectively, for the quarter and six months ended June 30, 2003. The increases in interest income was due to the increase in the amount of interest earning assets, as the weighted average yields earned decreased
due to lower market interest rates. The decrease in interest expense was due to the decrease in the weighted average rates paid on interest bearing liabilities, as the amount of interest bearing liabilities increased. The weighted average prime rate
decreased from 4.25% for the quarter and six months ended June 30, 2003 to 4.00% for the quarter and six months ended June 30, 2004.



Net interest income before provision for loan losses increased to $3.2 million and $6.1 million, respectively, for the quarter and six months ended June
30, 2004, from $2.2 million and $4.5 million, respectively, for the quarter and six months ended June 30, 2003. This was due primarily to an increase in net average interest earnings assets (average interest earning assets less average interest
bearing liabilities) from $41.4 million and $38.4 million, respectively, for the quarter and six months ended June 30, 2003 to $83.4 million and $75.7 million, respectively, for the quarter and six months ended June 30, 2004. This increase in net
average interest earning assets was due principally to a $42.4 million and $40.4 million, respectively, increase in average non-interest bearing liabilities (primarily demand deposits) which funded in part a $60.6 million and $57.4 million,
respectively, increase in average loans.



Our interest rate
spread increased from 3.60% during the second quarter of 2003 to 3.74% during the second quarter of 2004, and our net interest margin increased from 4.05% in the second quarter of 2003 to 4.31% in the second quarter of 2004. These increases were due
to: (i) loans, which are our highest yielding assets, constituting a greater percentage of interest-earning assets; (ii) an increase in the weighted average yield on our investment securities from 3.10% to 3.48% due to an increased level of higher
yielding corporate bonds; and (iii) savings and money market deposits, which are among our lower-cost liabilities, constituting a greater percentage of our total interest-earning liabilities.



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##### Table of Contents

The following table presents the weighted average yield on each specified category of interest earning
assets, the weighted average rate paid on each specified category of interest bearing liabilities, and the resulting interest rate spread and net interest margin for the periods indicated.



ANALYSIS OF NET INTEREST INCOME



|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ----------- | ------------------ | ---- | ------------------------------- |  | ---- | -------------- |  | ------------------ | ----------- | ------------------------------- | - | --------- |  | ---- | -
|                                                                                  |  | Quarter Ended June 30, |            
|                                                                                  |  | 2004                   |             |                    | 2003 |                                
|                                                                                  |  | AverageBalance         |             | Interest Inc./Exp. |      | WeightedAverageRatesEarned/Paid |  |      | AverageBalance |  | Interest Inc./Exp. |             | WeightedAverageRatesEarned/Paid |  
|Interest earning assets:                                                          |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Federal funds sold                                                                |  | $                      | 23,002,700  |                    | $    | 57,600                          |  | 1.01 | %              |  | $                  | 17,832,200  |                                 | $ | 51,400    |  | 1.17 | %
|Time deposits                                                                     |  |                        | 5,233,700   |                    |      | 18,300                          |  | 1.41 | %              |  |                    | 4,225,600   |                                 |   | 37,400    |  | 3.59 | %
|Securities                                                                        |  |                        | 44,712,200  |                    |      | 386,900                         |  | 3.48 | %              |  |                    | 33,203,200  |                                 |   | 254,200   |  | 3.10 | %
|Loans                                                                             |  |                        | 225,365,700 |                    |      | 3,844,800                       |  | 6.86 | %              |  |                    | 164,750,600 |                                 |   | 3,078,800 |  | 7.58 | %
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total interest-earning assets                                                     |  |                        | 298,314,300 |                    |      | 4,307,600                       |  | 5.81 | %              |  |                    | 220,011,600 |                                 |   | 3,421,800 |  | 6.31 | %
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Non-interest-earning assets                                                       |  |                        | 20,565,900  |                    |      |                                 |  |      |                |  |                    | 10,191,600  |                                 |   |           |  |      |  
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total assets                                                                      |  | $                      | 318,880,200 |                    |      |                                 |  |      |                |  | $                  | 230,203,200 |                                 |   |           |  |      |  
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Interest bearing liabilities:                                                     |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Interest-bearing demand deposits                                                  |  | $                      | 4,493,300   |                    |      | 7,900                           |  | 0.71 | %              |  | $                  | 4,492,700   |                                 |   | 9,100     |  | 0.82 | %
|Savings and money market deposits                                                 |  |                        | 113,040,600 |                    |      | 459,800                         |  | 1.64 | %              |  |                    | 67,804,400  |                                 |   | 334,400   |  | 2.00 | %
|Certificates of deposit                                                           |  |                        | 55,695,200  |                    |      | 282,800                         |  | 2.04 | %              |  |                    | 64,783,900  |                                 |   | 493,700   |  | 3.09 | %
|FHLB advances                                                                     |  |                        | 32,000,000  |                    |      | 224,400                         |  | 2.82 | %              |  |                    | 32,000,000  |                                 |   | 221,300   |  | 2.80 | %
|Subordinated debentures                                                           |  |                        | 2,483,000   |                    |      | 51,000                          |  | 8.26 | %              |  |                    | 2,500,000   |                                 |   | 51,000    |  | 8.27 | %
|Guaranteed preferred beneficial interest in the Companys subordinated debentures |  |                        | 7,217,000   |                    |      | 82,000                          |  | 4.57 | %              |  |                    | 7,000,000   |                                 |   | 84,200    |  | 4.88 | %
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total interest-bearing liabilities                                                |  |                        | 214,929,100 |                    |      | 1,107,900                       |  | 2.07 | %              |  |                    | 178,581,000 |                                 |   | 1,193,700 |  | 2.71 | %
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Non-interest bearing liabilities                                                  |  |                        | 80,808,400  |                    |      |                                 |  |      |                |  |                    | 38,407,900  |                                 |   |           |  |      |  
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total liabilities                                                                 |  |                        | 295,737,500 |                    |      |                                 |  |      |                |  |                    | 216,988,900 |                                 |   |           |  |      |  
|Shareholders equity                                                              |  |                        | 23,142,700  |                    |      |                                 |  |      |                |  |                    | 13,214,300  |                                 |   |           |  |      |  
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total liabilities and shareholders equity                                        |  | $                      | 318,880,200 |                    |      |                                 |  |      |                |  | $                  | 230,203,200 |                                 |   |           |  |      |  
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Net interest income                                                               |  |                        |             |                    | $    | 3,199,700                       |  |      |                |  |                    |             |                                 | $ | 2,228,100 |  |      |  
|                                                                                  |  |                        |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Interest rate spread                                                              |  |                        |             |                    |      |                                 |  | 3.74 | %              |  |                    |             |                                 |   |           |  | 3.60 | %
|Net interest margin                                                               |  |                        |             |                    |      |                                 |  | 4.31 | %              |  |                    |             |                                 |   |           |  | 4.05 | %



Note: Interest income on loans
includes loan fees.



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##### Table of Contents

ANALYSIS OF NET INTEREST INCOME



|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ----------- | ------------------ | ---- | ------------------------------- |  | ---- | -------------- |  | ------------------ | ----------- | ------------------------------- | - | --------- |  | ---- | -
|                                                                                  |  | Six Months Ended June 30, |            
|                                                                                  |  | 2004                      |             |                    | 2003 |                                
|                                                                                  |  | AverageBalance            |             | Interest Inc./Exp. |      | WeightedAverageRatesEarned/Paid |  |      | AverageBalance |  | Interest Inc./Exp. |             | WeightedAverageRatesEarned/Paid |  
|Interest earning assets:                                                          |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Federal funds sold                                                                |  | $                         | 27,308,800  |                    | $    | 135,300                         |  | 1.00 | %              |  | $                  | 18,974,500  |                                 | $ | 111,300   |  | 1.18 | %
|Time deposits                                                                     |  |                           | 4,639,000   |                    |      | 37,200                          |  | 1.61 | %              |  |                    | 3,915,100   |                                 |   | 72,900    |  | 3.75 | %
|Securities                                                                        |  |                           | 40,739,400  |                    |      | 719,800                         |  | 3.55 | %              |  |                    | 33,086,000  |                                 |   | 585,400   |  | 3.57 | %
|Loans                                                                             |  |                           | 215,635,600 |                    |      | 7,397,800                       |  | 6.90 | %              |  |                    | 158,244,800 |                                 |   | 6,070,500 |  | 7.74 | %
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total interest-earning assets                                                     |  |                           | 288,322,800 |                    |      | 8,290,100                       |  | 5.78 | %              |  |                    | 214,220,400 |                                 |   | 6,840,100 |  | 6.44 | %
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Non-interest-earning assets                                                       |  |                           | 19,059,200  |                    |      |                                 |  |      |                |  |                    | 9,900,400   |                                 |   |           |  |      |  
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total assets                                                                      |  | $                         | 307,382,000 |                    |      |                                 |  |      |                |  | $                  | 224,120,800 |                                 |   |           |  |      |  
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Interest bearing liabilities:                                                     |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Interest-bearing demand deposits                                                  |  | $                         | 4,610,800   |                    |      | 16,300                          |  | 0.71 | %              |  | $                  | 3,799,200   |                                 |   | 16,700    |  | 0.89 | %
|Savings and money market deposits                                                 |  |                           | 109,072,300 |                    |      | 880,200                         |  | 1.62 | %              |  |                    | 63,787,500  |                                 |   | 644,700   |  | 2.04 | %
|Certificates of deposit                                                           |  |                           | 57,185,900  |                    |      | 586,300                         |  | 2.06 | %              |  |                    | 68,152,700  |                                 |   | 1,065,800 |  | 3.15 | %
|FHLB advances                                                                     |  |                           | 32,000,000  |                    |      | 448,900                         |  | 2.82 | %              |  |                    | 30,548,400  |                                 |   | 381,300   |  | 2.52 | %
|Subordinated debentures                                                           |  |                           | 2,491,500   |                    |      | 102,000                         |  | 8.23 | %              |  |                    | 2,500,000   |                                 |   | 101,500   |  | 8.19 | %
|Guaranteed preferred beneficial interest in the Companys subordinated debentures |  |                           | 7,217,000   |                    |      | 164,800                         |  | 4.59 | %              |  |                    | 7,000,000   |                                 |   | 171,500   |  | 4.94 | %
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total interest-bearing liabilities                                                |  |                           | 212,577,500 |                    |      | 2,198,500                       |  | 2.08 | %              |  |                    | 175,787,800 |                                 |   | 2,381,500 |  | 2.73 | %
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Non-interest bearing liabilities                                                  |  |                           | 75,818,700  |                    |      |                                 |  |      |                |  |                    | 35,417,000  |                                 |   |           |  |      |  
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total liabilities                                                                 |  |                           | 288,396,200 |                    |      |                                 |  |      |                |  |                    | 211,204,800 |                                 |   |           |  |      |  
|Shareholders equity                                                              |  |                           | 18,985,800  |                    |      |                                 |  |      |                |  |                    | 12,916,000  |                                 |   |           |  |      |  
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Total liabilities and shareholders equity                                        |  | $                         | 307,382,000 |                    |      |                                 |  |      |                |  | $                  | 224,120,800 |                                 |   |           |  |      |  
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Net interest income                                                               |  |                           |             |                    | $    | 6,091,600                       |  |      |                |  |                    |             |                                 | $ | 4,458,600 |  |      |  
|                                                                                  |  |                           |             |                    |      |                                 |  |      |                |  |                    |             |                                 |   |           |  |      |  
|Interest rate spread                                                              |  |                           |             |                    |      |                                 |  | 3.70 | %              |  |                    |             |                                 |   |           |  | 3.71 | %
|Net interest margin                                                               |  |                           |             |                    |      |                                 |  | 4.25 | %              |  |                    |             |                                 |   |           |  | 4.20 | %



|Note: | Interest income on loans includes loan fees.
|----- | --------------------------------------------



Provision for Loan Losses



We made no provision for the allowance for loan losses (Allowance) for the quarter ended June 30, 2004 as compared to a provision of $0.3
million for the comparable period of 2003. We made provisions of $0.5 and $0.8 million to the Allowance for the six months ended June 30, 2004 and 2003, respectively. We assess the adequacy of the Allowance each calendar quarter. Classified loans
(loans assigned point values of 7  10) are assigned specific reserve percentages based on point value. Loans that are not classified (loans assigned risk point values of less than 7) are subdivided into pools of similar loans by loan type and
are assigned reserve percentages based on the loan type. We determine the reserve percentage by first examining actual loss history for each type of loan, then adjust that percentage by several factors including changes in lending policies; changes
in national and local economic conditions; changes in experience, ability and depth of lending management and staff; changes in trend of past due and classified loans; changes in external factors such as competition and legal and regulatory
requirements; and other relevant factors. Reserve estimates are totaled and any shortage is charged to current period operations and credited to the Allowance.



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The credit quality of our loans will be influenced by underlying trends in the economic cycle,
particularly in Southern California, and other factors, which are beyond managements control. Accordingly, no assurance can be given that we will not sustain loan losses that in any particular period will be sizable in relation to the
Allowance. Additionally, subsequent evaluation of the loan portfolio by us and by our regulators, in light of factors then prevailing, may require increases in the Allowance through changes to the provision for loan losses.



Non-Interest Income



Non-interest income remained relatively constant for the six months ended June 30, 2004 as compared to the same period in
2003. The increases in service charges and other non-interest income (primarily prepayment penalties on loan pay-offs) were offset by lower net gains on sales of loans and broker fees. The amount of SBA loans we can originate in any period depends
on many factors, including the types of loans the SBA will guarantee and SBA-budget constraints. In January 2004, the SBA reduced its funding of and placed limits on its 7a loan product. Virtually all of the loans we originated and gains we
generated in 2003 were from the sales of the guaranteed portions of 7a loans. Although the funding has been restored and limits placed on the 7a loan product have been removed by the SBA, the temporary policy change negatively impacted the volume of
our SBA for the quarter and six months ended June 30, 2004. In addition, the number of loans we can broker in any period is dependent upon market conditions, borrower demand and the ability to identify lenders desiring to make that type of loan.
Accordingly, broker fees from loans referred to others in one period can fluctuate from previous periods and have decreased for the quarter and six months ended June 30, 2004 as compared to the same periods in 2003.



Non-Interest Expense



Salary and related expenses increased by 92.2% and 85.6%, respectively, from the quarter and six months ended June 30, 2003
to the quarter and six months ended June 30, 2004. This increase was due to: (i) an increase in the number of employees and related benefit costs consistent with our growth, (ii) additional personnel for our two new offices in Woodland Hills and
Burbank, California, and (iii) a Company-wide incentive compensation program initiated to promote loan and deposit growth. At June 30, 2004, we employed 66 full time employees, compared with 45 employees at June 30, 2003.



Occupancy and equipment expenses increased by 20.5% and 34.9%, respectively,
from the quarter and six months ended June 30, 2003 to the quarter and six months ended June 30, 2004. Rent expense increased in March 2003 by $20,600 per month from rent under a 60-month lease for our new Orange County Regional Office in Irvine,
California and increased in December 2003 by $3,600 per month for additional space we occupied in Culver City at our headquarters office. In addition, we executed a 90-month lease in March 2004 for a new regional office comprised of approximately
3,900 square feet of ground floor space in Woodland Hills, California, at a monthly initial base rent of $8,400, which will become effective in August 2004 and is subject to annual increases of approximately 2.75%. Subsequent to June 30, 2004, we
executed a 60-month lease for a new regional office comprised of approximately 5,400 square feet of fifth floor space in Burbank, California, at a monthly initial base rent of approximately $14,400 subject to annual increases of approximately 2.00%.
We are currently renting temporary office space in Burbank.



Other operating expenses increased 17.7% and 13.9%, respectively, from the quarter ended June 30, 2003 to the quarter ended June 30, 2004 due in part to increases in professional fees and data processing expenses.



FINANCIAL CONDITION



Regulatory Capital



At June 30, 2004, Bancshares and the Banks Tier 1 capital, which is comprised of shareholders equity as
modified by certain regulatory adjustments, was $29.7 million and $30.0 million, respectively. Our regulatory capital increased since December 31, 2003 as a result of net earnings as well as proceeds from the sale of $7.7 million from the private
placement of Series A Preferred. At June 30, 2004, Bancshares and the Bank met all applicable regulatory capital requirements and the Bank was well capitalized as defined under applicable regulations.



The Series A Preferred bears non-cumulative preferential semiannual dividends
at a rate of 7% per annum ($0.3675 per share for each semiannual dividend period; $0.735 per share per annum) and has no voting rights except as required by law. Each share of Series A Preferred is convertible into one share of Common Stock, subject
to adjustment for stock splits and stock dividends with respect to the Common Stock, upon the occurrence of one or more of the following: (i) at any time at the option of the holder; (ii) upon the vote or written consent of the holders of a



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majority of the then outstanding Series A Preferred; (iii) on the 60thconsecutive trading day after December 31, 2008, if the market price of the common Stock equals or exceeds $16.00 per share for each trading day in such
60-day period; and/or (iv) at the first date there are fewer than 100,000 shares of Series A Preferred outstanding. Bancshares may redeem the Series A Preferred for $10.50 per share plus declared and unpaid dividends at any time on or after December
31, 2012.



Trust preferred securities are considered regulatory
capital for purposes of determining Bancshares capital ratios. However, in December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN 46R), Consolidation of Variable
Interest Entities, which required companies that have issued trust preferred securities to deconsolidate the related entities and restate their balance sheets. There has been some speculation as to whether the FRB would continue to permit
holding companies to include trust preferred securities in regulatory capital following the issuance of FIN 46R. However, the FRB has proposed a rule which would permit holding companies (including Bancshares) to continue to include trust preferred
securities as regulatory capital. However, if the FRB were ultimately to rule that Bancshares could not include any of its trust preferred securities as capital at June 30, 2004, Bancshares would have met all applicable regulatory capital
requirements.



The following table sets forth the regulatory
standards for well capitalized and adequately capitalized institutions and the capital ratios for Bancshares and the Bank as of the date indicated.



REGULATORY CAPITAL

June 30, 2004

(dollars in thousands)



|                                         |  |        |        |       |                             |   |        |                       |        |  |       |        |  |       |        |  |        |  
|---------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | --------------------- | ------ |  | ----- | ------ |  | ----- | ------ |  | ------ | -
|                                         |  | Actual |        |       | To Be AdequatelyCapitalized |   |        | To Be WellCapitalized |       
|                                         |  | Amount |        | Ratio |                             |   | Amount |                       | Ratio  |  |       | Amount |  | Ratio |       
|Bancshares                               |  |        |        |       |                             |   |        |                       |        |  |       |        |  |       |        |  |        |  
|Total Capital (to risk-weighted assets)  |  | $      | 36,261 |       | 13.6                        | % |        | $                     | 21,368 |  | >=8.0 | %      |  |       | N/A    |  | N/A    |  
|Tier 1 Capital (to risk-weighted assets) |  | $      | 29,672 |       | 11.1                        | % |        | $                     | 10,684 |  | >=4.0 | %      |  |       | N/A    |  | N/A    |  
|Tier 1 Capital (to average assets)       |  | $      | 29,672 |       | 9.3                         | % |        | $                     | 12,747 |  | >=4.0 | %      |  |       | N/A    |  | N/A    |  
|                                         |  |        |        |       |                             |  
|Bank                                     |  |        |        |       |                             |   |        |                       |        |  |       |        |  |       |        |  |        |  
|Total Capital (to risk-weighted assets)  |  | $      | 35,499 |       | 13.3                        | % |        | $                     | 21,346 |  | >=8.0 | %      |  | $     | 26,683 |  | >=10.0 | %
|Tier 1 Capital (to risk-weighted assets) |  | $      | 29,976 |       | 11.2                        | % |        | $                     | 10,673 |  | >=4.0 | %      |  | $     | 16,010 |  | >=6.0  | %
|Tier 1 Capital (to average assets)       |  | $      | 29,976 |       | 9.4                         | % |        | $                     | 12,724 |  | >=4.0 | %      |  | $     | 15,905 |  | >=5.0  | %



Liquidity and Cash Flow



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



Deposits provide most of our funds. This relatively stable and low-cost source of funds has, along with shareholders equity, provided 85% and 81% of
our funding as a percentage of average total assets during the six months ended June 30, 2004 and 2003, respectively. This increase was primarily attributable to the issuance of the Series A Preferred Stock discussed earlier.



Secondary sources of liquidity include borrowing arrangements with the FRB
and the FHLB. Borrowings from the FRB are short-term and must be collateralized by pledged securities or loans. As a member of the FHLB system, the Bank may obtain advances from the FHLB pursuant to various credit programs offered from time to time.
Credit limitations are based on the assessment by the FHLB of the Banks creditworthiness, including an adequate level of net worth, reasonable prospects of future earnings, sources of funds sufficient to meet the scheduled interest payments,
lack of financial or managerial deficiencies and other factors. Such advances may be obtained pursuant to several different credit programs, and each program has its own rate, commitment fees and range of maturities. Funds borrowed from the FHLB
must be collateralized either by pledged securities or by assignment of notes and may be for terms of one day to several years. As of June 30, 2004, we had $32.0 million outstanding FHLB advances and had no outstanding borrowings from the FRB.



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We also have liquidity as a net seller of overnight funds at a level that will cushion any unexpected
increase in demand for funds or decrease in funds deposited. During the six months ended June 30, 2004, we had an average balance of $27.3 million in overnight funds sold representing 8.9% of total average assets.



Cash Flow from Operating Activities



Net cash provided by operating activities for the six months ended June 30,
2004 decreased by $0.5 million as compared to the same period in 2003 primarily due to a decrease in the amount of SBA loans originated and sold in the period.



Cash Flow from Investing Activities



Net cash used in investing activities for the six months ended June 30, 2004 increased by $17.9 million as compared the same period in 2003 primarily due
to the increased purchase of securities held to maturity and the decrease in the proceeds from maturities of securities held to maturity.



Cash Flows from Financing Activities



Net cash provided by financing activities for the six months ended June 30, 2004 increased by $20.4 million as compared to the same period in 2003
primarily due to a net increase in deposits as well as the proceeds from the sale of preferred stock.



Asset Liability Management



Based on our business, market risk is primarily limited to interest rate risk which is the impact that changes in interest rates would have on future earnings. Our Investment Committee manages interest rate risk, including interest rate
sensitivity and the repricing characteristics of assets and liabilities. The principal objective of our asset/liability management is to maximize net interest income within acceptable levels of risk established by policy. Interest rate risk is
measured using financial modeling techniques, including stress tests, to measure the impact of changes in interest rates on future earnings. Net interest income, the primary source of earnings, is affected by interest rate movements. Changes in
interest rates have lesser impact the more that assets and liabilities reprice in approximately equivalent amounts at basically the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest sensitivity
gaps, which is the difference between interest sensitive assets and interest sensitive liabilities. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate
exposures.



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



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



RATE SENSITIVITY

June 30, 2004



|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|----------------------------------------------------------------------------- |  | -------------------- | ----------- | - | ----------------------------- | - | ---------- | ------------------------------- |  | - | --------------- | - |  | ----- | ----------- | - |  | - | ----------- | -
|                                                                              |  | Three Months Or Less |             |   | Over ThreeThroughTwelveMonths |   |            | Over OneYear Through Five Years |  |   | Over Five Years |   |  | Total |            
|Assets                                                                        |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Federal funds sold                                                            |  | $                    | 27,900,000  |   |                               | $ |           |                                 |  | $ |                |   |  | $     |            |   |  | $ | 27,900,000  |  
|Time deposits with other financial institutions                               |  |                      | 3,166,700   |   |                               |   | 1,389,000  |                                 |  |   | 594,000         |   |  |       |            |   |  |   | 5,149,700   |  
|Securities held to maturity                                                   |  |                      |            |   |                               |   |           |                                 |  |   | 29,297,700      |   |  |       | 31,424,800  |   |  |   | 60,722,500  |  
|Loans, gross                                                                  |  |                      | 115,990,800 |   |                               |   | 54,968,000 |                                 |  |   | 41,362,000      |   |  |       | 19,943,000  |   |  |   | 232,263,800 |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Total rate-sensitive assets                                                   |  | $                    | 147,057,500 |   |                               | $ | 56,357,000 |                                 |  | $ | 71,253,700      |   |  | $     | 51,367,800  |   |  | $ | 326,036,000 |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Liabilities:                                                                  |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Interest bearing demand deposits                                              |  | $                    | 4,016,400   |   |                               | $ |           |                                 |  | $ |                |   |  | $     |            |   |  | $ | 4,016,400   |  
|Savings and money market deposits                                             |  |                      | 125,094,300 |   |                               |   |           |                                 |  |   |                |   |  |       |            |   |  |   | 125,094,300 |  
|Certificates of deposit                                                       |  |                      | 19,634,200  |   |                               |   | 19,945,000 |                                 |  |   | 15,661,000      |   |  |       |            |   |  |   | 55,240,200  |  
|FHLB advances                                                                 |  |                      | 7,000,000   |   |                               |   | 10,000,000 |                                 |  |   | 15,000,000      |   |  |       |            |   |  |   | 32,000,000  |  
|Subordinated debentures                                                       |  |                      |            |   |                               |   | 2,450,000  |                                 |  |   |                |   |  |       |            |   |  |   | 2,450,000   |  
|Guaranteed preferred beneficial interest in Companys subordinated debentures |  |                      | 7,217,000   |   |                               |   |           |                                 |  |   |                |   |  |       |            |   |  |   | 7,217,000   |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Total rate sensitive liabilities                                              |  |                      | 162,961,900 |   |                               |   | 32,395,000 |                                 |  |   | 30,661,000      |   |  |       |            |   |  |   | 226,017,900 |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Interval Gaps:                                                                |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Interest rate sensitivity gap                                                 |  | $                    | (15,904,400 | ) |                               | $ | 23,962,000 |                                 |  | $ | 40,592,700      |   |  | $     | 51,367,800  |   |  | $ | 100,018,100 |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Rate sensitive assets to rate sensitive liabilities                           |  |                      | 90.2        | % |                               |   | 174.0      | %                               |  |   | 232.4           | % |  |       | N/A         |   |  |   | 144.2       | %
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Cumulative Gaps:                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Cumulative interest rate sensitivity gap                                      |  | $                    | (15,904,400 | ) |                               | $ | 8,057,600  |                                 |  | $ | 48,650,300      |   |  | $     | 100,018,100 |   |  | $ | 100,018,100 |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|Rate sensitive assets to rate sensitive liabilities                           |  |                      | 90.2        | % |                               |   | 104.1      | %                               |  |   | 121.5           | % |  |       | 144.3       | % |  |   | 144.3       | %
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  
|% of rate sensitive assets in period                                          |  |                      | 45.1        | % |                               |   | 62.4       | %                               |  |   | 84.2            | % |  |       | 100.0       | % |  |   | N/A         |  
|                                                                              |  |                      |             |   |                               |   |            |                                 |  |   |                 |   |  |       |             |   |  |   |             |  



Investments in Time Deposits and
Securities



The following table provides certain
information regarding our investments in time deposits with other financial institutions at the dates indicated:



TIME DEPOSIT INVESTMENTS



|                                       |  |                   |           |                       |               |   |            |   |                       |  |      |  
|-------------------------------------- |  | ----------------- | --------- | --------------------- | ------------- | - | ---------- | - | --------------------- |  | ---- | -
|                                       |  | December 31, 2003 |           |                       | June 30, 2004 |  
|                                       |  | Book Value        |           | WeightedAverage Yield |               |   | Book Value |   | WeightedAverage Yield | 
|Time deposits maturing:                |  |                   |           |                       |               |   |            |   |                       |  |      |  
|Three months or less                   |  | $                 |          |                       |              |   |            | $ | 3,166,700             |  | 1.29 | %
|After three months but within one year |  |                   | 3,413,700 |                       | 2.04          | % |            |   | 1,389,000             |  | 2.18 | %
|After one year but within five years   |  |                   | 595,000   |                       | 2.58          | % |            |   | 594,000               |  | 2.34 | %
|                                       |  |                   |           |                       |               |   |            |   |                       |  |      |  
|Total time deposits                    |  | $                 | 4,008,700 |                       |               |   |            | $ | 5,149,700             |  |      |  
|                                       |  |                   |           |                       |               |   |            |   |                       |  |      |  



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The following table provides certain information regarding our investment securities at the dates
indicated. Expected maturities will differ from contractual maturities, particularly with respect to collateralized mortgage obligations and mortgage backed securities, because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. We had no tax-exempt securities during the quarters ended June 30, 2003 or 2004.



INVESTMENT SECURITIES



|                                                                   |  |                   |            |                       |               |   |            |   |                       |  |      |  
|------------------------------------------------------------------ |  | ----------------- | ---------- | --------------------- | ------------- | - | ---------- | - | --------------------- |  | ---- | -
|                                                                   |  | December 31, 2003 |            |                       | June 30, 2004 |  
|                                                                   |  | Book Value        |            | WeightedAverage Yield |               |   | Book Value |   | WeightedAverage Yield | 
|Investment securities maturing:                                    |  |                   |            |                       |               |   |            |   |                       |  |      |  
|Within one year                                                    |  | $                 | 1,002,800  |                       | 3.19          | % |            | $ |                      |  |     |  
|After one year but within five years                               |  |                   | 19,170,300 |                       | 3.88          | % |            |   | 29,297,700            |  | 3.85 | %
|Collateralized mortgage obligations and mortgage backed securities |  |                   | 16,141,300 |                       | 3.85          | % |            |   | 31,424,800            |  | 3.88 | %
|                                                                   |  |                   |            |                       |               |   |            |   |                       |  |      |  
|Total investment securities                                        |  | $                 | 36,314,400 |                       |               |   |            | $ | 60,722,500            |  |      |  
|                                                                   |  |                   |            |                       |               |   |            |   |                       |  |      |  



Our present strategy
is to stagger the maturities of our time deposit investments and investment securities to meet our overall liquidity requirements. At June 30, 2004, we classified all our investment securities as held to maturity as we intend to hold the securities
to maturity.



Loans



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



The following table sets forth the composition of our loan portfolio at the dates indicated:



LOAN PORTFOLIO COMPOSITION



|                                 |  |                   |             |   |                 |       |   |                   |   |             |                 |  |       |   |  | 
|-------------------------------- |  | ----------------- | ----------- | - | --------------- | ----- | - | ----------------- | - | ----------- | --------------- |  | ----- | - |  | 
|                                 |  | December 31, 2003 |             |   | June 30, 2004   |      
|                                 |  | AmountOutstanding |             |   | Percent ofTotal |       |   | AmountOutstanding |   |             | Percent ofTotal | 
|Commercial loans                 |  | $                 | 51,498,100  |   |                 | 26.0  | % |                   | $ | 57,771,300  |                 |  | 25.4  | %
|Construction loans               |  |                   | 54,741,500  |   |                 | 27.6  |   |                   |   | 69,489,600  |                 |  | 30.5  |  
|Real estate loans                |  |                   | 79,196,300  |   |                 | 40.0  |   |                   |   | 84,528,300  |                 |  | 37.1  |  
|Other loans                      |  |                   | 12,616,300  |   |                 | 6.4   |   |                   |   | 15,876,300  |                 |  | 7.0   |  
|                                 |  |                   |             |   |                 |       |   |                   |   |             |                 |  |       |  
|                                 |  |                   | 198,052,200 |   |                 | 100.0 | % |                   |   | 227,665,500 |                 |  | 100.0 | %
|                                 |  |                   |             |   |                 |       |   |                   |   |             |                 |  |       |  
|Less  Deferred loan fees        |  |                   | (573,700    | ) |                 |       |   |                   |   | (659,300    | )               |  |       |  
|Less  Allowance for loan losses |  |                   | (3,030,700  | ) |                 |       |   |                   |   | (3,072,800  | )               |  |       |  
|                                 |  |                   |             |   |                 |       |   |                   |   |             |                 |  |       |  
|Net loans                        |  | $                 | 194,447,800 |   |                 |       |   |                   | $ | 223,933,400 |                 |  |       |  
|                                 |  |                   |             |   |                 |       |   |                   |   |             |                 |  |       |  



Our strategy has been
to diversify the construction loan portfolio and limit our level of these loans, particularly the more speculative types, and as a percentage of total assets and Tier 1 capital. At June 30, 2004, our portfolio remains within the limits established
by the Company. The increases in the construction loan portfolio since December 31, 2003 have occurred primarily in the areas of residential non-owner occupied over $0.8 million and residential subdivision over $0.8 million.



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Non-Performing Assets



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



NON-PERFORMING ASSETS



|                                        |  |                   |           |               |   |          
|--------------------------------------- |  | ----------------- | --------- | ------------- | - | ---------
|                                        |  | December 31, 2003 |           | June 30, 2004
|Non-accrual loans                       |  | $                 | 2,137,900 |               | $ | 3,104,900
|Accruing loans past due 90 days or more |  |                   |          |               |   |         
|Troubled debt restructurings            |  |                   |          |               |   | 705,700  
|Other real estate owned                 |  |                   |          |               |   |         
|                                        |  |                   |           |               |   |          
|Total                                   |  | $                 | 2,137,900 |               | $ | 3,810,600
|                                        |  |                   |           |               |   |          



Nonperforming assets
increased from $2.1 million at December 31, 2003 to $3.8 million at June 30, 2004. The increase in non-accrual loans is due to the non-accrual status of a $2.6 million real estate loan which was paid off subsequent to June 30, 2004. The troubled
debt restructuring represents a commercial line of credit secured by all of the borrowers assets. The loan was classified as a non-accrual loan at December 31, 2003. Since we have granted concessions to the borrower that we would not otherwise
consider, this loan has been classified as a troubled debt restructuring effective March 31, 2004. The loan has been written down by $0.2 million which represents the difference between the principal balance of the loan and the present value of the
expected future cash payments. We continue to closely monitor the loan and the collateral, and it is possible that in the future we may further downgrade the loan, resulting in material charges to the allowance for loan losses.



The additional interest income that would have been recorded from non-accrual
loans, if the loans had not been on non-accrual status, was $81,400 for the six months ended June 30, 2004. Cash collections on non-performing loans totaled $48,900 during the six months ended June 30, 2004 of which $38,900 was applied to principal
and $10,000 was recorded as interest income. Interest payments received on non-accrual loans are applied to principal unless there is no doubt as to ultimate full repayment of principal, in which case, the interest payment is recognized as interest
income. Interest income not recognized on non-accrual loans reduced the net yield on earning assets less than 0.1% for the six month periods ended June 30, 2004 and 2003.



Impaired Loans



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



We determine impaired loans by a periodic evaluation on an individual loan basis. At June 30, 2004 and December 31, 2003, we had classified $4.3 million
and $4.0 million, respectively, of our loans as impaired for which a $0.1 million reserve and $0.3 million reserve, respectively, were assigned. In the six months ended June 30, 2004, we collected $0.1 million on impaired loans. Subsequent to June
30, 2004, a $2.6 million impaired loan was collected as noted above under Nonperforming Assets.



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##### Table of Contents

Changes in Allowance for Loan Losses



The following table presents an analysis of changes in the allowance for loan losses during the periods indicated:



|                                      |  |                           |           |   |      |   |           |  
|------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|CHANGES IN ALLOWANCES FOR LOAN LOSSES | 
|                                      |  | Six months ended June 30, |          
|                                      |  | 2004                      |           |   | 2003 |  
|Balance at beginning of period        |  | $                         | 3,030,700 |   |      | $ | 1,982,900 |  
|                                      |  |                          
|Charge-offs                           |  |                           | (444,300  | ) |      |   | (509,800  | )
|Recoveries                            |  |                           | 36,400    |   |      |   | 48,500    |  
|                                      |  |                           |           |   |      |   |           |  
|Net charge-offs                       |  |                           | (407,900  | ) |      |   | (461,300  | )
|                                      |  |                          
|Additional provisions                 |  |                           | 450,000   |   |      |   | 775,000   |  
|                                      |  |                           |           |   |      |   |           |  
|Balance at end of period              |  | $                         | 3,072,800 |   |      | $ | 2,296,600 |  
|                                      |  |                           |           |   |      |   |           |  



Off-Balance Sheet Credit
Commitments and Contingent Obligations



Commitments to
extend credit are agreements to lend to a customer as long as there is not a violation of any condition in the loan contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since we
expect some commitments to expire without being drawn upon, the total commitment amounts do not necessarily represent future loans. At June 30, 2004, we had undisbursed loan commitments of $107.3 million.



Standby letters of credit and financial guarantees are conditional
commitments issued to secure the financial performance of a customer to a third party. These are issued primarily to support public and private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer is
essentially the same as that involved in extending a loan to that customer. We hold certificates of deposit and other collateral of at least 100% of the notional amount as support for letters of credit for which we deem collateral to be necessary.
At June 30, 2004, we had outstanding standby letters of credit with a potential $2.5 million of obligations. These standby letters of credit will mature at various dates through 2006.



Deposits



Total deposits increased from $224.7 million at December 31, 2003 to $277.9 million at June 30, 2004. This increase was primarily due to a $35.6 million
increase in savings and money market deposits and a $29.4 million increase in noninterest bearing demand deposits. This increase in deposits resulted from additional emphasis on core deposits as well as a Company-wide incentive compensation program
for deposit growth, which we used to fund the increase in our loan and investment portfolios and to increase our liquidity.



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



SOURCE OF DEPOSITS



|           |  |                   |             |                       |               |   |            |   |                       |  |       |  
|---------- |  | ----------------- | ----------- | --------------------- | ------------- | - | ---------- | - | --------------------- |  | ----- | -
|           |  | December 31, 2003 |             |                       | June 30, 2004 |  
|           |  | Book Value        |             | WeightedAverage Yield |               |   | Book Value |   | WeightedAverage Yield | 
|Branches   |  | $                 | 175,562,000 |                       | 78.1          | % |            | $ | 237,158,100           |  | 85.4  | %
|Money desk |  |                   | 26,517,300  |                       | 11.8          |   |            |   | 15,879,300            |  | 5.7   |  
|Brokered   |  |                   | 22,634,000  |                       | 10.1          |   |            |   | 24,824,000            |  | 8.9   |  
|           |  |                   |             |                       |               |   |            |   |                       |  |       |  
|Total      |  | $                 | 224,713,300 |                       | 100.0         | % |            | $ | 277,861,400           |  | 100.0 | %
|           |  |                   |             |                       |               |   |            |   |                       |  |       |  



Our money desk
attracts primarily certificates of deposit from institutional investors nationwide by telephone. We also engage brokers to place certificates of deposit for their customers. During 2004, the certificates of deposit obtained through our money desk or
deposit brokers generally had maturities ranging from six months to four years. We limit the amount of money desk and broker deposits that are scheduled to mature in any one calendar month. In addition, we have historically maintained an appropriate
level of liquidity specifically to counter any concurrent deposit reduction that might occur.



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



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



Borrowed Funds



At June 30, 2004, the Bank had
outstanding $2.45 million of 8% Optional Convertible Subordinated Debentures due June 1, 2009 (the Debentures). The Debentures bear interest at the rate of 8% payable semiannually and are convertible at the option of the holder at any time up
to December 1, 2004 into shares of Bancshares Common Stock at the conversion price $2.00 per share. The Debentures are treated as Tier 2 regulatory capital for the Bank.



At June 30, 2004, we had $32.0 million in advances from the FHLB which were collateralized by certain qualifying loans with
a carrying value of $38.8 million and investment securities with a carrying value of $45.4 million. The advances mature on various dates from 2004 through 2006. Advances totaling $25.0 million bear interest at a weighted average fixed rate of 2.74%
and a $7.0 million advance bears interest at a rate of the prime lending rate less 2.89% (1.36% at June 30, 2004). Interest is payable monthly with principal and any accrued interest due at maturity.



In October 2002, Bancshares newly formed wholly owned subsidiary,
Alliance Bancshares California Capital Trust I, a Delaware trust, issued and sold $7,217,000 of trust preferred securities. These securities mature in 30 years, are redeemable at the Companys option beginning after 5 years at par, and require
quarterly distributions which will reset quarterly at the three-month LIBOR rate plus 3.4%.



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FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS



We face risk from changes in interest rates.



The success of our business depends, to a large extent, on our net interest
income. Changes in market interest rates can affect our net interest income by affecting the spread between our interest earning assets and interest bearing liabilities. This may be due to the different maturities of our interest earning assets and
interest bearing liabilities, as well as an increase in the general level of interest rates. Changes in market interest rates also affect, among other things:



| |  | Our ability to originate loans;
| | - | -------------------------------



| |  | The ability of our borrowers to make payments on their loans;
| | - | -------------------------------------------------------------



| |  | The value of our interest earning assets and our ability to realize gains from the sale of these assets;
| | - | --------------------------------------------------------------------------------------------------------



| |  | The average life of our interest earning assets;
| | - | ------------------------------------------------



| |  | Our ability to generate deposits instead of other available funding alternatives; and
| | - | -------------------------------------------------------------------------------------



| |  | Our ability to access the wholesale funding market.
| | - | ---------------------------------------------------



Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political
conditions and other factors beyond our control.



We face risk from possible
declines in the quality of our assets.



Our financial
condition depends significantly on the quality of our assets. While we have developed and implemented underwriting policies and procedures to guide us in the making of loans, compliance with these policies and procedures in making loans does not
guarantee repayment of the loans. If the level of our non-performing assets rises, our results of operations and financial condition will be affected. A borrowers ability to pay its loan in accordance with its terms can be adversely affected
by a number of factors, such as a decrease in the borrowers revenues and cash flows due to adverse changes in economic conditions or a decline in the demand for the borrowers products and/or services.



Our allowances for loan losses may be inadequate.



We establish allowances for loan losses against each segment of our loan
portfolio. At June 30, 2004, our allowance for loan losses equaled 1.3% of loans. Although we believed that we had established adequate allowances for loan losses as of June 30, 2004, the credit quality of our assets is affected by many factors
beyond our control, including local and national economic conditions, and the possible existence of facts which are not known to us which adversely affect the likelihood of repayment of various loans in our loan portfolio and realization of the
collateral upon a default. Accordingly, we can give no assurance that we will not sustain loan losses materially in excess of the allowance for loan losses. In addition, the FDIC and California Department of Financial Institutions, as an integral
part of their examination process, periodically review our allowance for loan losses and could require additional provisions for loan losses. Material future additions to the allowance for loan losses may also be necessary due to increases in the
size and changes in the composition of our loan portfolio. Increases in our provisions for loan losses would adversely affect our results of operations.



Economic conditions may worsen.



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



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At June 30, 2004, a significant number of our loans were collateralized by real estate located in
California. Because of this concentration in California, our financial position and results of operations have been and are expected to continue to be influenced by general trends in the California economy and its real estate market. Real estate
market declines may adversely affect the values of the properties collateralizing loans. If the principal balances of our loans, together with any primary financing on the mortgaged properties, equal or exceed the value of the mortgaged properties,
we could incur higher losses on sales of properties collateralizing foreclosed loans. In addition, California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides, which are not
typically covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may adversely impact our ability to recover losses on properties affected by such disasters and adversely impact our results of operations.



Our business is very competitive.



There is intense competition in Southern California and elsewhere in the
United States for banking customers. We experience competition for deposits from many sources, including credit unions, insurance companies and money market and other mutual funds, as well as other commercial banks and savings institutions. We
compete for loans and deposits primarily with other commercial banks, mortgage companies, commercial finance companies and savings institutions. In recent years out-of-state financial institutions have entered the California market, which has also
increased competition. Many of our competitors have greater financial strength, marketing capability and name recognition than we do, and operate on a statewide or nationwide basis. In addition, recent developments in technology and mass marketing
have permitted larger companies to market loans more aggressively to our small business customers. Such advantages may give our competitors opportunities to realize greater efficiencies and economies of scale than we can. We can provide no assurance
that we will be able to compete effectively against our competition.



A
significant portion of our loan portfolio consists of construction loans to developers for tract projects and single homes for sale to unidentified buyers.



At June 30, 2004, we had outstanding construction loans to developers for tract projects and single homes for sale to unidentified buyers totaling
$50.8 million, representing 21.9% of our loan portfolio, and additional commitments for these projects in the amount of $49.6 million. These types of loans generally have greater risks than loans on completed homes, multifamily and commercial
properties. A construction loan generally does not cover the full amount of the construction costs, so the borrower must have adequate funds to pay for the balance of the project. Price increases, delays and unanticipated difficulties can materially
increase these costs. Further, even if completed, there is no assurance that the borrower will be able to sell the project on a timely or profitable basis, as these are closely related to real estate market conditions, which can fluctuate
substantially between the start and completion of the project. If the borrower defaults prior to completion of the project, the value of the project will likely be less than the outstanding loan, and we could be required to complete construction
with our own funds to minimize losses on the project.



Our business is
heavily regulated.



Both Bancshares, as a bank holding
company, and Bank, as a California-chartered FDIC insured bank, are subject to significant governmental supervision, regulation and legislation, which is intended primarily to maintain a safe and sound banking system, to protect depositors and the
FDIC insurance fund, and to facilitate the conduct of sound monetary policy, and are not intended to protect bank and bank holding company shareholders. Statutes, regulations and regulatory policies affecting us may be changed at any time, and the
interpretation of these statutes and regulations by examining authorities also may change. We cannot assure you that future changes in applicable statutes, regulations, legislation and policies or in their interpretation will not materially
adversely affect our business.



A significant portion of our deposits are
higher-cost, less stable deposits obtained through our money desk.



We attract primarily certificates of deposit from institutional investors telephonically nationwide through a money desk. We also engage brokers to place certificates of deposit with their customers. As of June 30, 2004, money desk deposits
were $15.9 million representing 6% of total deposits, as compared to $26.5 million at December



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##### Table of Contents

31, 2003 representing 12% of total deposits. Brokered deposits were $24.8 million at June 30, 2004 representing 9% of
total deposits as compared to $22.6 million at December 31, 2003 representing 10% of total deposits. All of our brokered deposits at June 30, 2004 were obtained through one broker. The discontinuation of business between this broker and the Company
could have a material adverse effect on the Company. However, the deposits obtained through this broker as of June 30, 2004 mature throughout August 2007, and thus such discontinuation would not result in the immediate withdrawal of such
deposits.In addition, the Company could obtain certificates of deposit through other brokers. The Company intends to continue its efforts to increase its levels of core deposits in an effort to decrease its reliance on money desk and
brokered deposits.



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



The FRB may determine not to allow trust preferred securities
to be included as a part of regulatory capital.



Trust
preferred securities are considered regulatory capital for purposes of determining Bancshares capital ratios. However, in December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN
46R), Consolidation of Variable Interest Entities, which required companies that have issued trust preferred securities to deconsolidate the related entities and restate their balance sheets. Bancshares believes that the FRB
may rule on continued inclusion of trust preferred securities in regulatory capital following the issuance of FIN 46R. If the FRB ruled that Bancshares could not include any of its trust preferred securities as capital at June 30, 2004, Bancshares
would have met all applicable regulatory and capital requirements.



SBA loan
programs may be modified or discontinued.



In recent years
we have generated significant income from fees and interest on SBA loans and gains on sales of participation interests in SBA loans. Congress or the SBA may discontinue or modify these programs at any time. Such discontinuation or modification could
have a material adverse affect on our results of operations depending on our level SBA lending at the time.



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##### Table of Contents

ITEM 3. CONTROLS AND PROCEDURES



The Companys management, with the participation of the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Companys disclosure controls and procedures pursuant to Rule
13a-15 under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that the Companys disclosure
controls and procedures reasonably ensure that information required to be disclosed by the Company in this quarterly report has been made known to them in a timely manner.



There was no change in the Companys internal control over financial reporting during the Companys most recently
completed fiscal quarters that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II OTHER INFORMATION



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



The Annual Meeting of Shareholders of the Company was held on May 28, 2004. Set forth below are the matters voted on by Shareholders at the Annual Meeting and the results of the voting.



(1) Election of Directors. Set forth below is the name of each
Director that was nominated and elected at the Annual Meeting and the respective numbers of votes cast for their election and the respective number of votes withheld. As the election was uncontested, there were no broker non-votes.



|                   |  |            |  |         
|------------------ |  | ---------- |  | --------
|                   |  | Votes Cast
|Nominee Director   |  | For        |  | Withheld
|Michael L. Abrams  |  | 3,755,791  |  | 63,200  
|Robert H. Bothner  |  | 3,815,791  |  | 3,200   
|Lyn S. Caron       |  | 3,815,791  |  | 3,200   
|Willie D. Davis    |  | 3,755,791  |  | 63,200  
|Curtis S. Reis     |  | 3,815,791  |  | 3,200   
|D. Gregory Scott   |  | 3,815,791  |  | 3,200   
|Andrew A. Talley   |  | 3,815,791  |  | 3,200   
|Robert H. Thompson |  | 3,815,791  |  | 3,200   



(2) Ratification of
Independent Public Accountants. The Shareholders ratified the selection of McGladrey & Pullen, LLP as the Companys independent public accountants for fiscal 2004 by the following vote:



|           |  |                   |  |       
|---------- |  | ----------------- |  | ------
|Votes Cast |  | Shares Abstaining
|For        |  | Against           | 
|3,770,791  |  | 1,000             |  | 47,200



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) | Exhibits.
| | --- | ---------



|   |  |                            
|-- |  | ---------------------------
|31 |  | Rule 13a-14 Certifications 
|   | 
|32 |  | Section 1350 Certifications



| | (b) | Reports on Form 8-K:
| | --- | --------------------



The Company filed a Current Report on Form 8-K (Item 9) on May 28, 2004 to report that it had issued a press release announcing that its Annual Meeting of
Shareholders was held on May 28, 2004 and reporting on certain comments made by the Chief Executive Officer at the meeting.



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##### Table of Contents

SIGNATURES



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



|                      |  |                                |  |                             
|--------------------- |  | ------------------------------ |  | ----------------------------
|DATE: August 12, 2004 |  | ALLIANCE BANCSHARES CALIFORNIA
|                      |  |                               
|                      |  | By:                            |  | /s/ Daniel L. Erickson      
|                      |  |                                |  | Daniel L. Erickson          
|                      |  |                                |  | Executive Vice President and
|                      |  |                                |  | Chief Financial Officer     



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