Pacific Premier Bancorp (PPBI) 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

OR

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

For the transition period from         to        

Commission File Number 0-22193

PACIFIC PREMIER BANCORP, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	33-0743196
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1600 SUNFLOWER AVENUE, 2^ND FLOOR, COSTA MESA, CALIFORNIA 92626

(714) 431 - 4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o No ý

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,259,988 shares of common stock par value $0.01 per share, were outstanding as of November 14, 2005.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

FOR THE QUARTER ENDED SEPTEMBER 30, 2005

PART I             FINANCIAL INFORMATION
Item 1	Consolidated Statements of Financial Condition: September 30, 2005 (unaudited) and December 31, 2004
	Consolidated Statements of Income: For the three and nine months ended September 30, 2005 and 2004 (unaudited)
	Consolidated Statement of Stockholders’ Equity and Comprehensive Income: For the three and nine months ended September 30, 2005 and 2004 (unaudited)
	Consolidated Statements of Cash Flows: For the nine months ended September 30, 2005 and 2004 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures About Market Risk .
Item 4	Controls and Procedures
PART IIOTHER INFORMATION
Item 1	Legal Proceedings
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3	Defaults Upon Senior Securities.
Item 4	Submission of Matters to a Vote of Security Holders
Item 5	Other Information
Item 6	Exhibits

Item 1.  Financial Statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

	September 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Cash and due from banks	$	6,289		$	3,003
Federal funds sold	20,000			13,000
Cash and cash equivalents	26,289			16,003
Investment securities available for sale	35,967			36,455
Investment securities held to maturity:
FHLB Stock, at cost	13,348			8,389
Loans:
Loans held for sale, net	344			532
Loans held for investment, net	572,226			469,822
Accrued interest receivable	2,792			1,938
Foreclosed real estate	369			351
Premises and equipment	5,895			5,244
Income taxes receivable	144			188
Deferred income taxes	4,474			3,473
Other assets	974			729
Total Assets	$	662,822		$	543,124
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts
Noninterest bearing	$	17,115		$	11,732
Interest bearing:
Transaction accounts	65,389			63,438
Certificates of deposit	242,134			213,717
Total Deposits	324,638			288,887
Borrowings	272,500			196,400
Subordinated debentures	10,310			10,310
Accrued expenses and other liabilities	6,070			3,499
Total Liabilities	$	613,518		$	499,096
COMMITMENTS AND CONTINGENCIES	—			—
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value; 15,000,000 shares authorized; 5,259,988 shares issued and outstanding at September 30, 2005 and 5,258,738 shares issued and outstanding at December 31, 2004.	$	53		$	53
Additional paid-in capital; common stock and warrants	67,567			67,564
Accumulated deficit	(17,760		)	(23,280		)
Accumulated other comprehensive loss, net of tax of $171 (2005) and $217 (2004)	(556		)	(309		)
Total Stockholders’ Equity	$	49,304		$	44,028
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	662,822		$	543,124

Accompanying notes are an integral part of these consolidated financial statements.

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(UNAUDITED)

	For the Three Months Ended					For the Nine Months Ended September 30,
	September 30, 2005		September 30, 2004			September 30, 2005			September 30, 2004
INTEREST INCOME:
Loans	$	8,230	$	5,123		$	22,585		$	13,820
Other interest-earning assets	510		804			1,422			3,072
Total interest income	8,740		5,927			24,007			16,892
INTEREST EXPENSE:
Interest-bearing deposits	2,145		1,440			5,736			3,948
Other borrowings	2,125		530			5,139			1,116
Subordinated debentures	162		112			446			218
Total interest expense	4,432		2,082			11,321			5,282
NET INTEREST INCOME	4,308		3,845			12,686			11,610
PROVISION FOR LOAN LOSSES	56		195			292			460
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	4,252		3,650			12,394			11,150
NONINTEREST INCOME:
Loan servicing fee income	513		139			1,001			382
Bank and other fee income	125		154			383			447
Net gain from loan sales	270		47			364			105
Net gain from investment securities	—		358			—			1,931
Other income	148		63			1,214			379
Total noninterest income	1,056		761			2,962			3,244
NONINTEREST EXPENSE:
Compensation and benefits	1,914		1,842			5,614			5,106
Premises and occupancy	391		333			1,034			1,030
Data processing	86		80			249			233
Net loss (gain) on foreclosed real estate	18		(54		)	(7		)	(13		)
Other expense	668		841			1,890			2,188
Total noninterest expense	3,077		3,042			8,780			8,544
INCOME BEFORE INCOME TAXES	2,231		1,369			6,576			5,850
PROVISION FOR INCOME TAXES	398		219			1,056			425
NET INCOME	$	1,833	$	1,150		$	5,520		$	5,425
INCOME PER SHARE:
Basic income per share	$	0.35	$	0.22		$	1.05		$	1.03
Diluted income per share	$	0.27	$	0.17		$	0.83		$	0.82
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	5,259,241		5,256,427			5,258,907			5,255,527
Diluted	6,691,665		6,652,867			6,650,164			6,596,092

Accompanying notes are an integral part of these consolidated financial statements.

2

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)

(UNAUDITED)

	Common Stock Shares	Amount		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Comprehensive Income		Total Stockholders’ Equity
Balance at December 31, 2003	5,255,072	$	53	$	67,546	$	(30,021	)	$	(246	)			$	37,332
Net income	—	—		—		5,425			—			$	5,425	5,425
Unrealized loss on investments, net of tax of ($170)	—	—		—		—			3			3		3
Total comprehensive income	—	—		—		—			—			$	5,428	—
Stock options exercised	3,666	—		18		—			—					18
Balance at September 30, 2004	5,258,738	$	53	$	67,564	$	(24,596	)	$	(243	)			$	42,778

	Common Stock Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Comprehensive Income  (Loss)			Total Stockholders’ Equity
Balance at December 31, 2004	5,258,738		$	53	$	67,564		$	(23,280	)	$	(309	)				$	44,028
Net income	—		—		—			5,520			—			$	5,520		5,520
Unrealized loss on investments, net of tax of ($171)	—		—		—			—			(247		)	(247		)	(247		)
Total comprehensive income	—		—		—			—			—			$	5,273		—
Shares repurchased	(2,500	)	—		(26		)	—			—						(26		)
Stock options exercised	3,750		—		29			—			—						29
Balance at September 30, 2005	5,259,988		$	53	$	67,567		$	(17,760	)	$	(556	)				$	49,304

Accompanying notes are an integral part of these consolidated financial statements.

3

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(UNAUDITED)

	Nine Months Ended
	September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	5,520		$	5,425
Adjustments to Net Income:
Depreciation expense	256			350
Provision for loan losses	292			460
Loss (gain) on sale, provision, and write-down of foreclosed real estate	119			(22		)
Net unrealized loss and amortization on investment securities	241			265
Loss on sale of investment securities available for sale	—			42
Gain on sale of loans held for investment	(364		)	(105		)
Net accretion on Participation Contract	—			(1,927		)
Gain on sale and termination of residual assets of Participation Contract	—			(1,973		)
Proceeds from the sales of, and principal payments from, loans held for sale	27			63
Change in current and deferred income tax receivable	(957		)	(502		)
Increase in accrued expenses and other liabilities	2,571			2,633
Federal Home Loan Bank stock dividend	(170		)	(90		)
Increase in other assets	(1,095		)	(798		)
Net cash provided by operating activities	6,440			3,821
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale and principal payments on loans held for investment	86,264			57,649
Purchase, origination and advances of loans held for investment	(188,722		)	(216,717		)
Principal payments on securities available for sale	—			840
Proceeds from sale of foreclosed real estate	150			1,116
Purchase of securities available for sale	—			(5,314		)
Proceeds from sale or maturity of securities available for sale	—			7,436
Proceeds from Participation Contract	—			1,503
Proceeds from sale and termination of residual assets of Participation Contract	—			7,269
Increase in premises and equipment	(911		)	(210		)
Purchase of FHLB stock	(4,789		)	(4,225		)
Net cash used in investing activities	(108,008		)	(150,653		)
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposit accounts	35,751			57,088
Proceeds from FHLB advances	93,500			94,900
(Repayment of)/proceeds from other borrowings	(17,400		)	8,400
Issuance of subordinated debentures	—			10,310
Proceeds from exercise of stock options	3			18
Net cash provided by financing activities	111,854			170,716
NET INCREASE IN CASH AND CASH EQUIVALENTS	10,286			23,884
CASH AND CASH EQUIVALENTS, beginning of period	16,003			2,440
CASH AND CASH EQUIVALENTS, end of period	$	26,289		$	26,324
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid	$	11,233		$	5,219
Income taxes paid	$	2,049		$	251
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate	$	287		$	398

Accompanying notes are an integral part of these consolidated financial statements.

4

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(UNAUDITED)

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiary, Pacific Premier Bank, F.S.B. (the “Bank”) (collectively, the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2005, the results of its operations for three and nine months ended September 30, 2005 and 2004 and its stockholders’ equity, comprehensive income and cash flows for the nine months ended September 30, 2005 and 2004.  Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2005.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, using the equity method under which the subsidiary’s net earnings are recognized in the Company’s statement of income.

The pro forma effects of applying SFAS No. 123 are disclosed below (dollars in thousands, except per share data):

	For the Three Months Ended
	September 30, 2005		September 30, 2004
	(Unaudited)
Net income to common stockholders:
As reported	$	1,833	$	1,150
Stock-based compensation that would have been reported using the fair value method of SFAS 123	—		123
Pro forma	$	1,833	$	1,027
Basic earnings per share:
As reported	$	0.35	$	0.22
Pro forma	$	0.35	$	0.20
Diluted earnings per share:
As reported	$	0.27	$	0.17
Pro forma	$	0.27	$	0.15

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In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB NO. 51” (“FIN 46”) and in December 2003, FASB issued a revision (“FIN 46R”).  FIN 46 and FIN 46R address the requirements for consolidation by business enterprises of variable interest entities.  Subsidiary business trusts formed by bank holding companies to issue trust preferred securities and lend the proceeds to the parent holding company have been determined to not meet the definition of a variable interest entity and therefore must be deconsolidated for financial reporting purposes.  Bank holding companies have previously consolidated these entities and reported the trust preferred securities as liabilities in the consolidated financial statements.  The Company adopted this statement at the time of the issuance of the junior subordinated debentures in March 2004, which did not have a material impact on the Company’s financial statements as subordinated debentures are reported as a component of liabilities.  See Note 4 – Subordinated Debentures.

In December 2004, the FASB staff issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123R, “Share-Based Payment.”  SFAS No. 123R focuses primarily on transactions in which the entity exchanges its equity instruments for employee services and generally establishes standards for the accounting for transactions in which an entity obtains goods or services in share-based payment transactions.  SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements over the period during which an employee is required to provide service in exchange for the award.  SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based method in accounting for share-based transactions with employees.  SFAS No. 123R is effective as of the beginning of the first interim reporting period that begins after June 15, 2005.  On April 14, 2005, the effective date was amended by the SEC.  As a result, SFAS No. 123R is now effective for most public companies for annual (rather than interim) periods that begin after June 15, 2005.  Therefore, we will begin to expense options in the first quarter of 2006, unless further amended by the SEC.  Management is currently evaluating the effect of adoption of SFAS No. 123R, but does not expect adoption to have a material effect on the firm’s financial condition or cash flows. However, any future issuance of options will reduce earnings.

Note 2 – Regulatory Matters

The Bank’s capital amounts and ratios are presented in the following table:

	Actual				To be adequately capitalized				To be well capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
At September 30, 2005 (Unaudited)
Total Capital (to risk-weighted assets)	$	56,168	12.59	%	$	35,679	8.00	%	$	44,599	10.00	%
Tier 1 Capital (to adjusted tangible assets)	53,527		8.12	%	26,378		4.00	%	32,973		5.00	%
Tier 1 Risk-Based Capital (to risk-weighted assets)	56,168		12.00	%	17,840		4.00	%	26,759		6.00	%
At December 31, 2004
Total Capital (to risk-weighted assets)	$	51,316	13.59	%	$	30,206	8.00	%	$	37,758	10.00	%
Tier 1 Capital (to adjusted tangible assets)	49,072		9.09	%	21,600		4.00	%	27,001		5.00	%
Tier 1 Risk-Based Capital (to risk-weighted assets)	51,316		13.00	%	15,103		4.00	%	22,655		6.00	%

Note 3 – Borrowings

At September 30, 2005, the Bank had no advances on its $100 million credit facility with Salomon Brothers.  At September 30, 2005, the Bank also had one advance in the amount of $1.0 million at a rate of 4.50% per annum against its $18.8 million credit facility, secured by mutual funds pledged to Pershing Bank.  Additionally, the Company had $271.5

6

million in Federal Home Loan Bank (“FHLB”) advances with a weighted average interest rate of 3.41% and a weighted average maturity of 0.29 years, as of September 30, 2005.  Advances from the FHLB are collateralized by pledges of certain real estate loans with an aggregate principal balance of $459.6 million.  As of September 30, 2005, the Bank was able to borrow up to 45% of its total assets as of June 30, 2005 under the line, which amounted to $284.1 million, an increase of $45.2 million from the prior quarter.  FHLB advances consisted of the following as of September 30, 2005:

					Weighted
					Average Annual
FHLB Advances Maturing in:	Amount		% of Total		Interest Rate
	(dollars in thousands)
One month or less	$	106,500	39.23	%	3.95	%
Over one month to three months	75,000		27.62	%	3.10	%
Over three months to six months	5,000		1.84	%	2.51	%
Over six months to one year	60,000		22.10	%	2.91	%
Over one year	25,000		9.21	%	3.37	%
Total FHLB Advances	$	271,500	100.00	%	3.41	%

Note 4 – Subordinated Debentures

In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) to PPBI Trust I, which fund the payment of $10.0 million of Floating Rate Trust Preferred Securities which were issued by PPBI Trust I in March 2004. The net proceeds from the offering of Trust Preferred Securities were contributed as capital to the Bank to support further growth.  Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% per annum for an effective rate of 6.35% per annum as of September 30, 2005.

Under FIN 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” the Corporation is not allowed to consolidate PPBI Trust I into the Company’s financial statements.  The resulting effect on the Company’s consolidated financial statements is to report the Subordinated Debentures as a component of liabilities.  Prior to the issuance of FIN 46R, bank holding companies typically consolidated these entities and reported the Trust Preferred Securities as a component of liabilities.

Note 5 – Earnings Per Share

The tables below set forth the Company’s unaudited earnings per share calculations for the three and nine months ended September 30, 2005 and 2004.

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share is computed by dividing income available to common stockholders including common stock equivalents, such as outstanding stock options and warrants by the weighted average number of common shares and common stock equivalents outstanding for the period.  Stock options totaling 109,247 and 42,372 shares for September 30, 2005 and September 30, 2004, respectively, were excluded from the computation of diluted earnings per share due to their exercise price exceeded the average market price.

The earnings per share reconciliation is as follows (dollars in thousands, except per share data):

7

	For the Three Months Ended September 30,
	2005					2004
	Net			Per Share		Net			Per Share
	Earnings		Shares	Amount		Earnings		Shares	Amount
	(Unaudited)
Net Earnings	$	1,833				$	1,150
Basic EPS Earnings Available to common stockholders	$	1,833	5,259,241	$	0.35	$	1,150	5,256,427	$	0.22
Effect of Warrants and Dilutive Stock Options	—		1,432,424			—		1,396,440
Diluted EPS Earnings Available to common stockholders plus assumed conversions	$	1,833	6,691,665	$	0.27	$	1,150	6,652,867	$	0.17

	For the Nine Months Ended September 30,
	2005					2004
	Net			Per Share		Net			Per Share
	Earnings		Shares	Amount		Earnings		Shares	Amount
	(Unaudited)
Net Earnings	$	5,520				$	5,425
Basic EPS Earnings Available to common stockholders	$	5,520	5,258,907	$	1.05	$	5,425	5,255,527	$	1.03
Effect of Warrants and Dilutive Stock Options	—		1,391,257			—		1,340,565
Diluted EPS Earnings Available to common stockholders plus assumed conversions	$	5,520	6,650,164	$	0.83	$	5,425	6,596,092	$	0.82

Note 6 –Sale of portions of the Participation Contract

In March 2004, the Company sold its share of the residual interest in the 1998-1 component of the Participation Contract for $6.3 million.  The gain on sale was $1.6 million. In August 2004, the 1997-2 component of the Participation Contract was terminated early and the performing assets sold. The gain on the sale was $387,000.

Note 7 – Valuation Allowance for Deferred Income Taxes

The Company benefited from a reduction in its valuation allowance for deferred taxes in the three and nine months ended September 30, 2005 and the three and nine months ended 2004 of $500,000, $1.5 million, $61,000 and $1.7 million, respectively.  The Company’s valuation allowance for deferred taxes was $2.5 million at September 30, 2005. The decrease in the deferred tax valuation allowance is due to management’s updated forecast of taxable earnings for the foreseeable future. As the Company recognizes continuous taxable income and if the earnings projections show that the Company will have the ability to use its net operating loss carry-forwards, then all or part of the remaining valuation allowance for deferred taxes of $2.5 million will be eliminated.

Note 8 – Subsequent Events

On November 1, 2005, Mr. Roy A. Henderson resigned from his position on the Board of Directors of both the Corporation and the Bank

8

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The following presents management’s discussion and analysis of the consolidated financial condition and operating results of the Company for the three and nine months ended September 30, 2005 and 2004.  The discussion should be read in conjunction with the Company’s Management Discussion and Analysis included in the 2004 Annual Report on Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.  The results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results expected for the year ending December 31, 2005.

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.  There can be no assurance that future developments affecting the Company will be the same as those anticipated by management.  Actual results may differ from those projected in the forward-looking statements.  These forward-looking statements involve risks and uncertainties.  These include, but are not limited to, the following risks:   (1) changes in the performance of the financial markets,  (2) changes in the demand for and market acceptance of the Company’s products and services,  (3) changes in general economic conditions including interest rates, presence of competitors with greater financial resources, and the impact of competitive projects and pricing,  (4)  the effect of the Company’s policies,  (5)  the continued availability of adequate funding sources,  and (6)  various legal, regulatory and litigation risks.

GENERAL

The Corporation, a Delaware corporation organized in 1997, is a unitary savings and loan holding company that owns 100% of the capital stock of the Bank, the Corporation’s principal operating subsidiary.  The primary business of the Company is community banking.

The Bank was founded in 1983 as a state chartered savings and loan and became a federally chartered stock savings bank in 1991.  The Bank is a member of the FHLB of San Francisco, which is a member bank of the Federal Home Loan Bank System. The Bank’s deposit accounts are insured up to the $100,000 maximum amount currently allowable under federal laws by the Savings Association Insurance Fund (“SAIF”), which is a separate insurance fund administered by the Federal Deposit Insurance Corporation (“FDIC”).  The Bank is subject to examination and regulation by the Office of Thrift Supervision (“OTS”), its primary federal regulator, and by the FDIC.

The Company is a financial services organization committed to serving consumers and small businesses in Southern California. The Bank currently operates three full-service branches in Southern California located in the cities of San Bernardino, Seal Beach and Huntington Beach.   The Bank offers a variety of products and services for consumers and small businesses, which include checking, savings, money market accounts and certificates of deposit.  Additionally, the Bank’s lending activities are focused on generating loans secured by multi-family and commercial real estate properties, as well as, business loans throughout Southern California. The Bank funds its lending and investment activities primarily with retail deposits obtained through its branches, advances from the FHLB of San Francisco, lines of credit, and wholesale and brokered certificates of deposits.

The Company’s principal sources of income are the net spread between interest earned on loans and investments and the interest costs associated with deposits and other borrowings used to finance its loan and investment portfolio.  Additionally, the Bank generates fee income from various products and services offered to both depository and loan customers.

CRITICAL ACCOUNTING POLICIES

Management has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s financial statements. The Company’s significant accounting policies are described in the Notes to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K. Certain accounting policies require management to make estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at balance sheet dates and the Company’s results of operations for future reporting periods.

9

Management believes that the allowance for loan losses and the valuation allowance on deferred taxes are the critical accounting policies that require estimates and assumptions in the preparation of the Company’s financial statements that are most susceptible to significant change. For further information, see “Allowances for Loan Losses” and “Provision (Benefit) for Income Taxes” discussed later in this document and in our 2004 Annual Report on Form 10-K.

FINANCIAL CONDITION

Total assets of the Company were $662.8 million as of September 30, 2005, compared to $543.1 million as of December 31, 2004.  The $119.7 million or 22.0% increase in total assets was primarily the result of increases of $102.2 million, or 21.7%, in net loans and $10.3 million in cash and cash equivalents.

Investment Securities

A summary of the Company’s securities as of September 30, 2005 and December 31, 2004 is as follows (dollars in thousands):

	September 30, 2005
	Amortized						Unrealized		Unrealized			Estimated
	Cost						Gain		Loss			Market Value
Securities Available for Sale:
Mortgage-Backed Securities (1)	$					9,191	$	—	$	(92	)	$	9,099
Mutual Funds (2)	27,719						—		(851		)	26,868
Total securities available for sale	$				36,910		$	—	$	(943	)	$	35,967
Securities Held to Maturity:
FHLB Stock	$			13,348			$	—	$	—		$	13,348
Total securities held to maturity	$		13,348				$	—	$	—		$	13,348
Total securities	$	50,258					$	—	$	(943	)	$	49,315

	December 31, 2004
	Amortized						Unrealized		Unrealized			Estimated
	Cost						Gain		Loss			Market Value
Securities Available for Sale:
Mortgage-Backed Securities	$					9,262	$	—	$	(48	)	$	9,214
Mutual Funds	27,719						—		(478		)	27,241
Total securities available for sale	$				36,981		$	—	$	(526	)	$	36,455
Securities Held to Maturity:
FHLB Stock	$			8,389			$	—	$	—		$	8,389
Total securities held to maturity	$		8,389				$	—	$	—		$	8,389
Total securities	$	45,370					$	—	$	(526	)	$	44,844

(1)At September 30, 2005, mortgage-backed securities consisted of one collateralized mortgage obligation (“CMO”) secured by the Federal Home Loan Mortgage Corporation “(FHLMC”), with a carrying value of $9.1 million.

(2)The Company’s mutual fund investments are with Shay Assets Management Inc, within their AMF Adjustable Rate Mortgage fund and their AMF Intermediate Mortgage fund.  Both of these funds qualified for inclusion in the 20% risk-weighting capital category for the quarter ended September 30, 2005. $1.4 million of the mutual funds have been pledged to Pershing Bank to secure an advance of $1.0 million under its $18.8 million line of credit.

10

Investment Securities by Contractual Maturity

As of September 30, 2005

(dollars in thousands)

	One Year				More than One				More than Five				More than
	or Less				to Five Years				to Ten Years				Ten Years				Total
	Carrying				Carrying				Carrying				Carrying				Carrying
	Value		Yield		Value		Yield		Value		Yield		Value		Yield		Value		Yield
Mortgage-Backed Securities	$	—	0.00	%	$	—	0.00	%	$	—	0.00	%	$	9,099	4.47	%	$	9,099	4.47	%
Mutual Fund	26,868		3.92	%	—		0.00	%	—		0.00	%	—		0.00	%	26,868		3.92	%
Total securities available for sale	26,868		3.92	%	—		0.00	%	—		0.00	%	9,099		4.47	%	35,967		4.06	%
FHLB Stock	13,348		4.15	%	—		0.00	%	—		0.00	%	—		0.00	%	13,348		4.15	%
Total securities held to maturity	13,348		4.15	%	—		0.00	%	—		0.00	%	—		0.00	%	13,348		4.15	%
Total securities	$	40,216	4.00	%	$	—	0.00	%	$	—	0.00	%	$	9,099	4.47	%	$	49,315	4.08	%

Loans

Gross loans outstanding totaled $574.1 million at September 30, 2005 compared to $471.6 million at December 31, 2004, which represents a 29.0% annualized growth rate. The Company’s multi-family loans and commercial real estate secured loans grew during the third quarter of 2005 at an annualized rate of 3.2% and 72.6%, respectively.

The Bank originated $43.7 million, $21.2 million, $941,000, and $1.9 million, respectively, of adjustable-rate multi-family loans, commercial real estate secured loans, commercial business loans, and single-family residence loans for the three months ended September 30, 2005 and  $128.2 million, $56.2 million, $2.3 million, and $1.9 million, respectively, for the nine months ended September 30, 2005. Principal repayments for the three and nine months ending September 30, 2005 totaled $25.8 million and $54.1 million, respectively, and loan sales for the same periods totaled $21.5 million, and $31.8 million, respectively.

A summary of the Company’s loan originations and principal repayments for the nine months ended September 30, 2005 and 2004 are as follows (dollars in thousands):

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	For the Nine Months Ended
	September 30, 2005		September 30, 2004
Beginning balance, gross	$	471,609	$	250,117
Loans originated:
Multi-family	128,194		187,867
Commercial real estate	56,242		27,824
Commercial business loans	2,339		—
Other	1,945		11
Total loans originated	188,720		215,702
Total	660,329		465,819
Less:
Principal repayments	54,092		46,143
Net Charge-offs	18		41
Sales of loans	31,823		12,147
Transfers to REO	287		398
Total Gross loans	574,109		407,090
Ending balance loans held for sale (gross)	370		664
Ending balance loans held for investment (gross)	$	573,739	$	406,426

The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated (dollars in thousands):

	September 30, 2005						December 31, 2004
					Weighted						Weighted
			% of		Average				% of		Average
	Amount		Total		Interest Rate		Amount		Total		Interest Rate
Real Estate Loans:
Multi-family	$	450,407	78.46	%	5.78	%	$	394,582	83.66	%	5.12	%
Commercial and land	103,768		18.07	%	6.39	%	54,502		11.56	%	5.54	%
One-to-four family (1)	17,970		3.13	%	9.54	%	22,347		4.74	%	9.67	%
Commercial business	1,939		0.34	%	7.66	%	103		0.02	%	5.25	%
Other Loans	25		0.00	%	11.87	%	75		0.02	%	4.54	%
Total Gross loans	$	574,109	100.00	%	6.01	%	$	471,609	100.00	%	5.38	%

(1) Includes second trust deeds.

Allowance for Loan Losses

The allowance for loan losses totaled $2.9 million as of September 30, 2005 and $2.6 million as of December 31, 2004. The allowance for loan losses as a percent of nonperforming loans was 232.7% and 110.8% as of September 30, 2005 and December 31, 2004, respectively.  Net nonperforming assets totaled $1.5 million at September 30, 2005 and $2.5 million as of December 31, 2004, or 0.22% and 0.46% of total assets, respectively.

The Company’s determination of the level of the allowance for loan losses and correspondingly, the provision for loan losses, rests upon various judgments and assumptions.  The allowance for the one-to-four family residential loan portfolio is primarily based upon the Bank’s historical loss experience from charge-offs and real estate owned for the last 33 quarters, and a historical delinquency migration analysis.   For the multi-family and commercial real estate loan portfolio, the Bank analyzes and uses the 10 year historical loan loss experience for multi-family and commercial real estate secured loans compiled by the OTS to determine its loss factors, since the Bank has not experienced any losses or delinquency on its own loans within the income property portfolio. For the commercial business loans portfolio, the Bank bases the level of allowance on the type of collateral and the five year historical loan loss experience for commercial

12

business loans compiled by the OTS. Given the composition of the Company’s loan portfolio, the $2.9 million allowance for loan losses was considered adequate to cover losses inherent in the Company’s loan portfolio at September 30, 2005. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of the loan portfolio, in light of the prevailing factors, including economic conditions which may adversely affect the Company’s market area or other circumstances, will not require significant increases in the loan loss allowance.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses.  Such agencies may require the Bank to recognize additional provisions to increase the allowance or take charge-offs in anticipation of future losses.

The table below summarizes the activity of the Company’s allowance for loan losses for the three and nine months ended September 30, 2005 and 2004 (in thousands):

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
	2005				2004			2005			2004
Balance, beginning of period	$		2,779		$	2,195		$	2,626		$	1,984
Provision for loan losses	56				195			292			460
Charge-offs
Real estate:
One-to-four family	(38			)	(57		)	(206		)	(176		)
Multi-family	—				—			—			—
Commercial and land	—				—			—			—
Construction	—				—			—			—
Commercial Business	—				—			—			—
Other loans	—				(66		)	(6		)	(143		)
Total Charge-offs	(38			)	(123		)	(212		)	(319		)
Recoveries
Real estate:
One-to-four family	25				31			97			74
Multi-family	—				—			—			—
Commercial and land	—				—			—			—
Construction	74				—			74			—
Commercial Business	—				—			—			—
Other loans	4				105			23			204
Total Recoveries	103				136			194			278
Net (charge-offs) recoveries	65				13			(18		)	(41		)
Balance, end of period	$	2,900			$	2,403		$	2,900		$	2,403

Composition of Nonperforming Assets

The table below summarizes the Company’s composition of nonperforming assets as of the dates indicated.  The decrease in the total nonperforming assets is primarily due to decreases in net nonperforming one-to-four family loans of $1.1 million.  All nonperforming loans consist of one-to-four family loans.

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	At September 30,			At December 31,
(dollars in thousands)	2005			2004
Nonperforming loans:
Real Estate:
One-to-four family	$	1,246		$	2,371
Multi-family	—			—
Commercial real estate	—			—
Construction	—			—
Commercial Business	—			—
Other loans	—			—
Total nonaccrual loans	1,246			2,371
Foreclosures in process	—			—
Specific Allowance	(153		)	(244		)
Total nonperforming loans, net	1,093			2,127
Foreclosed Real Estate Owned	369			351
Total nonperforming assets, net (1)	$	1,462		$	2,478
Restructured Loans	$	—		$	—
Allowance for loan losses as a percent of gross loans receivable (2)	0.51		%	0.56		%
Allowance for loan losses as a percent of total nonperforming loans, gross	232.74		%	110.77		%
Nonperforming loans, net of specific allowances, as a percent of gross loans receivable	0.19		%	0.45		%
Nonperforming assets, net of specific allowances, as a percent of total assets	0.22		%	0.46		%

(1)Nonperforming assets consist of nonperforming loans and REO.  Nonperforming loans consisted of all loans 90 days or more past due and foreclosures in process less than 90 days and still accruing interest.

(2)Gross loans include loans receivable that are held for investment and are held for sale.

Liabilities and Stockholders’ Equity

Total liabilities of the Company increased from $499.1 million at December 31, 2004 to $613.5 million at September 30, 2005.  The increase is primarily due to increases in FHLB advances of $93.5 million and deposits of $35.7 million which was partially offset by a decrease in other borrowings of $17.4 million.

The Company had $272.5 million in FHLB advances and other borrowings as of September 30, 2005, compared to $196.4 million in such borrowings at December 31, 2004.  Advances from the FHLB are collateralized by pledges of certain real estate loans with an aggregate principal balance of $459.6 million.  The Bank may borrow up to 45% of its assets under the line.  As of September 30, 2005, the maximum the Bank may borrow was $284.1 million, based on the Bank’s assets as of June 30, 2005.  The total cost of the Company’s borrowings at September 30, 2005 was 3.52%, an increase of 140 basis points compared to the same period in 2004.

Deposits increased by $35.7 million to $324.6 million at September 30, 2005, compared to $288.9 million of deposits at December 31, 2004.  The increase in deposits was primarily comprised of increases of $7.3 million in transaction accounts and $28.1 million in wholesale and brokered certificates of deposits. During the three months ended September 30, 2005, the cost of deposits increased 76 basis points to 2.85% compared to the same period in 2004.

Total stockholder’s equity increased $5.3 million to $49.3 million at September 30, 2005, compared to $44.0 million at December 31, 2004, primarily due to net income during this period.

14

RESULTS OF OPERATIONS

Highlights for the three and nine months ended September 30, 2005 and 2004:

The Company recorded third quarter net income of $1.8 million, or $0.27 per diluted share, compared to net income of $1.2 million, or $0.17 per diluted share for the third quarter of 2004, an increase of 59.4% in net income.  Net income for the nine months ended September 30, 2005 was $5.5 million, or $0.83 per diluted share, compared to net income of $5.4 million, or $0.82 per diluted share for the nine months ended September 30, 2004.  The results for the first nine months of 2004 included a total of $3.9 million of interest income and gain on sale income generated from the Company’s Participation Contract compared to $1.0 million in other income associated with the Participation Contract during the nine months ended September 30, 2005.  All diluted earnings per share amounts have been adjusted to reflect the dilutive effect of all warrants and stock options outstanding.  See Note 5 — Earnings Per Share.

Return on average assets (ROAA) for the three and nine months ended September 30, 2005 was 1.16% and 1.24%, respectively, compared to 1.05% and 1.85%, respectively, for the same periods in 2004.  The Company’s return on average equity (ROAE) for the three and nine months ended September 30, 2005 was 14.95 % and 15.74%, respectively, compared to 10.90% and 17.92%, respectively, for the three and nine months ended September 30, 2004.  The Company’s basic and diluted book value per share increased to $9.38 and $7.86, respectively, at September 30, 2005, reflecting an annualized increase of 11.9% and 11.0% from December 31, 2004.  Options whose exercise price exceeds the closing market price as of September 30, 2005 are excluded from the diluted book value calculation.

Net Interest Income

For the three and nine months ended September 30, 2005, net interest income increased to $4.3 million and $12.7 million, respectively, from $3.8 million and $11.6 million for the same periods a year earlier.  The increase for the nine month period is predominately attributable to a 64.2% increase in the average loans outstanding or $207.1 million, over the prior year period, which was partially offset by increases in average borrowings and deposits outstanding of $154.8 million or 44.6% and $40.2 million or 15.7%, respectively.  The improvement in net interest income occurred despite the Company receiving no interest income from the Participation Contract in 2005 compared to $1.9 million in the first nine months of 2004.

The net interest margin for the quarter ended September 30, 2005 was 2.81% compared to 3.63% for the same period a year ago.   The elimination of the Participation Contract interest income represents 41.0% of the decrease in the net interest margin.   The remaining decrease was primarily attributable to increases in the average cost of deposits and borrowings of 76 and 114 basis points, respectively, which was partially offset by an increase in loan yield of 35 basis points.   The increase in the loan yields is primarily due to the repricing of the Bank’s adjustable rate loans.  The Bank’s loan portfolio is comprised of $558.3 million, or 97.1% of adjustable rate loans that have an overall average time to reprice of 10.2 months. The adjustable rate loan portfolio contains $250.8 million of loans that reprice monthly of which $171.7 million is indexed to the 12 Month Treasury Average rate (MTA) and $120.9 million that reprice every six months of which $91.4 million is indexed to the six-month LIBOR rate. The increase in the Company’s cost of funds is attributable to the overall rising interest rate environment and strong competitor deposit pricing within the Bank’s primary markets.

The following tables set forth the Company’s average balance sheets (unaudited), and the related weighted average yields and costs on average interest-earning assets and interest-bearing liabilities, for the three and nine months ended September 30, 2005 and 2004.

The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.  Average balances are measured on a daily basis.  The yields and costs include fees that are considered adjustments to yields.

15

	Three Months Ended						Three Months Ended
	September 30, 2005						September 30, 2004
	(dollars in thousands, unaudited)
					Average						Average
	Average				Annualized		Average				Annualized
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
Assets
Interest-earning assets:
Cash and cash equivalents	$	864	$	16	7.41	%	$	1,309	$	8	2.44	%
Federal funds sold	403		4		3.70	%	1,671		5		1.20	%
Investment securities	48,025		491		4.09	%	46,649		419		3.59	%
Participation Contract	—		—		—		1,337		372		111.29	%
Loans receivable	563,260		8,230		5.84	%	373,262		5,123		5.49	%
Total interest-earning assets	612,552		8,741		5.71	%	424,228		5,927		5.59	%
Non-interest-earning assets	17,201						14,465
Total assets	$	629,753					$	438,693
Liabilities and Equity
Interest-bearing liabilities:
Passbook accounts, money market, and checking	$	80,739	$	308	1.53	%	$	73,798	$	200	1.08	%
Certificate accounts	220,563		1,838		3.33	%	202,008		1,240		2.46	%
Total interest-bearing deposits	301,302		2,146		2.85	%	275,806		1,440		2.09	%
Borrowings	263,674		2,125		3.22	%	106,601		530		1.99	%
Subordinated debentures	10,310		162		6.29	%	10,310		112		4.35	%
Total interest-bearing liabilities	575,286		4,433		3.08	%	392,717		2,082		2.12	%
Non-interest-bearing liabilities	5,420						3,772
Total liabilities	580,706						396,489
Equity	49,047						42,204
Total liabilities and equity	$	629,753					$	438,693
Net interest income			$	4,308					$	3,845
Net interest rate spread					2.63	%					3.46	%
Net interest margin					2.81	%					3.63	%
Ratio of interest-earning assets to interest-bearing liabilities					106.48	%					108.02	%

16

	Nine Months Ended						Nine Months Ended
	September 30, 2005						September 30, 2004
	(dollars in thousands, unaudited)
					Average						Average
	Average				Annualized		Average				Annualized
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
Assets
Interest-earning assets:
Cash and cash equivalents	$	541	$	36	8.87	%	$	5,338	$	48	1.20	%
Federal funds sold	328		7		2.91	%	772		6		1.04	%
Investment securities	46,961		1,378		3.91	%	43,923		1,091		3.31	%
Participation Contract	—		—		—		3,009		1,927		85.39	%
Loans receivable	529,947		22,585		5.68	%	322,817		13,820		5.71	%
Total interest-earning assets	577,777		24,006		5.54	%	375,859		16,892		5.99	%
Non-interest-earning assets	15,765						14,697
Total assets	$	593,542					$	390,556
Liabilities and Equity
Interest-bearing liabilities:
Passbook accounts, money market, and checking	$	78,937	$	844	1.43	%	$	73,073	$	598	1.09	%
Certificate accounts	217,493		4,892		3.00	%	183,167		3,350		2.44	%
Total interest-bearing deposits	296,430		5,736		2.58	%	256,240		3,948		2.05	%
Borrowings	235,532		5,138		2.91	%	83,889		1,116		1.77	%
Subordinated debentures	10,310		446		5.77	%	7,142		218		4.07	%
Total interest-bearing liabilities	542,272		11,320		2.78	%	347,271		5,282		2.03	%
Non-interest-bearing liabilities	4,522						2,929
Total liabilities	546,794						350,200
Equity	46,748						40,356
Total liabilities and equity	$	593,542					$	390,556
Net interest income			$	12,686					$	11,610
Net interest rate spread					2.76	%					3.96	%
Net interest margin					2.93	%					4.12	%
Ratio of interest-earning assets to interest-bearing liabilities					106.55	%					108.23	%

The following table sets forth the effects of changing rates and volumes (changes in the average balances) on the Company’s net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate/volume (change in rate multiplied by change in volume).

17

	Three Months Ended September 30, 2005												Nine Months Ended September 30, 2005
	Compared to												Compared to
	Three Months Ended September 30, 2004												Nine Months Ended September 30, 2004
	Increase (decrease) due to												Increase (decrease) due to
							Rate/												Rate/
	Rate			Volume			Volume			Net			Rate			Volume			Volume			Net
	(dollars in thousands)
Interest-earning assets:
Cash and cash equivalents	$	65		$	(11	)	$	(46	)	$	8		$	410		$	(58	)	$	(364	)	$	(12	)
Federal Funds	43			(15		)	29			(1		)	16			(5		)	(11		)	0
Investment securities	232			49			(209		)	72			264			101			(77		)	288
Participation Contract	—			(1,488		)	1,116			(372		)	—			(2,569		)	642			(1,927		)
Loans receivable, net (1)	1,323			10,431			(8,647		)	3,107			(83		)	11,823			(2,975		)	8,765
Total interest-earning assets	1,663			8,966			(7,815		)	2,814			607			9,292			(2,785		)	7,114
Interest-bearing liabilities:
Passbook accounts, money market, and checking	$	325		$	75		$	(292	)	108			$	244		$	64		$	(62	)	246
Certificate accounts	1,774			456			(1,632		)	598			1,027			837			(322		)	1,542
Borrowings	1,316			3,124			(2,845		)	1,595			952			2,690			379			4,021
Subordinated debentures	200			—			(150		)	50			121			129			(21		)	229
Total interest-bearing deposits	3,615			3,655			(4,919		)	2,351			2,344			3,720			(26		)	6,038
Change in net interest income	$	(1,952	)	$	5,311		$	(2,896	)	$	463		$	(1,737	)	$	5,572		$	(2,759	)	$	1,076

Provision for Loan Losses

The provision for loan losses was $56,000 and $292,000 for the three and nine months ended September 30, 2005, compared to $195,000 and $460,000 for the same periods in 2004.   The decrease in the provision for the three months ended September 30, 2005 compared to the same period in 2004 is primarily due to a smaller increase in loan growth, which increased by $20.3 million during the third quarter of 2005 as compared to $54.9 million during the third quarter of 2004, and greater net charge-off recoveries of $52,000 compared to the same period in 2004.

For the nine months ended September 30, 2005 and 2004, net charge-offs were $18,000 and $41,000, respectively.  The Bank’s Loss Mitigation Department continues collection efforts on loans previously written-down and/or charged-off to maximize potential recoveries.  See “Provision for Loan Losses.”

Noninterest Income

Noninterest income was $1.1 million and $3.0 million for the three and nine months ended September 30, 2005, compared to $761,000 and $3.2 million for the same periods ended September 30, 2004.  The 38.8% increase in noninterest income for the three month period is primarily due to $269,000 in gains from the sale of $21.5 million of multi-family secured loans (with servicing-retained on $15.9 million of the loans) and $468,000 in prepayment penalty income received from the early pay-off of $20.8 million of loans, which was partially offset during the third quarter of 2004 by a $387,000 gain on sale from the termination of the residual interest component of the Participation Contract and the simultaneous sale of its related assets in the third quarter of 2004.  The 8.7% decrease in noninterest income over the nine month period is primarily due to the reduction of income associated with the Participation Contract during 2005, which was partially offset by an increase in prepayment penalty income of $589,000.  During the nine month period in 2004, the Company recognized a $2.0 million gain from the sale of the residual interest components of the Participation Contract. During the same period in 2005, the Company collected $1.0 million in recoveries on the sale or collection of charged-off loans associated with the Participation Contract.

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Noninterest Expense

Noninterest expense was $3.1 million and $8.8 million for the three and nine months ended September 30, 2005, respectively, compared to $3.0 million and $8.5 million for the same periods ended September 30, 2004.  The increase in noninterest expense for the nine months in 2005 was the result of an increase in compensation and benefits of $508,000, which was partially offset by a $343,000 decrease in legal expenses.

At September 30, 2005, the Company had 89 full-time equivalent employees compared to 77 at September 30, 2004.

Provision for Income Taxes

The Company’s tax provision for the three and nine months ended September 30, 2005 was $398,000 and $1.1 million, respectively.  For the same periods a year earlier, the tax provision was $219,000 and $425,000, respectively.  The Company benefited from a reduction in its valuation allowance for deferred taxes in the three and nine months ended September 30, 2005 and for the three and nine months ended September 30, 2004 of $500,000, $1.5 million, $472,000, and $1.7 million, respectively.  The Company’s valuation allowance for deferred taxes was $2.5 million at September 30, 2005. The decrease in the deferred tax valuation allowance is due to management’s updated forecast of taxable earnings for the foreseeable future and because we believe that it is more likely than not that we will realize these tax assets. As the Company recognizes continuous taxable income and if the earning projections show that the Company will, more likely than not, have the ability to use its net operating loss carry-forwards, then all or part of the remaining valuation allowance for deferred taxes of $2.5 million will be eliminated.

LIQUIDITY

The Bank’s primary sources of funds are principal and interest payments on loans, deposits and borrowings. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.  However, the Bank has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The Bank’s average liquidity ratios were 5.27% and 11.20% for the quarters ended September 30, 2005 and 2004, respectively.

The Company’s cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities.  Cash flows provided by operating activities was $6.4 million for the nine months ended September 30, 2005, compared to $3.8 million for the nine months ended September 30, 2004.  Net cash used in investing activities was $108.0 million for the nine months ended September 30, 2005, compared to $150.7 million for the nine months ended September 30, 2004.  Net cash provided by financing activities was $111.9 million for the nine months ended September 30, 2005, compared to $170.7 million for the nine months ended September 30, 2004.

The Company’s most liquid assets are unrestricted cash and short-term investments.  The levels of these assets are dependent on the Company’s operating, lending and investing activities during any given period.  At September 30, 2005, cash and cash equivalents totaled $26.3 million and the market-value of the Bank’s short-term investments totaled $26.9 million.  The Company has other sources of liquidity if a need for additional funds arises, including the utilization of FHLB advances.

As of September 30, 2005, the Bank had outstanding commitments for loan originations and unused lines of credit of $374,000 and $2.1 million, respectively, compared to $8.1 million and $600,000, respectively, at December 31, 2004.  There were no material changes to the Company’s commitments or contingent liabilities as of September 30, 2005 compared to the period ended December 31, 2004 as discussed in the notes to the audited consolidated financial statements of Pacific Premier Bancorp, Inc., for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K.

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CAPITAL RESOURCES

The OTS capital regulations require savings institutions to meet three minimum capital requirements: a 1.5% tangible capital ratio, a 3.0% Tier 1 leverage capital ratio and an 8.0% risk-based capital ratio.  The Tier 1 leverage capital requirement has been effectively increased to 4.0% because the prompt corrective action legislation provides that institutions with less than 4.0% Tier 1 leverage capital will be deemed “undercapitalized.”In addition, the OTS, under the prompt corrective action regulation, can impose various constraints on institutions depending on their level of capitalization ranging from “well capitalized” to “critically undercapitalized.”

The table in “Item 1. Financial Statements - Note 2 - “Regulatory Matters” reflects the Bank’s capital ratios based on the end of the period covered by this report and the related OTS requirements to be adequately capitalized and well capitalized.  As of September 30, 2005, the Bank met the capital ratios required to be considered well capitalized.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since December 31, 2004. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in the Company’s Form 10-K.

Item 4.  Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(c) and 15-d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 (b)  Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions.  As a result, no corrective actions were taken.

PART II.OTHER INFORMATION

Item 1.    Legal Proceedings

The Company is not involved in any legal proceedings other than those occurring in the ordinary course of business, except for the “James Baker v. Century Financial, et al” which was discussed in the Company’s March 31, 2005 Form 10-Q.  Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.

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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.    Defaults Upon Senior Securities

None

Item 4.    Submission of Matters to a Vote of Security Holders

None

Item 5.    Other Information

None

Item 6.    Exhibits

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.

		PACIFIC PREMIER BANCORP, INC.,
November 14, 2005	By:	/s/ Steven R. Gardner
Date		Steven R. Gardner
		President and Chief Executive Officer
		(principal executive officer)
November 14, 2005		/s/ John Shindler
Date		John Shindler
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)

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Index to Exhibits

Exhibit No.		Description of Exhibit
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

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