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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003—Commission File No.: 0-22193

Pacific Premier Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(Title of class)

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

        The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is approximately $8,940,405 and is based upon the last sales price as quoted on The Nasdaq Stock Market as of June 30, 2003, the last business day of the most recently completed 2^nd fiscal quarter.

        As of March 15, 2004, the Registrant had 5,255,072 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

INDEX

PART I

ITEM 1. BUSINESS

General

        All references to "we", "us", "our", or the "Company" mean Pacific Premier Bancorp, Inc. and our consolidated subsidiaries, including Pacific Premier Bank, our primary operating subsidiary. All references to "Bank" refer to Pacific Premier Bank.

        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, (6) actual prepayment rates and credit losses as compared to prepayment rates and credit losses assumed by the Company for purposes of its valuation of mortgage derivative securities (the "Participation Contract"), (7) the effect of changes in market interest rates on the spread between the coupon rate and the pass through rate and on the discount rate assumed by the Company in its valuation of its Participation Contract, and (8) various legal, regulatory and litigation risks.

        We are a California-based community banking institution focused on full service banking to small businesses and consumers. Through our operating subsidiary, the Bank, we emphasize the delivery of depository products and services to our customers through our three branches in Orange and San Bernardino Counties in Southern California. Our lending is focused on income property loans. Income property lending consists of originating multi-family residential loans (five units and more) and commercial real estate loans within Southern California. We began originating these loans in the second quarter of 2002 with a focus on small to medium-sized loans. Our average multi-family loan and commercial real estate loan originated since June 30, 2002 had balances at origination of $728,000 and $981,000, respectively. At December 31, 2003, we had consolidated total assets of $309.4 million, net loans of $247.6 million, total deposits of $221.4 million, consolidated total stockholders' equity of $37.3 million, and the Bank was considered a "well-capitalized" financial institution for regulatory capital purposes.

        At December 31, 2003, an aggregate of 83.8% of our total loans consisted of income property loans, with multi-family loans and commercial real estate loans constituting 75.5% and 8.3%, respectively, of total loans. We generally target multi-family and commercial real estate loans in the $200,000 to $2.0 million range, as management believes this market is underserved, especially in Southern California. Substantially all of the income property loans that we originate have adjustable interest rates thereby reducing our interest rate risk with respect to these loans. Mortgage brokers and bankers generally refer income property loans to us. In addition, commencing in the third quarter of 2003, we began to offer income property loans directly to real estate investors and through referrals from our retail branches; however, we anticipate the substantial majority of these loans will continue to be obtained through referrals from mortgage brokers and bankers. From time to time, we may also obtain income property loans through whole loan purchases and through participations with other banks.

        Beginning in late 2000, our current management team, headed by Steven R. Gardner, our President and Chief Executive Officer, was retained and a new business plan was developed to lower

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the risk profile and recapitalize the Bank, and to oversee the transformation of the Bank to a community banking institution. From 1994 through early 2000, we operated as a nationwide mortgage banking institution focused on subprime and high loan-to-value debt consolidation loans. By 1999, we began to experience significant problems, including low capital levels, significant problem assets and losses as a result of write-downs on our residual assets and the overall high operating costs associated with our nationwide operations. The business plan formulated by management in the fourth quarter of 2000 focuses on the origination of income property loans and retail branch banking.

        In the third quarter of 2000, management ceased all subprime lending activities, exited the mortgage banking business, closed one underperforming branch and began disposing of nearly $200 million of high risk loans. During 2001, management continued the disposal of high risk loans, pursued the recapitalization of the Bank, reduced the Bank's interest rate risk and implemented enhanced internal controls. In 2002, we closed our final two underperforming branches, thereby further reducing noninterest expense, and closed on the private placement of a $12.0 million note and warrants that resulted in the recapitalization of the Bank. We subsequently paid-off the $12.0 million note in October of 2003. Since our new management team has assumed responsibility, it has focused on decreasing balance sheet risk through the sale and run off of subprime loans, the strengthening of loss mitigation and collection efforts, decreasing operating costs and reducing higher cost volatile deposits, thus reducing the overall size of our balance sheet. Further, in the second quarter of 2002, we began originating multi-family and commercial real estate loans, and by December 31, 2003, 83.8% of our loan portfolio consisted of these income property loans. As a result of this strategy, we have already seen a decrease in our net nonperforming loans from $14.7 million at December 31, 2001 to $2.5 million at December 31, 2003, or a decrease of 83.2%. In addition, our foreclosed real estate decreased 76.5% from $4.2 million at December 31, 2001 to $979,000 at December 31, 2003.

        During 2000, we began an emphasis on growing our core deposits, consisting of transaction accounts (i.e., checking, money market and passbook accounts), thereby providing us with a substantially less volatile source of funding for our loans than our previous reliance on high costing certificates of deposits. Since implementing this strategy, we have seen an increase in our transaction accounts from $31.5 million at December 31, 2001 to $71.4 million at December 31, 2003, or an increase of 126.4%. At December 31, 2003, transaction accounts represented 32.2% of our total deposits.

        In March 1997, we issued an aggregate principal amount of $10.0 million in subordinated debentures (the "Debentures") which were to mature in March 2004 and bore interest at the rate of 13.5% per annum, payable semi-annually. In September 1998, holders of $8.5 million in Debentures exercised their option to have us repurchase their Debentures as of December 1998. In October 2003, the remaining Debentures, with a principal amount $1.5 million, were repurchased.

        In December 1999, the Bank sold its residual mortgage-backed securities retained from securitization and related mortgage servicing rights for $19.4 million in cash and other consideration in the form of a participation contract (the "Participation Contract"). The Participation Contract is a contractual right from the purchaser of the Bank's residual mortgage-backed securities for the Company to receive 50% of any cash realized after the purchaser recaptures its initial cash investment of $8.1 million, a 15% internal rate of return and $200,000 in servicing fees from the transaction. In January 2002, we purchased the Participation Contract from the Bank at the Bank's carrying value. During the second quarter of 2002, we started to receive cash payments under the Participation Contract. We had pledged the Participation Contract as collateral for the Note issued in January 2002 as defined and discussed below. The Participation Contract was released when the Note was paid off in October 2003.

        In January 2002, we completed a recapitalization through the private placement of a $12.0 million senior secured note due 2007 (the "Note") together with warrants to purchase 1,166,400 shares of

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common stock at an exercise price of $0.75 per share (the Warrants"). The recapitalization provided us with the resources to assemble a loan origination team experienced in income property lending in the markets that we serve, to invest in the infrastructure that we believe is capable of supporting our growth plans with respect to income property lending, and to fully implement the other aspects of our community banking business model. Following the recapitalization, the Bank qualified as a "well capitalized" institution under applicable banking regulations. The Note was paid off in October 2003. The Warrant, if exercised, would constitute approximately 18% of our issued and outstanding common stock.

        In October 2003, we closed a secondary offering of 3,921,500 shares of the Company's common stock at a per share price of $6.75. We received net proceeds from the offering of approximately $24.2 million, and we utilized the proceeds to pay off the $12.0 million Note and the $1.5 million of Debentures, thus reducing our interest expense by approximately $2.1 million annually. Additionally, the Company contributed $7.0 million of additional capital to the Bank during the fourth quarter of 2003 to support future growth.

        Although we only completed the full implementation of our community banking business model during 2002, we are already realizing the results of our new strategy. In addition to achieving profitability in 2002, our loan and deposit profile has changed dramatically in the past year. The following are our growth and operating strategies:

•

Growth of our Loan Portfolio.  We intend to continue to grow our loan portfolio by increasing our production of multi-family and commercial real estate loans. In addition to our traditional methods of obtaining multi-family and commercial real estate loans through referrals from mortgage brokers and bankers, we also initiated a retail origination channel for these loans. Our originators, who we recruited from other Southern California financial institutions, have established relationships with mortgage brokers, bankers and real estate investors, which we intend to develop further to increase our market share of income property loans. We have grown our income property loan portfolio from $14.0 million at December 31, 2001 to $209.6 million at December 31, 2003.



•

Emphasis on Retail Branch Banking.  We currently have three retail branch offices, one each in Huntington Beach and Seal Beach in Coastal Orange County, California and one in San Bernardino in the Inland Empire region of California. We intend to expand the growth of our core deposits through an emphasis on relationship banking, thereby lowering our cost of funds and building franchise value. Funds for our planned lending growth may also be generated, as needed, from Federal Home Loan Bank ("FHLB") advances, wholesale and/or brokered deposits as well as other borrowings.



•

Additional Retail Products and Services.  We believe it is important to have multiple account relationships with our customers in order to retain their lower cost transaction accounts and maximize our fee income. As a result, we believe it is essential to be able to offer our customers a wide array of products and services. In this regard, management has introduced several new products and services to attract new deposit relationships and to expand the relationships with our existing customers. We have introduced the following new products and services: merchant services for processing credit and debit cards, payroll processing services, contract collections for investors and small businesses, courier services, group employee banking services for business owners, an overdraft privilege product and an airline travel Visa card offered by a third party provider. In addition, we offer our customers the convenience of insurance and mutual fund products at our retail branches. Although we intend to continue to focus on our multi-family and commercial real estate lending, we will also monitor our customers' financial needs and will consider additional loan and deposit products in the future, which are consistent with our community banking business model.

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•

Reducing Risk.  As we continue to originate higher quality income property loans, the amount of subprime loans remaining in our portfolio will continue to be proportionately reduced. At December 31, 2003, we had $7.0 million and $6.6 million of subprime and high loan-to-value loans, respectively. In addition to a reduction of risk in our loan portfolio, we also intend to continue to improve our interest rate risk profile through the origination of income property loans which we only originate on an adjustable-rate basis, thereby subjecting us to less interest rate risk, and through the growth of our core deposits

        Our executive offices are located at 1600 Sunflower Avenue, 2^nd Floor, Costa Mesa, California 92626 and our telephone number is (714) 431-4000. Our internet website address is www.ppbi.net. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, from 1998 to present, are available free of charge on our internet website. Also on our website are our Code of Ethics, Insider Trading and Beneficial Ownership forms, and Corporate Governance Guidelines. The information contained in our website, or in any websites linked by our website, is not a part of this Annual Report on Form 10-K.

Lending Activities

        General.    Beginning in 2002 and corresponding with our recapitalization, management implemented a new lending strategy to focus on originating multi-family and commercial real estate loans primarily secured by real estate in Southern California. Specifically, we target multi-family and commercial loans in the $200,000 to $4.0 million range with a particular emphasis on loans under $1.0 million. As part of this new focus, the Bank ceased originating one-to-four family residential loans. Management believes that the origination of multi-family and commercial real estate loans provides higher risk-adjusted rates of return, than the lower yielding one-to-four family loans.

        During 2003, we originated an aggregate of $161.8 million in multi-family and commercial real estate loans. The Bank's portfolio of multi-family and commercial real estate secured loans at December 31, 2003 totaled $209.6 million. At December 31, 2003, we had $247.6 million in total net loans outstanding.

        Sourcing of our Loans.    We primarily obtain new income property loans from mortgage brokers and mortgage bankers operating throughout Southern California. Our account managers work out of our corporate office and they are responsible for building and maintaining relationships with mortgage brokers and mortgage bankers that serve as a source for the income property loans that we seek. We currently have relationships with over 20 mortgage brokers. However, from August 1, 2003 to December 31, 2003, two mortgage brokerage companies accounted for 46.1% of the income property loans originated by us. We intend to continue to establish relationships with other mortgage brokers and bankers to diversify our reliance on individual mortgage brokers. Management believes that obtaining loans through mortgage brokers is a more cost-effective method of originating loans, and will afford us greater access to potential loan transactions and a consistent source of loan funding volume. Management believes that our highly focused lending strategy, timely decision-making process, competitive pricing, and flexibility in structuring transactions provide an incentive for brokers to do business with us. We also began originating income property loans in the third quarter of 2003 through referrals from our retail branches and by soliciting these loans directly on a retail basis. Our account managers will be focused on maintaining and developing relationships with individual investors, commercial real estate investment sales and leasing agents and other banks. We may also obtain loans through whole loan purchases and through participations with other banks, as these opportunities may arise from time-to-time.

        Interest Rates on Our Loans.    The interest rates we charge on our multi-family and commercial real estate loans generally vary based on a number of factors, including the degree of credit risk, size, maturity of the loan, borrower/property management expertise, and prevailing market rates for similar

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types of loans. Depending on market conditions at the time the loan is originated, certain income property loan agreements will include prepayment penalties. Most loans secured by multi-family and commercial properties are subject to an adjustment of their interest rate based on one of several interest rate indices. All loans originated by the Bank in 2002 and 2003 were adjustable-rate loans and had minimum interest rates ("floor rates") at which the rate charged may not be reduced further regardless of further reductions in the underlying interest rate index.

        Lending Risks on our Loans.    The majority of our multi-family and commercial real estate loans typically involve larger loans to a single borrower that are generally viewed as exposing us to a greater risk than one-to-four family residential lending. The liquidation values of income producing properties may be adversely affected by risks generally incidental to interests in real property, such as:

•

Changes or continued weakness in general or local economic conditions;



•

Changes or continued weakness in specific industry segments;



•

Declines in real estate values;



•

Declines in rental rates



•

Declines in occupancy rates



•

Increases in other operating expenses (including energy costs);



•

The availability of refinancing at lower interest rates or better loan terms;



•

Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;



•

Increases in interest rates, real estate and personal property tax rates; and



•

Other factors beyond the control of the borrower or the lender.

        We attempt to mitigate these risks through sound and prudent underwriting policies. See "Underwriting and Approval Authority for Our Loans" below.

        We will not make loans to any one borrower that are in excess of regulatory limits. Pursuant to OTS regulations, loans-to-one borrower cannot exceed 15% of the Bank's unimpaired capital and surplus. At December 31, 2003, the Bank's loans-to-one borrower limit was $4.3 million. See "Regulation—Federal Savings Institution Regulation—Loans-to-One Borrower."

        Underwriting and Approval Authority for Our Loans.    Our board of directors establishes our basic lending policies. Each loan must meet minimum underwriting criteria established in our lending policies and must fit within our overall strategies for yield and portfolio concentrations. The underwriting and quality control functions are managed through our corporate offices. The underwriting standards for multi-family and commercial real estate loans consider the borrower's financial resources, credit worthiness, ability to repay the requested loan amount, the level, quality and stability of cash flow from the underlying collateral, property management experience of the borrower of similar properties, the loan-to-value ratio and the debt coverage ratio.

        Our loan origination activities are centralized and conducted out of our corporate offices. Our salaried account managers generate new loans through relationships they have established with individual loan agents working at approved mortgage brokers. These managers also generate originations through our marketing campaigns targeted toward individual real estate investors, commercial sales and leasing agents as well as existing clients. Upon receipt of a completed loan application from a prospective borrower, a credit and other required reports are ordered and, if necessary, additional information is requested. Prior to processing and underwriting any loan, we issue a letter of interest based on a preliminary analysis conducted by our account managers, which letter

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details the terms and conditions on which we will consider the loan request. Upon receipt of the signed letter of interest, we process and underwrite each loan application and prepare all loan documentation wherein the loan has been approved.

        An independent appraisal conducted by a licensed appraiser is required on every property securing a loan, which must be paid for by the borrower. An internal review of the appraisal is conducted on every loan by our appraisal department. Our board of directors reviews and approves annually the independent appraisers list that we use as well as our appraisal policy.

        Our underwriter's credit memorandum includes a description of the prospective borrower and any guarantors, the collateral, and the proposed uses of loan proceeds, as well as an analysis of the borrower's financial statements and the property operating history. Each application is evaluated from a number of underwriting perspectives, including property appraised value, loan-to-value level, level of debt service coverage utilizing both the actual net operating income and forecasted net operating income, use and condition of the property, as well as the borrower's liquidity, income, credit history, net worth and operating experience. Our loans are originated on both a nonrecourse and full recourse basis. On loans facilitated to entities such as partnerships, limited liability companies, corporations or trusts, we generally seek to obtain personal guarantees from the appropriate managing members, major shareholders, trustees or other appropriate principals.

        All of our loans must satisfy an interest rate sensitivity test (qualifying rate) in order for the loan origination or purchase to be approved; that is, the actual effective income of the property securing the loan must be adequate to achieve a minimum debt service coverage ratio (the ratio of net earnings on a property to debt service) based on a higher qualifying interest rate than the actual interest rate charged on our adjustable-rate loans, and must meet the established policy minimums for such loans. Additionally, a stress test of 100 basis points above the qualifying interest rate must be adequate to achieve a minimum 1:1 debt service cover ratio. Following loan approval and prior to funding, our underwriting and processing departments assure that all loan approval terms have been satisfied, that they conform with lending policies (or are properly documented exceptions that have been approved), and that all required documentation is present and in proper form.

        Subject to the above standards, our board of directors delegates authority and responsibility for loan approvals to management up to $1.0 million. Loan amounts up to $1.0 million require the approval of at least two members of our Management Loan Committee, consisting of our President and Chief Executive Officer, Chief Credit Officer and Director of Retail Branch Banking. All loans in excess of $1.0 million, including total aggregate borrowings in excess of $1.0 million, require a majority approval of our Board's Credit Committee, which is comprised of three directors, including our President and Chief Executive Officer.

        Multi-family Residential Lending.    We originate and purchase loans secured by multi-family residential properties (five units and greater) throughout Southern California. Pursuant to our underwriting policies, multi-family residential loans may be made in an amount up to the lesser of 75% of the appraised value or the purchase price of the underlying property. In addition, we generally require a stabilized minimum debt service coverage ratio of 1.15:1, based on the qualifying loan interest rate. Loans are generally made for terms up to 30 years with amortization periods up to 30 years. As of December 31, 2003, we had $188.9 million of multi-family real estate secured loans, constituting 75.5% of our loan portfolio. Since June 30, 2002, our multi-family loans, at origination had an average outstanding balance of $728,000, loan-to-value of 66.7% and debt coverage ratio of 1.36:1.

        Commercial Real Estate Lending.    We originate and purchase loans secured by commercial real estate, such as retail centers, small office and light industrial buildings and other mixed-use commercial properties throughout Southern California. We will also, from time to time, make a loan secured by a special purpose property such as an auto wash center or motel. Pursuant to our underwriting policies, commercial real estate loans may be made in amounts up to the lesser of 75% of the appraised value

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or the purchase price of the underlying property. We consider the net operating income of the property and require a debt service coverage ratio of at least 1.25:1, based on a qualifying interest rate. Loans are generally made for terms up to fifteen years with amortization periods up to 30 years. As of December 31, 2003, we had $20.7 million of commercial real estate secured loans, constituting 8.3% of our loan portfolio. Since June 30, 2002, our commercial real estate loans, at origination, had an average balance of $981,000, loan-to-value of 60.8% and debt coverage ratio of 1.52:1.

        Residential Construction Lending.    As of December 31, 2003, we had $3.6 million of construction loans (less undisbursed loan funds of $1.0 million), constituting 1.5% of the Bank's loan portfolio at that date. We no longer originate construction loans.

        Loan Servicing.    Loan servicing is centralized at our corporate headquarters. Our loan servicing operations are intended to provide prompt customer service and accurate and timely information for account follow-up, financial reporting and loss mitigation. Following the funding of an approved loan, the data is entered into our data processing system, which provides monthly billing statements, tracks payment performance, and effects agreed upon interest rate adjustments. The loan servicing activities include (i) the collection and remittance of mortgage loan payments, (ii) accounting for principal and interest and other collections and expenses, (iii) holding and disbursing escrow or impounding funds for real estate taxes and insurance premiums, (iv) inspecting properties when appropriate, (v) contacting delinquent borrowers, and (vi) acting as fiduciary in foreclosing and disposing of collateral properties.

        When payments are not received by their contractual due date, collection efforts are begun by our loss mitigation personnel. Accounts delinquent more than 15 days are reviewed by our loss mitigation manager and are assigned to collectors to begin the process of collections. Our collectors begin by contacting the borrower telephonically and progress to sending a notice of intention to foreclose within 30 days of delinquency, and we will initiate foreclosure 30 days thereafter if the delinquent payments are not received in full. Our loss mitigation manager conducts an evaluation of all loans 90 days or more past due by obtaining an estimate of value on the underlying collateral. The evaluation may result in our establishing a specific allowance for that loan or charging off the entire loan, however, continuing with collection efforts. In addition to servicing loans that we own, at December 31, 2003, we were servicing $2.9 million of loans we sold to other investors. We receive a servicing fee for performing these services for others. We do not expect to increase the level of loans serviced for others in the foreseeable future, other than with respect to multi-family loans in which we participate with another bank.

        Loan Portfolio Composition.    In 1994, the Bank shifted its lending strategy away from originating traditional one-to-four family home loans. The Bank focused on mortgage banking nationwide, consisting of originating, purchasing and selling residential mortgage loans to borrowers with subprime credit and high loan-to-value consumer loans. In late 1998, the Bank ceased originating high loan-to-value loans due to a change in the regulatory treatment of such loans, together with a change in the secondary markets for such loans. In September 2000, the Bank ceased originating and purchasing sub-prime loan products due to concerns over the costs of originating, servicing and owning such loans as well as the overall higher delinquency and default rates of these loans. The Bank's portfolio of one-to-four family home loans at December 31, 2003 totaled $36.6 million.

        A portion of the Bank's one-to-four family loan portfolio consists of loans secured by first liens on real estate to sub-prime credit borrowers. At December 31, 2003, $7.0 million of one-to-four family loans are considered to be sub-prime. A portion of the Bank's one-to-four family loan portfolio consists of loans secured by junior liens on real estate that are considered high loan-to-value loans. At December 31, 2003, $96,000 of one-to-four family, junior lien loans possess loan-to-values greater than 125% of the appraised value of the property, $6.1 million of one-to-four family, junior lien loans possess loan-to-values between 100% and 125% of the appraised value of the property and $386,000 of

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one-to-four family, junior lien loans possess loan-to-values between 90% and 100% of the appraised value of the property.

        At December 31, 2003, our net loans receivable held for investment totaled $246.8 million and net loans receivable held for sale totaled $804,000. The types of loans that the Bank may originate are subject to federal law, state law, and regulations.

        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:

(1)

Includes second trust deeds.

        Loan Maturity.    The following table shows the contractual maturity of the Bank's gross loans for the period indicated. The table does not reflect prepayment assumptions.

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        The following table sets forth at December 31, 2003, the dollar amount of gross loans receivable contractually due after December 31, 2004, and whether such loans have fixed interest rates or adjustable interest rates.

        The following table sets forth the Bank's loan originations, purchases, sales, and principal repayments for the periods indicated:

(1)

Gross loans includes loans held for investment and loans held for sale.

(2)

Includes second trust deeds.

        Delinquencies and Classified Assets.    Federal regulations require that the Bank utilize an internal asset classification system to identify and report problem and potential problem assets. The Bank's Internal Asset Review ("IAR") Manager has responsibility for identifying and reporting problem assets

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to the Bank's Internal Asset Review Committee ("IARC"), which operates pursuant to the Board-approved IAR policy. The policy incorporates the regulatory requirements of monitoring and classifying all assets of the Bank. The Bank currently designates or classifies problem and potential problem assets as "Special Mention", "Substandard" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. All real estate owned ("REO") acquired from foreclosure is classified as "Substandard". Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "Special Mention."

        When the Bank classifies an asset, or portions thereof, as Substandard under current Office of Thrift Supervision ("OTS") policy, the Bank is required to consider establishing a general valuation allowance in an amount deemed prudent by management. The general valuation allowance, which is a regulatory term, represents a loss allowance which has been established to recognize the inherent credit risk associated with lending and investing activities, but which, unlike specific allowances, has not been allocated to particular problem assets. When the Bank classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

        The Bank's determination as to the classification of its assets and the amount of its valuation allowances are subject to review by the OTS, which can order the establishment of additional general or specific loss allowances or a change in a classification. The OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. While the Bank believes that it has established an adequate allowance for estimated loan losses, there can be no assurance that its regulators, in reviewing the Bank's loan portfolio, will not request the Bank to materially increase its allowance for estimated loan losses, thereby negatively affecting the Bank's financial condition and earnings at that time. Although management believes that an adequate allowance for estimated loan losses has been established, actual losses are dependent upon future events and, as such, further additions to the level of allowances for estimated loan losses may become necessary.

        The Bank's IARC reviews the IAR Manager's recommendations for classifying the Bank's assets quarterly and reports the results of its review to the Board of Directors. The Bank classifies assets and establishes both a general allowance and specific allowance in accordance with the Board-approved

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Allowance for Loan Losses policy. The following table sets forth information concerning substandard assets, REO and total classified assets at December 31, 2003: