Edgar Filing: FIRST PACTRUST BANCORP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

FIRST PACTRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

000-49806

(Commission File Number)

Maryland

(State of incorporation)

04-3639825

(IRS Employer Identification No.)

610 Bay Boulevard, Chula Vista, California

(Address of Principal Executive Offices)

91910

(ZIP Code)

(619) 691-1519

(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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (p232.405) of this chapter) during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer; an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12B-2 of the Exchange Act.


Large accelerated Filer ¨		Accelerated Filer ¨		Non-accelerated Filer ¨		Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of November 6, 2009 the Registrant had 4,248,135 outstanding shares of common stock.

FIRST PACTRUST BANCORP, INC.

Form 10-Q Quarterly Report

Index


		Page
PART I - Financial Information

Item 1	Financial Statements	4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4	Controls and Procedures	26

PART II - Other Information

Item 1	Legal Proceedings	26

Item 1A	Risk Factors	26

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3	Defaults Upon Senior Securities	27

Item 4	Submission of Matters to a Vote of Security Holders	27

Item 5	Other Information	27

Item 6	Exhibits	28

SIGNATURES		30

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements within the meaning of Section 27a of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. First PacTrust Bancorp, Inc. (the Company) and Pacific Trust Bank (the Bank) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, as amended, and are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company and the Bank, are generally identifiable by use of the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The ability of the Company and the Bank to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company, the Bank, and the Bank’s wholly owned subsidiaries include, but are not limited to, changes in: interest rates; the economic health of the local real estate market; general economic conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Bank’s market area; and impact of new accounting pronouncements. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

ITEM 1 – FINANCIAL STATEMENTS

First PacTrust Bancorp, Inc.

Consolidated Statements of Financial Condition

(In thousands of dollars except share data)

(Unaudited)


	September 30, 2009			December 31, 2008
ASSETS
Cash and due from banks	$	7,501		$	6,629
Federal funds sold		14,175			8,835
Interest-bearing deposits		3,714			3,773

Total cash and cash equivalents		25,390			19,237
Interest-bearing deposit in other financial institution		—			893
Securities available-for-sale		48,751			17,565
Federal Home Loan Bank stock, at cost		9,364			9,364
Loans receivable, net of allowance of $11,188 at September 30, 2009 and $18,286 at December 31, 2008		767,970			793,045
Accrued interest receivable		3,665			4,008
Real estate owned, net		5,277			158
Premises and equipment, net		4,268			4,448
Bank owned life insurance investment		17,846			17,565
Other assets		11,922			10,237

Total assets	$	894,453		$	876,520

LIABILITIES AND EQUITY
LIABILITIES
Deposits
Noninterest-bearing	$	14,580		$	14,697
Interest-bearing		622,545			583,480

Total deposits		637,125			598,177
Advances from Federal Home Loan Bank		150,000			175,000
Due to broker		5,875			—
Accrued expenses and other liabilities		4,439			4,620

Total liabilities		797,439			777,797
SHAREHOLDERS’ EQUITY
Preferred stock, $.01 par value per share, $1,000 per share liquidation preference, 5,000,000 shares authorized, 19,300 shares issued and outstanding at September 30, 2009 and December 31, 2008		19,085			19,068
Common stock, $.01 par value per share, 20,000,000 shares authorized; 5,445,000 shares issued		54			54
Additional paid-in capital		68,076			68,155
Retained earnings		36,573			38,496
Treasury stock, at cost (September 30, 2009 - 1,196,865 shares, December 31, 2008 - 1,192,832 shares)		(25,771	)		(25,736	)
Unearned employee stock ownership plan shares (September 30, 2009 - 95,220 shares, December 31, 2008 - 126,960 shares)		(1,142	)		(1,523	)
Accumulated other comprehensive income		139			209

Total shareholders’ equity		97,014			98,723

Total liabilities and shareholders’ equity	$	894,453		$	876,520

See accompanying notes to consolidated financial statements.

First PacTrust Bancorp, Inc.

Consolidated Statements of Income (Loss)

(In thousands of dollars except per share data)

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009			2008
Interest and dividend income
Loans, including fees	$	10,212	$	11,513	$	32,507		$	33,721
Securities		1,278		—		3,093			75
Dividends and other interest-earning assets		25		132		73			418

Total interest income		11,515		11,645		35,673			34,214
Interest expense
Deposits		3,036		4,031		10,201			13,413
Federal Home Loan Bank advances		1,212		1,630		4,033			3,985

Total interest expense		4,248		5,661		14,234			17,398

Net interest income		7,267		5,984		21,439			16,816
Provision for loan losses		2,709		1,479		12,395			7,370

Net interest income after provision for loan losses		4,558		4,505		9,044			9,446
Noninterest income
Customer service fees		343		412		1,025			1,186
Mortgage loan prepayment penalties		11		—		21			47
Income from bank owned life insurance		95		169		283			485
Other income		3		4		16			10

Total noninterest income		452		585		1,345			1,728
Noninterest expense
Salaries and employee benefits		1,625		1,616		5,012			5,160
Occupancy and equipment		494		454		1,474			1,360
Advertising		43		73		138			256
Professional fees		128		184		427			440
Stationary, supplies, and postage		86		106		261			298
Data processing		255		268		751			791
ATM costs		91		96		268			298
FDIC expense		337		119		1,231			357
Loan servicing & foreclosure		20		41		575			169
Operating loss on equity investment		87		89		261			267
Other general and administrative		278		260		841			761

Total noninterest expense		3,444		3,306		11,239			10,157

Income/(loss) before income tax expense/(benefit)		1,566		1,784		(850	)		1,017
Income tax expense/(benefit)		71		340		(452	)		203

Net income/(loss)	$	1,495	$	1,444	$	(398	)	$	814

Dividends and discount on preferred stock	$	251	$	—	$	752		$	—

Net income/(loss) available to common shareholders.		1,244		1,444		(1,150	)		814
Basic	$	.30	$	.35	$	(.28	)	$	.20

Diluted	$	.30	$	.35	$	(.28	)	$	.20

See accompanying notes to consolidated financial statements.

First PacTrust Bancorp, Inc.

Consolidated Statements of Cash Flows

(In thousands of dollars) (Unaudited)


	Nine Months Ended September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss)	$	(398	)	$	814
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
Provision for loan losses		12,395			7,370
Net accretion of securities		(1,431	)		(53	)
Depreciation and amortization		334			337
Employee stock ownership plan compensation expense		231			477
Stock option compensation expense		39			144
Stock award compensation expense		71			318
Bank owned life insurance income		(283	)		(485	)
Operating loss on equity investment		261			267
Impairment of securities		15			—
Loss on sale of property and equipment		2			—
Deferred income tax (benefit)/expense		(1,320	)		(262	)
Write down of other real estate owned		—			89
Interest capitalized on negative amortizing loans		(16	)		(534	)
Federal Home Loan Bank stock dividends		—			(306	)
Net change in:
Deferred loan costs		181			(400	)
Accrued interest receivable		526			(158	)
Other assets		(207	)		(234	)
Accrued interest payable and other liabilities		6,059			(373	)

Net cash provided by operating activities		16,459			7,011
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls, and principal repayments of securities available-for-sale		7,500			4,476
Purchases of securities available-for-sale		(37,572	)		—
Loan originations and principal collections, net		(312	)		(89,081	)
Redemption/(purchase) of Federal Home Loan Bank stock		—			(2,130	)
Net decrease in other interest bearing deposits		893			99
Proceeds from sale of real estate owned		7,550			432
Additions to premises and equipment		(156	)		(96	)

Net cash used in investing activities		(22,097	)		(86,300	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		38,948			1,585
Net change in Federal Home Loan Bank open line		—			(28,400	)
Repayments of Federal Home Loan Bank advances		(45,000	)		(45,000	)
Proceeds from Federal Home Loan Bank advances		20,000			145,000
Purchase of treasury stock		(28	)		(1,641	)
Issuance costs on preferred stock		(13	)		—
Tax loss from RRP shares vesting		(46	)		(27	)
Dividends paid on preferred stock		(722	)		—
Dividends paid on common stock		(1,348	)		(2,321	)

Net cash provided by financing activities		11,791			69,196

Net change in cash and cash equivalents		6,153			(10,093	)

Cash and cash equivalents at beginning of period		19,237			21,796

Cash and cash equivalents at end of period	$	25,390		$	11,703

Supplemental disclosures of cash flow information
Transfers of loans to other real estate owned		12,827			867
Dure to broker		5,875			—

See accompanying notes to consolidated financial statements.

First PacTrust Bancorp, Inc.

Consolidated Statements of Equity

(In thousands of dollars, except share and per share data)

(Unaudited)


	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Unearned ESOP			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2008	$	—		$	54	$	67,537		$	42,192		$	(23,685	)	$	(2,031	)	$	8		$	84,075
Comprehensive income:
Net loss		—			—		—			(529	)		—			—			—			(529	)
Change in net unrealized gain (losses) on securities available-for-sale, net of reclassification and tax effects		—			—		—			—			—			—			201			201

Total comprehensive loss																						(328	)

Forfeiture and retirement of RRP		—			—		4			—			(4	)		—			—			—
ESOP forfeitures used to reduce ESOP contribution		—			—		(35	)		—			—			—			—			(35	)
Stock option compensation expense		—			—		167			—			—			—			—			167
Stock awards earned		—			—		369			—			—			—			—			369
Issuance of stock awards		—			—		(131	)		—			131			—			—			—
Issuance of 19,300 shares of preferred stock, net of issuance costs of $42		19,258			—		—			—			—			—			—			19,258
Issuance of warrants for 280,795 shares of common stock and amortization of preferred stock discount		(190	)		—		193			(3	)		—			—			—			—
Purchase of 149,924 shares of treasury stock		—			—		—			—			(2,178	)		—			—			(2,178	)
Employee stock ownership plan shares earned		—			—		78			—			—			508			—			586
Tax benefit/(loss) of RRP shares vesting		—			—		(27	)		—			—			—			—			(27	)
Dividends declared ($.74 per common share)		—			—		—			(3,058	)		—			—			—			(3,058	)
Preferred stock dividends		—			—		—			(106	)		—			—			—			(106	)

Balance at December 31, 2008		19,068			54		68,155			38,496			(25,736	)		(1,523	)		209			98,723
Comprehensive income (loss):
Net loss		—			—		—			(398	)		—			—			—			(398	)
Change in net unrealized gain (losses) on securities available-for-sale, net of reclassification and tax effects		—			—		—			—			—			—			(70	)		(70	)

Total comprehensive loss																						(468	)

Forfeiture and retirement of stock		—			—		7			—			(7	)		—			—			—
Stock option compensation expense		—			—		39			—			—			—			—			39
Stock awards earned		—			—		71			—			—			—			—			71
Additional issuance costs on preferred stock		(13	)		—		—			—			—			—			—			(13	)
Amortization of preferred stock discount		30			—		—			(30	)		—			—			—			—
Purchase of 3,633 shares of treasury stock		—			—		—			—			(28	)		—			—			(28	)
Employee stock ownership plan shares earned		—			—		(150	)		—			—			381			—			231
Tax benefit/(loss) of RRP shares vesting		—			—		(46	)		—			—			—			—			(46	)
Dividends declared ($.20 per common share)		—			—		—			(773	)		—			—			—			(773	)
Preferred stock dividends		—			—		—			(722	)		—			—			—			(722	)

Balance at September 30, 2009	$	19,085		$	54	$	68,076		$	36,573		$	(25,771	)	$	(1,142	)	$	139		$	97,014

See accompanying notes to consolidated financial statements.

FIRST PACTRUST BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Amounts in thousands of dollars, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of First PacTrust Bancorp, Inc. (the Company) and its wholly owned subsidiary Pacific Trust Bank (the Bank) as of September 30, 2009 and December 31, 2008 and for the three and nine month periods ended September 30, 2009 and September 30, 2008. Significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. The December 31, 2008 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all of the disclosures required by U.S. generally accepted accounting principles.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2009. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented.

The results of operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations: The principal business of the Company is the ownership of the Bank. The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (FHLB) system, which maintains insurance on deposit accounts with the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation.

The Bank is engaged in the business of retail banking, with operations conducted through its main office and eight branches located in San Diego and Riverside counties. There are no significant concentrations of loans to any one industry or customer. However, the customer’s ability to repay their loans is dependent on the real estate market and general economic conditions in the area.

The accounting and reporting polices of the Company are based upon U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. Significant accounting policies followed by the Company are presented below.

Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, other real estate owned and the fair value of financial instruments are particularly subject to change.

Accounting for Uncertainty in Income Taxes (“ASC 740”): A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company has approximately $109 thousand of total gross unrecognized tax benefits at September 30, 2009, which represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities through 2005 and for all state income taxes through 2003. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties at September 30, 2009.

New Accounting Pronouncements: On July 1, 2009, the FASB’s GAAP Codification became effective as the sole authoritative source of US GAAP. This codification reorganizes current GAAP for non-governmental entities into a topical index to facilitate accounting research and to provide users additional assurance that they have referenced all related literature pertaining to a given topic. Existing GAAP prior to the Codification was not altered in compilation of the GAAP Codification. The GAAP Codification encompasses all FASB Statements of Financial Accounting Standards (SFAS), Emerging Issues Task Force (EITF) statements, FASB Staff Positions

(FSP), FASB Interpretations (FIN), FASB Derivative Implementation Guides (DIG), American Institute of Certified Public Accountants (AICPA) Statement of Positions (SOPS), Accounting Principals Board (APB) Opinions and Accounting Research Bulletins (ARBs) along with the remaining body of GAAP effective as of June 30, 2009. Financial Statements issued for all interim and annual periods ending after September 15, 2009 will need to reference accounting guidance embodied in the Codification as opposed to referencing the previously authoritative pronouncements. Accounting literature included in the codification is referenced by Topic, Subtopic, Section and paragraph.

In June 2009, the FASB issued SFAS No. 166, Accounting for the Transfer of Financial Assets and Amendment of FASB Statement No. 140 Instruments (“SFAS 166”). Under FASB’s Codification at ASC 105-10-65-1-d, SFAS 166 will remain authoritative until integrated into the FASB Codification. SFAS 166 removes the concept of a special purpose entity (SPE) from Statement 140 and removes the exception of applying FASB Interpretation 46 Variable Interest Entities, to Variable Interest Entities that are SPEs. It limits the circumstances in which a transferor derecognizes a financial asset. SFAS 166 amends the requirements for the transfer of a financial asset to meet the requirements for “sale” accounting. The statement is effective for all interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption to have a material impact on the Company’s financial condition, results of operations or cash flows.

In June 2009 the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). Under FASB’s Codification at ASC 105-10-65-1-d, SFAS 167 will remain authoritative until integrated into the FASB Codification. SFAS 167 amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest give it a controlling financial interest in the variable interest entity. SFAS 167 is effective for all interim and annual periods beginning after November 15, 2009. The Company does not expect the adoption to have a material impact on the Company’s financial condition, results of operations or cash flows.

In December 2007, the FASB issued ASC 805, Business Combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. ASC 805 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard did not have a material effect on the Corporation’s results of operations or financial position.

In June 2008, ASC 260-10—Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities was issued, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method of FASB Statement No. 128, Earnings Per Share. ASC 260-10 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This topic was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this topic. The adoption of this topic did not have a material impact on the current or comparative period earnings per share calculation.

In April 2009, the FASB issued ASC 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The topic requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the topic expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This topic is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this topic did not have a material effect on the results of operations or financial position.

In April 2009, the FASB issued ASC 820-10, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This topic emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The topic provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The topic also requires increased disclosures. This topic is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption of this topic did not have a material effect on the results of operations or financial position.

In April 2009, the FASB issued Staff Position ASC 825-10, Interim Disclosures about Fair Value of Financial Instruments. This topic amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This topic is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this topic did not have a material effect on the results of operations or financial position.

NOTE 3 – EMPLOYEE STOCK OWNERSHIP PLAN

In connection with its conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank in 2002, the Bank established an Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees. The Company issued 423,200 shares of common stock to the ESOP in exchange for a ten-year note in the amount of approximately $5.1 million. The $5.1 million for the ESOP purchase was borrowed from the Company.

Shares issued to the ESOP are allocated to ESOP participants based on principal repayments made by the ESOP on the loan from the Company. The loan is secured by shares purchased with the loan proceeds and is being repaid by the ESOP with funds from the Bank’s contributions to the ESOP and earnings on ESOP assets. Principal payments are scheduled to occur over a ten-year period. Dividends on unallocated and/or unearned shares first reduce accrued interest and second reduce principal.

NOTE 4 – EMPLOYEE STOCK COMPENSATION

Stock Options

A Stock Option Plan (“SOP”) provides for the issuance of options to directors, officers, and employees. The Company adopted the SOP in April of 2003 under the terms of which up to 529,000 shares of the Company’s common stock may be awarded. The options become exercisable in equal installments over a five-year period beginning on their one year anniversary after the date of grant. The options expire ten years from the date of grant. As of September 30, 2009, the Company had 466,196 exercisable options outstanding. There were no options granted during the nine months ended September 30, 2009. There were 800 shares forfeited during the nine months ended September 30, 2009 and 1,200 shares forfeited during the nine months ended September 30, 2008.

The Black-Scholes option pricing valuation model was used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

The following table represents stock option activity during the nine months ended September 30, 2009:


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at beginning of period	483,196		$	18.33
Granted	—			—
Exercised	—			—
Forfeited or expired	(800	)		20.29

Outstanding at end of period	482,396		$	18.32	4.01	$	—

Options exercisable at end of period	466,196		$	18.24	3.89	$	—

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. ASC 718 and 505 requires the recognition of stock based compensation for the number of awards that are ultimately expected to vest. As a result, recognized stock compensation expense was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 5% for senior management and the board of directors and 45% for all other employees. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances. The Company recorded stock compensation expense of $39 thousand and $144 thousand as salary and employee benefits expense during the nine months ended September 30, 2009 and September 30, 2008 respectively. As of September 30, 2009, there was a total of $32 thousand of total unrecognized compensation costs related to 16,200 nonvested options in the plan.

Options outstanding at September 30, 2009 were as follows:


	Outstanding			Exercisable
Range of Exercise Prices	Number	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number	Weighted Average Exercise Price
$17 - $22	458,396	3.92	17.88	447,996	17.90
$22 - $25	—	—	—	—	—
$25 - $29	24,000	5.68	26.88	18,200	26.79

Outstanding at quarter end	482,396			466,196

Recognition and Retention Plan

A Recognition and Retention Plan (“RRP”) provides for the issuance of shares to directors, officers, and employees. Pursuant to its 2003 stock-based incentive plan, the Company granted 220,600 shares of RRP awards since the inception of the plan. There were no shares granted during the nine months ended September 30, 2009. There were 400 shares forfeited during the nine months ended September 30, 2009 and 200 shares forfeited during the nine months ended September 30, 2008. Compensation expense for RRP awards totaled approximately $71 thousand for the nine months ended September 30, 2009 and $318 thousand for the nine months ended September 30, 2008. As of September 30, 2009, there was a total of $72 thousand unrecognized compensation cost related to 4,640 nonvested RRP awards granted under the plan.

As described in Note 14 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, the plan allows for the issuance of RRP awards that may not be sold or otherwise transferred until the restrictions have lapsed. The unearned stock-based compensation related to these awards is being amortized to compensation expense over the vesting period (generally five years). The share based expense for these awards was determined based on the market price of our stock at the date of grant applied to the total numbers of shares that were anticipated to fully vest and then amortized over the vesting period. ASC 718 and 505 requires the recognition of stock based compensation for the number of awards that are ultimately expected to vest. As a result, recognized stock compensation expense was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 6%. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

NOTE 5 – EARNINGS/(LOSS) PER SHARE

Basic earnings/(loss) per share were computed by dividing net income/(loss) by the weighted average number of shares outstanding. Diluted earnings/(loss) per share were computed by dividing net income/(loss) by the weighted average number of shares outstanding, adjusted for the dilutive effect of the outstanding stock options and restricted stock awards. Computations for basic and diluted earnings/(loss) per share are provided below.


	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009			2008
Basic
Net income/(loss)	$	1,495		$	1,444	$	(398	)	$	814
Less: Dividends on preferred stock		(241	)		0		(722	)		0
Less Imputed dividends		(10	)		0		(30	)		0

Net income/(loss) available to common shareholders	$	1,244		$	1,444	$	(1,150	)	$	814

Weighted average common shares outstanding		4,162,914			4,150,217		4,152,727			4,164,316

Basic earnings/(loss) per share	$	.30		$	.35	$	(.28	)	$	.20

Diluted
Net income/(loss) available to common shareholders	$	1,244		$	1,444	$	(1,150	)	$	814

Weighted average common shares outstanding for basic earnings per common share		4,162,914			4,150,217		4,152,727			4,164,316
Add: Dilutive effects of stock options		0			0		0			0
Add: Dilutive effects of stock awards		0			0		0			0
Add: Dilutive effects of assumed exercised common stock warrants		0			0		0			0

Average shares and dilutive potential common shares		4,162,914			4,150,217		4,152,72			7 4,164,316

Diluted earnings/(loss) per common share	$	.30		$	.35	$	(.28	)	$	.20

All outstanding options, stock awards and outstanding warrants were not considered in computing diluted earnings per common share for the period ending September 30, 2009 because they were anti-dilutive. They were anti-dilutive since the exercise prices were greater than the average market price of the common stock. Stock options for 483,616 shares of common stock were not considered in computing diluted earnings per common share for the period ending September 30, 2008 because they were anti-dilutive.

NOTE 6 – FAIR VALUE

Fair Value Hierarchy. ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

Investment Securities Available for Sale. The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Real Estate Owned Assets. Real estate owned assets are recorded at fair value at the time of foreclosure. The fair value of real estate owned assets is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring and Non Recurring Basis

Available for sale securities are measured at fair value on a recurring basis, impaired loans and real estate owned are measured at fair value on a non-recurring basis.


	Fair Value Measurements at September 30, 2009 Using
	Quoted Prices in Active Markets for Identical Assets (Level One)	Significant Other Observable Inputs (Level Two)		Significant Unobservable Inputs (Level Three)
Assets
U.S. government sponsored entities and agency securities (recurring)	—	$	5,160		—
Residential mortgage-backed securities (recurring)	—	$	43,591		—
Impaired loans (non recurring)	—		—	$	42,244
Real estate owned assets (non recurring)	—		—	$	5,277

The following represent impairment charges recognized during 2009:

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $47.2 million, net of a valuation allowance of $5.0 million at September 30, 2009, and prior charge-offs in the amount of $12.3 million. During the quarter and nine month periods ended September 30, 2009, a provision of $2.0 million and $4.3 million was made for these loans, net of charge-offs previously provided, respectively.


	Fair Value Measurements at December 31, 2008 Using
	Quoted Prices in Active Markets for Identical Assets (Level One)	Significant Other Observable Inputs (Level Two)		Significant Unobservable Inputs (Level Three)
Assets
Residential mortgage-backed securities securities (recurring)	—	$	17,565		—
Impaired loans (non recurring)	—		—	$	25,956
Real estate owned assets (non recurring)	—		—	$	158

At December 31, 2008, impaired loans had a carrying amount of $39.7 million, net of a valuation allowance of $13.8 million. During the year ended December 31, 2008, a provision of $12.1 million was made for those loans.

In accordance with ASC 825-10, the carrying amounts and estimated fair values of financial instruments, at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	25,390	$	25,390	$	19,237	$	19,237
Interest-bearing deposits in other financial institutions		—		—		893		893
Securities available-for-sale		48,751		48,751		17,565		17,565
FHLB stock		9,364		N/A		9,364		N/A
Loans receivable, net		767,970		773,685		793,045		800,422
Accrued interest receivable		3,665		3,665		4,008		4,008
Financial liabilities
Deposits	$	637,125		639,184	$	598,177	$	601,262
Advances from the FHLB		150,000		153,256		175,000		179,761
Accrued interest payable		373		373		583		583

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits in other financial institutions, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material (or is based on the current fees or cost that would be charged to enter into or terminate such arrangements).

NOTE 7 – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale portfolio at September 30, 2009 and the corresponding amounts of unrealized gains and losses therein:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for sale
U.S. government-sponsored entities and agencies	$	5,167		—	$	(7	)	$	5,160
Residential mortgage-backed securities		43,348		515		(272	)		43,591
Total available-for-sale

Securities	$	48,515	$	515	$	(279	)	$	48,751

The fair value of the investment securities portfolio in the table above is shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. All of the Company’s mortgage-backed securities are available-for-sale and have varying maturity dates. The Company’s agency security has a fixed maturity date of May 2011.

The following table summarizes the amortized cost and fair value of the available-for-sale portfolio at December 31, 2008 and the corresponding amounts of unrealized gains and losses therein:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for sale
Residential mortgage-backed securities		17,210		438		(83	)		17,565

Total available-for-sale securities	$	17,210	$	438	$	(83	)	$	17,565

The following table summarizes the investment securities with unrealized losses at September 30, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale
U.S. government-sponsored entities and agencies	$	5,160	$	(7	)	$	—	$	—	$	5,160	$	(7	)
Residential mortgage-backed securities		12,284		(272	)		—		—		12,284		(272	)

Total available-for-sale	$	17,444	$	(279	)	$	—	$	—	$	17,444	$	(279	)

During the nine months ended September 30, 2009, the Company determined that securities with a book value of $15 thousand was other-than-temporarily impaired due to current market conditions and the restricted ability to sell the security and was written off. There were no sales or calls of securities during the nine months ended September 30, 2009 and 2008.

The following table summarizes the investment securities with unrealized losses at December 31, 2008 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale
Residential mortgage-backed securities		5,186		(83	)		—		—		5,186		(83	)

Total available-for-sale	$	5,186	$	(83	)	$	—	$	—	$	5,186	$	(83	)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Statement of Financial Accounting Standards ASC 320, Accounting for Certain Investments in Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by ASC 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the ASC 325 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of September 30, 2009, the Company’s security portfolio consisted of seventeen securities, six of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed and other securities, as discussed below.

At September 30, 2009, approximately 12%, or $5.2 million, of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the $7 thousand decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2009.

The Company’s mortgage-backed securities portfolio that are in a loss position had a market value of $12.3 million with unrealized losses of approximately $272 thousand at September 30, 2009. These non-agency mortgage-backed securities were rated AAA at purchase and are not within the scope of ASC 325. The Company monitors to insure it has adequate credit support and as of September 30, 2009, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

NOTE 8 – Preferred Stock

On November 21, 2008, as part of the United States Department of the Treasury’s (the “Treasury”) Capital Purchase Program made available to certain financial institutions in the U.S. pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), the Company and the Treasury entered into a Letter Agreement including the Securities Purchase Agreement – Standard Terms Incorporated therein (the “Purchase Agreement”) pursuant to which the Company issued to the Treasury in exchange for aggregate consideration of $19.3 million, (i) 19,300 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 280,795 shares (the “Warrant Common Stock”), of the Company’s common stock, par value $0.01 per share, with an exercise price of $10.31 per share.

The proceeds from the Series A Preferred Stock qualifies as Tier 1 capital to the extent that the proceeds are infused into the Bank, and pays cumulative cash dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series A Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Series A Preferred Stock. The Series A Preferred Stock may be redeemed by the Company at par at any time, subject to Treasury consulting with our primary federal regulator, the OTS. Subject to certain limited exceptions, until November 21, 2011, or such earlier time as all Series A Preferred Stock has been redeemed or transferred by Treasury, the Company will not, without Treasury’s consent, be able to increase its dividend rate per share of common stock or repurchase its common stock other than for employee tax liability sales.

The Warrant is immediately exercisable and has a 10-year term. The Treasury will not exercise voting power with respect to any shares of Warrant Common Stock. If the Company receives aggregate gross cash proceeds of not less than $19.3 million from one or more Qualified Equity Offerings on or prior to November 21, 2009, the number of shares of Warrant Common Stock underlying the Warrant then held by Treasury will be reduced by one half of the original number of shares underlying the Warrant.

Upon receipt of the aggregate consideration from the Treasury on November 21, 2008, the Company allocated $19.3 million proceeds on a pro rata basis to the Series A Preferred Stock and the Warrant based on relative fair values. In estimating the fair value of the Warrant, the Company utilized the Black-Scholes model which includes assumptions regarding the Company’s common stock prices, stock price volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value of the Series A Preferred Stock was determined using a discounted cash flow methodology and a discount rate of 13.0%. As a result, the Company assigned $193 thousand of the aggregate proceeds to the Warrant and $19.1 million to the Series A Preferred Stock. The value assigned to the Series A Preferred Stock will be amortized up to the $19.3 million liquidation value of the Series A Preferred Stock, with the cost of such amortization being reported as additional preferred stock dividends. This results in a total dividend with a consistent effective yield of 8.41% over a five year period, which is the expected life of the Series A Preferred Stock.

In addition, the Purchase Agreement (i) grants the holders of the Series A Preferred Stock, the Warrant and the Warrant Common Stock certain registration rights, (ii) subjects the Company to certain of the executive compensation limitations included in the EESA and (iii) allows the Treasury to unilaterally amend any of the terms of the Purchase Agreement to the extent required to comply with any changes in applicable federal statutes.

On December 19, 2008, the Company filed a registration statement with the Securities and Exchange Commission (the “Commission”) for the purpose of registering the Warrant and the Warrant Common Stock in order to permit the sale of such securities by the U.S. Treasury at any time after effectiveness of the registration statement. On February 3, 2009, the registration statement was deemed effective by the Commission.

NOTE 9 – Subsequent Events

As defined in ASC 855-10, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with GAAP. The Company has evaluated subsequent events through November 6, 2009, which is the date that the Company’s financial statements are being issued.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion compares the financial condition of First PacTrust Bancorp, Inc. (the Company), at September 30, 2009, to its financial condition at December 31, 2008, and the results of operations for the three months and nine months ended September 30, 2009 to the same periods in 2008. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

The Company is a community-oriented financial institution deriving substantially all of its revenue from providing banking services to individuals within its market area, primarily San Diego County and portions of Riverside County, CA. The Company’s assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company’s basic strategy is to maintain and grow net interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. The Company’s primary market risk exposure is interest rate risk and credit risk.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Assets. The Company’s total assets increased by $17.9 million, or 2.1%, to $894.5 million at September 30, 2009 from $876.5 million at December 31, 2008. The increase primarily reflected the growth in the balance of available-for-sale securities portfolio in the amount of $31.2 million, an increase in total cash and cash equivalents of $6.2 million, and an increase in other real estate owned of $5.1 million, reduced by a decrease in loans of $25.1 million.

Investments. Securities classified as available-for-sale of $48.8 million at September 30, 2009 increased $31.2 million from December 31, 2008 due to the purchase of U.S. agency debentures and mortgage-backed securities during the period totaling $37.6 million.

Loans. Loans receivable, net of valuation allowances, decreased by $25.1 million, or 3.2%, to $768.0 million at September 30, 2009 from $793.0 million at December 31, 2008. This was the result of loan principal repayments, charge offs and foreclosures exceeding loan production during the nine months ended September 30, 2009. Loan production for the period ended September 30, 2009 was $54.4 million. The loan production was primarily attributable to growth in the Company’s Green account loan product. The Company’s ability to originate loans has been largely unaffected by the turmoil in the secondary mortgage markets given that all loans originated are kept in portfolio. The Company’s strong capital ratios coupled with being a portfolio lender has allowed the Company to take advantage of the current market and compete with other lenders who have liquidity or capital constraints and have reduced lending operations.

The following table presents the composition of the Company’s loan portfolio in thousands of dollars and in percentages as of the dates indicated.


	September 2009					December 2008
	Amount			Percent		Amount			Percent
Real Estate
One- to four-family	$	432,347		55.66	%	$	460,316		56.92	%
Commercial and multi-family		89,908		11.57			98,062		12.12
Construction		2,472		0.32			17,835		2.21
Consumer
Real estate secured-first trust deeds (Green acct)*		212,431		27.34			192,586		23.81
Real estate secured-second trust deeds (Green acct)*		8,593		1.11			8,252		1.02
Other real estate and land secured (Green acct)*		19,071		2.46			18,253		2.26

Green account subtotal		240,095		30.91			219,091		27.09
Other consumer		11,368		1.46			12,313		1.52
Commercial		569		0.08			1,133		0.14

Total loans		776,759		100.00	%		808,750		100.00	%

Net deferred loan origination costs		2,399					2,581

Allowance for loan losses		(11,188	)				(18,286	)

Total loans receivable, net	$	767,970				$	793,045

*	At 9/30/09, these totals included $240.1 million of the Company’s Green account loans, of which $221.0 million was secured by one-to four- family properties, $14.2 million was secured by commercial properties, $2.6 million was secured by land, and $2.3

million was secured by multi-family properties. At 12/31/08, these totals included $219.1 million of the Company’s Green account loans, of which $200.8 million was secured by one-to four- family properties, $14.9 million was secured by commercial properties, $2.5 million was secured by multi-family properties and $798 thousand was secured by land.

At September 30, 2009, the Company had a total of $319.3 million in interest-only mortgage loans (including Green accounts) and $34.5 million in loans with the potential for negative amortization. At December 31, 2008, the Company had a total of $347.6 million in interest-only mortgage loans and $37.3 million in loans with the potential for negative amortization. The Company no longer originates loans with the potential for negative amortization. The Company continues to originate interest-only loans and growth in those loans is primarily attributable to growth in the Company’s Green account loan product which, by its nature, is an interest-only product. Negatively amortizing and interest-only loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization which could result in a larger amount outstanding. However, management believes the risk is mitigated through the Company’s loan terms and underwriting standards.

Allowance for Loan Losses. The allowance for loan losses at September 30, 2009 was $11.2 million, which represented 1.4% of the loans, outstanding at September 30, 2009, as compared to $18.3 million, or 2.3%, of the loans outstanding at December 31, 2008. The decline in the percentage of allowance to loans outstanding was a direct result of the increase in loan charge-offs during the period for which specific reserves had been previously provided.

Management assesses the allowance for loan losses monthly. While management uses available information to recognize losses on loans future loan loss provisions may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of September 30, 2009 was maintained at a level that represented management’s best estimate of incurred losses in the loan portfolio to the extent they were both probable and reasonably estimable. See further discussion in subsection entitled “Operating Results-Provision for Loan Losses.”

Set forth below is a summary, in thousands of dollars, of the transactions in the allowance for loan losses for the nine months ended September 30, 2009 and the year ended December 31, 2008:


	Nine Months Ended September 30, 2009			Year Ended December 31, 2008
Balance, beginning of period	$	18,286		$	6,240
Provision for loan losses		12,395			13,547
Total loans charged off		(19,494	)		(1,551	)
Total recoveries		1			50

Balance, end of period	$	11,188		$	18,286

Charge-offs totaled $19.5 million for the period ending September 30, 2009, of which $16.3 million was attributed to two construction loans and one land loan that were written down to current estimated fair values.

Delinquent Loans. The following table sets forth, in thousands of dollars, our loan delinquencies by type, number, and amount at September 30, 2009, and December 31, 2008.


	Loans Delinquent For:								Total Loans Delinquent 60 days or more
	60-89 Days				Greater than 90 days				Total Loans Delinquent 60 days or more
	Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans
September 30, 2009
One- to four-family	8	$	5,924		17	$	14,870		25	$	20,794
Commercial and multi-family real estate	—		—		7		5,107		7		5,107
Home equity	—		—		—		—		—		—
Real estate secured-first trust deeds (Green acct)	1		1,050		4		4,594		5		5,644
Real estate secured-second trust deeds (Green acct)	1		269		—		—		1		269
Construction	—		—		1		2,472		1		2,472
Commercial	—		—		—		—		—		—
Land	—		—		2		1,466		2		1,466
Consumer	1		7		4		30		5		37

	11	$	7,250		35	$	28,539		46	$	35,789

Delinquent loans to total gross loans			.93	%			3.67	%			4.60	%

	Loans Delinquent For:								Total Loans Delinquent 60 days or more
	60-89 Days				Greater than 90 days				Total Loans Delinquent 60 days or more
	Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans
	(Dollars in thousands)
December 31, 2008
One- to four-family	1	$	1,825		12	$	8,942		13	$	10,767
Commercial, multi-family real estate and land	1		345		1		9,377		2		9,722
Home equity	2		1,854		1		92		3		1,946
Construction	—		—		2		17,835		2		17,835
Commercial	—		—		—		—		—		—
Consumer	—		—		—		—		—		—

	4	$	4,024		16	$	36,246		20	$	40,270

Delinquent loans to total gross loans			0.50	%			4.48	%			4.98	%

Non-performing Assets. The table below, in thousands of dollars, sets forth the amounts and categories of non-performing assets and includes those loans on nonaccrual status, loans that have been restructured resulting in a troubled debt classification and impaired loans. The Company ceases accruing interest, and therefore classifies as nonaccrual, any loan as to which principal or interest has been in default for a period of greater than 90 days, or if repayment in full of interest or principal is not expected. Of the non-performing loan balance, five loans totaling $3.0 million were current as of September 30, 2009 but were still considered impaired.


	September, 2009			December, 2008
Non-performing loans:
One- to four-family	$	17,537		$	9,745
Commercial and multi-family real estate		2,017			—
Home equity		—			92
Real estate secured-first trust deeds (Green acct)		4,948			790
Real estate secured-second trust deeds (Green acct)		—			—
Construction		2,472			17,835
Commercial		—			—
Land		1,466			9,377
Consumer		—			—

Total non-performing loans	$	28,440		$	37,839
Troubled debt restructured loans:
One- to four-family	$	5,720		$	3,538
Commercial and Multi-family real estate		8,502			5,412
Home equity		202			—
Real estate secured-first trust deeds (Green acct)		320			—
Real estate secured-second trust deeds (Green acct)		—			—
Construction		—			—
Commercial		—			—
Land		4,047			—
Consumer		—			—

Total troubled debt restructured loans	$	18,791		$	8,950

Total non-performing and troubled debt restructured loans	$	47,231		$	46,789

Real estate owned, net		5,277			158
Total non-performing assets	$	52,508		$	46,947

Non-performing assets to total assets		5.91	%		5.36	%

Total non-performing loans increased $400 thousand to $47.2 million at September 30, 2009 compared to $46.8 million at December 31, 2008. The Company utilizes estimated current fair values when assessing loan loss provisions for non-performing collateral dependent loans. During the nine months ended September 30, 2009, the Company charged off any specific loan allowances that have been outstanding for at least 180 days or any that management deemed as loss. There were no loan commitments for the troubled debt restructured loans at September 30, 2009 and December 31, 2008.

Real estate owned assets. At September 30, 2009, other real estate acquired in settlement of loans totaled $5.3 million, compared to $158 thousand at December 31, 2008, based on the estimated fair value of the collateral, and consisted of one participation construction property currently held for sale. The Company’s share of the participation construction property totals $5.3 million. As a result of recent actions taken by the FDIC, a new lead lender has been established on the construction property in which the Bank is a participant. The Company is hopeful that these recent developments will prompt a timely resolution.

Deposits. Total deposits increased by $38.9 million, or 6.5%, to $637.1 million at September 30, 2009 from $598.2 million at December 31, 2008. Savings accounts increased $31.4 million, or 32.4%, to $128.2 million and certificate of deposit accounts increased $12.9 million, or 3.5%, to $378.2 million due to competitive rate offering terms. Money market accounts decreased $7.0 million, or 8.4%, to $76.0 million as customers shifted funds into accounts offering substantially higher rates paid by the Bank as well as other competitors.

FHLB Advances. Due to the increase in deposit balances, the Company’s Federal Home Loan Bank advances decreased $25.0 million to $150.0 million.

Equity. Equity decreased $1.7 million, or 1.7% to $97.0 million at September 30, 2009 from $98.7 million at December 31, 2008. The net decrease was primarily due to the total net operating loss of $398 thousand, the payment of dividends on common stock in the amount of $773 thousand and the payment of dividends on preferred stock in the amount of $722 thousand. Equity increased primarily due to ESOP shares earned of $231 thousand and stock awards earned of $71 thousand.

Comparison of Operating Results for the Nine Months Ended September 30, 2009 and 2008

General. Net loss for the nine months ended September 30, 2009 was $398 thousand, reflecting a $1.2 million decrease over the same period of the prior year. The decrease resulted from the fluctuations described below.

Interest Income. Interest income increased by $1.5 million, or 4.3%, to $35.7 million for the nine months ended September 30, 2009, from $34.2 million for the nine months ended September 30, 2008. This was due to a $73.1 million increase in average interest earning assets from $772.2 million for the nine months ended September 30, 2008 to $845.3 million for the nine months ended September 30, 2009.

Interest income on securities increased $3.0 million to $3.1 million for the nine months ended September 30, 2009 from $75 thousand for the nine months ended September 30, 2008. This increase was due to a $37.1 million increase in the average balance of the securities portfolio directly resulting from the security purchases made during the period.

Interest income on loans decreased $1.2 million, or 3.6% to $32.5 million for the nine months ended September 30, 2009 from $33.7 million for the nine months ended September 30, 2008. The primary factor for the decrease was a $5.6 million increase in the non-performing asset balance on which the Company ceased to accrue interest during the nine months ended September 30, 2009. The decrease in interest income on loans receivable was further reduced by a 46 basis point reduction in the average yield on loans receivable to 5.51% due to a general decline in market interest rates from the prior period. A decrease in the average balances of loans receivable of $33.2 million, due to loan principal repayments, loan charge-offs, and foreclosures exceeding production, also contributed to a decline in loan interest income.

Interest income on other interest-earning assets decreased $345 thousand to $73 thousand for the nine months ended September 30, 2009 from $418 thousand for the nine months ended September 30, 2008. During the first and second quarter of 2009, there were no stock dividends received from the Federal Home Loan Bank of San Francisco, however a stock dividend in the amount of $20 thousand was received during the third quarter of 2009 compared to $306 thousand stock dividends received for the nine months ended September 30, 2008. Future dividends received will be subject to economic conditions and the ability of the Federal Home Loan Bank of San Francisco to pay them.

Interest Expense. Interest expense decreased $3.2 million or 18.2%, to $14.2 million for the nine months ended September 30, 2009. Interest expense on deposits decreased $3.2 million, or 24.0%, to $10.2 million for the nine months ended September 30, 2009 from $13.4 million for the same period in 2008. Although the average balance of deposits increased $57.3 million from $555.9 million for the nine months ended September 30, 2008 to $613.2 million for the nine months ended September 30, 2009, interest expense was reduced by an 84 basis point decrease in the Company’s cost of funds. This decline in the Company’s cost of funds reflects the overall decrease in short term market interest rates as a result of the Federal Open Market Committee of the Federal Reserve Board’s (“FOMC”) decision in 2008 to substantially reduce the overnight lending rate in response to the continued liquidity crisis in the credit markets and recessionary concerns.

Interest expense on Federal Home Loan Bank advances of $4.0 million remained unchanged for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The average balance of the Federal Home Loan bank advances increased $12.4 million from $151.1 million for the nine months ended September 30, 2008 to $163.5 million for the nine months ended September 30, 2009. Although the average balance of Federal Home Loan Bank advances increased during the period, rates paid on those advances decreased by 23 basis points due to the decrease in market interest rates.

Net Interest Income. As a result of the combined effect of the factors mentioned above, net interest income before the provision for loan losses increased $4.6 million, or 27.5%, to $21.4 million for the nine months ended September 30, 2009 from $16.8 million for the nine months ended September 30, 2008. Due to the substantial decline in the Company’s cost of funds as a result of the decrease in short term market interest rates, the Company’s margins have increased over the prior period with the net interest spread increasing 56 basis points to 3.19%, and the net interest margin increasing 48 basis points to 3.38%.

losses and may require the bank to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of September 30, 2009 was maintained at a level that represented management’s best estimate of incurred losses in the loan portfolio to the extent they were both probable and reasonably estimable. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.

Provisions for loan losses are charged to operations at a level required to reflect probable incurred credit losses in the loan portfolio. In this regard, approximately 95% of the Company’s loans are to individuals and businesses in southern California. California, in general, and more specifically, San Diego and Riverside Counties, continue to be amongst the distressed real estate markets in the country. A provision for loan losses of $12.4 million was recorded for the nine months ended September 30, 2009 compared to a $7.4 million provision for loan losses recorded for the nine months ended September 30, 2008. Increased provision levels reflect the deteriorated housing markets, continued high levels of unemployment, the overall challenging economic environment, and the resulting increase in the Company’s non-performing loan balances and loan charged off. Year-to-date net charge-offs totaled $19.5 million compared to $950 thousand at September 30, 2008. The current year net charge-offs consisted primarily of two construction loans and one land loan totaling $16.3 million. During the period the Company charged off any specific loan allowances that had been outstanding for at least 180 days or any that management deemed as loss. In addition, the Company increased the FAS 5 factors on all loan products due to the continued market deterioration.

Noninterest Income. Noninterest income decreased $383 thousand, or 22.2%, to $1.3 million for the nine months ended September 30, 2009 compared to $1.7 million for the same period of the prior year primarily due to decreased performance of the bank owned life insurance investment as a result of current market conditions, as well as a decrease in various customer service fees.

Noninterest Expense. Noninterest expense increased $1.1 million, or 10.7%, to $11.2 million for the nine months ended September 30, 2009 compared to $10.2 million for the same period of the prior year. This net increase was primarily the result of a $874 thousand increase in FDIC expenses, a $406 thousand increase in loan servicing and foreclosure expenses and an increase of $114 thousand in occupancy and equipment expenses. Additionally, salaries and employee benefit expenses decreased $148 thousand and advertising expenses decreased $118 thousand.

The FDIC expenses increased $874 thousand to $1.2 million for the nine months ended September 30, 2009 from $357 thousand for the nine months ended September 30, 2008 primarily due to increases in FDIC fees comprised of increased quarterly assessments as well as an emergency special assessment imposed on all depository institutions in the second quarter.

Loan servicing and foreclosure expenses increased $406 thousand to $575 thousand for the nine months ended September 30, 2009 form $169 thousand for the nine months ended September 30, 2008 primarily due to an increase in other real estate owned activity and increased non-performing loans.

Occupancy and equipment expenses increased $114 thousand, or 8.4%, to $1.5 million for the nine months ended September 30, 2009 compared to $1.4 million for the nine months ended September 30, 2008 due to increased rent and equipment maintenance expenses for the period ending September 30, 2009.

Salaries and employee benefits represented 44.6% and 50.8% of total noninterest expense for the nine months ended September 30, 2009 and September 30, 2008, respectively. Total salaries and employee benefits decreased $148 thousand, or 2.9%, to $5.0 million for the nine months ended September 30, 2009 from $5.2 million for the same period in 2008 primarily due to lower ESOP compensation expenses resulting from a decrease in the fair market value of the Company’s stock compared to the prior year. Additionally, stock award and option expenses decreased as a result of a large portion of the awards fully vesting in April 2009.

Advertising expenses decreased $118 thousand, or 46.1% to $138 thousand resulting from fewer marketing and radio ads for the period ending September 30, 2009.

Income Tax Expense/(Benefit). An income tax benefit of $452 thousand was recorded for the nine months ended September 30, 2009 due to the net loss incurred. The effective tax rate was (53.2%) and 19.9% for the periods ending September 30, 2009 and 2008, respectively. The effective tax rate for the current period was based on projected net income for the year under the guidelines of ASC 740.

Comparison of Operating Results for the Three Months ended September 30, 2009 and 2008

General. Net income for the three months ended September 30, 2009 was $1.5 million, reflecting a $51 thousand increase over the same period of the prior year. The increase resulted from the fluctuations described below.

Interest Income. Interest income decreased by $130 thousand, or 1.1%, to $11.5 million for the three months ended September 30, 2009 from $11.6 million for the three months ended September 30, 2008. This was primarily due to a $1.3 million decrease in total loan interest income.

Interest income on loans decreased $1.3 million, or 11.3% to $10.2 million for the three months ended September 30, 2009 from $11.5 million for the three months ended September 30, 2008. Interest income on loans decreased primary due to a $3.7 million increase in the non-performing loan balance on which the Company ceased to accrue interest during the three months ended September 30, 2009 compared to the prior year’s quarter, as well as a 62 basis point reduction in the average yield on loans receivable to 5.27% due to a general decline in market interest rates during the same period.

Interest income on other interest-earning assets decreased $107 thousand to $25 thousand for the three months ended September 30, 2009 from $132 thousand for the three months ended September 30, 2008 primarily due to a decline in the stock dividend payment received from the Federal Home Loan Bank of San Francisco for the third quarter of 2009. Future dividends received will be subject to economic conditions and the ability of the Federal Home Loan Bank of San Francisco to pay them.

Interest income on securities increased to $1.3 million for the three months ended September 30, 2009 primarily due to a $44.9 million increase in the average balance of the securities portfolio resulting from mortgage backed security purchases made during the current year.

Interest Expense. Interest expense decreased $1.4 million or 25.0%, to $4.3 million for the three months ended September 30, 2009 compared to $5.7 million for the three months ended September 30, 2008 due to an overall decline in the Company’s cost of funds. Interest expense on deposits decreased approximately $995 thousand, or 24.7%, to $3.0 million for the three months ended September 30, 2009 from $4.0 million for the same period in 2008 due to an 96 basis point decrease in the average rates paid on deposits resulting from a decrease in short term interest rates. This overall decline in the Company’s cost of funds reflected the substantial decrease in short term market interest rates as a result of the Federal Open Market Committee of the Federal Reserve Board’s (“FOMC”) decision in 2008 to reduce the overnight lending rate, which has been maintained in the current year, in response to the continued liquidity crisis in the credit markets and recessionary concerns.

Interest expense on Federal Home Loan Bank advances decreased $418 thousand, or 25.6%, to $1.2 million for the three months ended September 30, 2009 from $1.6 million for the same period in 2008 due to a $28.4 million decrease in the average balance of the Federal Home Loan Bank (“FHLB”) advances. Advances decreased during the period as a result of declining loan balances and increased deposit balances. Interest expense was also reduced by a 42 basis point decline in rates paid on FHLB advances as a result of the overall decline in market interest rates.

Net Interest Income. Net interest income before the provision for loan losses increased $1.3 million, or 21.4%, to $7.3 million for the three months ended September 30, 2009 from $6.0 million for the three months ended September 30, 2008. This was due to a $44.3 million increase in average interest earning assets as well as an 88 basis point decline in the Company’s average cost of funds. As a result, the Company’s margins have substantially increased with the net interest spread increasing 52 basis points to 3.28%, and the net interest margin increasing 45 basis points to 3.45%.

Provision for Loan Losses. Management assesses the allowance for loan losses on a monthly basis. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, peer group information, bank regulatory guidelines, declining property values and prevailing economic conditions. Management uses available information to recognize loan losses, however, future loan loss provisions may be necessary based on changes in the above mentioned factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the bank to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of September 30, 2009 was maintained at a level that represented management’s best estimate of incurred losses in the loan portfolio to the extent they were both probable and reasonably estimable. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.

Provisions for loan losses are charged to operations at a level required to reflect probable incurred credit losses in the loan portfolio. In this regard, approximately 95% of the Company’s loans are to individuals and businesses in southern California. California, in general, and more specifically, San Diego and Riverside Counties, continue to be amongst the distressed real estate markets in the country. A provision for loan losses of $2.7 million was recorded for the three months ended September 30, 2009 compared to a $1.5 million provision for loan losses recorded for the three months ended September 30, 2008. Continued high provision levels reflect the deteriorated housing markets, continued high levels of unemployment, the overall challenging economic environment, and the resulting increase in the Company’s non-performing loan balances and loans charged off. Net charge-offs totaled $6.1 million for the current quarter compared to $208 thousand in the prior year’s quarter. During the period the Company charged off any specific loan allowances that have been outstanding for at least 180 days or any that management deemed as loss. In addition, the Company increased the FAS 5 factors on all loan products due to the continued market deterioration.

Noninterest Income. Noninterest income decreased $133 thousand, or 22.7%, to $452 thousand for the three months ended September 30, 2009 compared to $585 thousand for the same period of the prior year primarily due to decreased performance in the bank owned life insurance investment as well as a decrease in various customer service fees.

Noninterest Expense. Noninterest expense increased $138 thousand, or 4.2%, to $3.4 million for the three months ended September 30, 2009 from $3.3 million from prior year’s quarter. This net increase was primarily the result of a $218 thousand increase in FDIC expenses. In addition, professional fees decreased $56 thousand and advertising expenses decreased $30 thousand.

FDIC expenses increased $218 thousand primarily due to increases in FDIC quarterly assessments in the third quarter.

Professional fees decreased $56 thousand, or 30.4 % to $128 thousand compared to $184 thousand for the three months ended September, 30 2008 as a result of decreased legal fee expenses during 2009. Advertising expenses decreased $30 thousand, or 41.1 % to $43 thousand compared to $73 thousand for the three months ended September 30, 2008 resulting from less marketing and radio ads for the third quarter of 2009.

Income Tax Expense/(Benefit). An income tax expense of $71 thousand was recorded for the three months ended September 30, 2009 compared to $340 thousand income tax expense for the three months ended September 30, 2008. The effective tax rate for the current period was based on projected net income for the year under the guidelines of ASC 740.

Liquidity and Commitments

The Bank is required to have enough liquid assets in order to maintain sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained.

The Bank’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing, and financing activities. The Bank’s primary sources of funds are deposits, payments and maturities of outstanding loans and investment securities; and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Bank invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. The Bank also generates cash through borrowings. The Bank utilizes Federal Home Loan Bank advances to leverage its capital base, to provide funds for its lending activities, as a source of liquidity, and to enhance its interest rate risk management. The Bank also has the ability to obtain brokered certificates of deposit, however, historically has not issued significant amounts. The Bank has a brokered certificate of deposit balance of $10.0 million as of September 30, 2009, and has limited future brokered deposit activity to $20.0 million.

Liquidity management is both a daily and long-term function of business management. Any excess liquidity would be invested in federal funds or authorized investments such as mortgage-backed or U.S. Agency securities. On a longer-term basis, the Bank maintains a strategy of investing in various lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments, and to maintain its portfolio of mortgage-backed securities and investment securities. At September 30, 2009, there were no outstanding approved loan origination commitments. At the same date, unused lines of credit were $54.7 million and outstanding letters of credit totaled $20 thousand. There were no securities scheduled to mature in one year or less at September 30, 2009. Certificates of deposit scheduled to mature in one year or less at September 30, 2009, totaled $328.1 million. Based on the competitive rates offered and on historical experience, management believes that a significant portion of maturing deposits will remain with the Bank. In addition, the Bank had the ability at September 30, 2009 to borrow an additional $108.1 million from the Federal Home Loan Bank of San Francisco, $110.7 million at the Federal Reserve Bank as well as $8.0 million from Pacific Coast Bankers Bank as additional funding sources to meet commitments and for liquidity purposes. The Bank has Federal Home Loan Bank advances of $75.0 million maturing within the next 12 months. The Bank intends to replace these advances with new borrowings from the Federal Home Loan Bank, Federal Reserve Bank or deposits depending on market conditions. The Federal Reserve Bank and the Federal Home Loan Bank have indicated to the banking industry that they will be reducing available lines of credit due to current market conditions, however, management expects that liquidity levels will continue to be adequately maintained.

Capital

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to be a “well capitalized” institution in accordance with regulatory standards. Total equity of the Bank was $83.8 million at September 30, 2009, or

9.4% of total assets on that date. As of September 30, 2009, the Bank exceeded all capital requirements of the Office of Thrift Supervision and is deemed “well-capitalized.” The Bank’s regulatory capital ratios at September 30, 2009 were as follows: core capital 9.27%; Tier 1 risk-based capital, 12.22%; and total risk-based capital, 13.13%. The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively. The Bank’s regulatory capital ratios at December 31, 2008 were as follows: core capital 8.64%, Tier I risk-based capital, 11.50% and total risk-based capital, 12.18%. The Bank has committed to maintaining core and risk-based capital ratios of 8.0 and 12.0 percent, respectively, while the Bank is facing adverse market conditions.

Impact of Inflation

The unaudited consolidated financial statements presented herein have been prepared in accordance with U. S. generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

The Company’s primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that the Company has made. The Company is unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Bank’s interest rate sensitivity is monitored by management through the use of a model that estimates the change in net portfolio value (NPV) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance-sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Sensitivity Measure is the decline in the NPV Ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The higher an institution’s Sensitivity Measure is, the greater its exposure to interest rate risk is considered to be. The Office of Thrift Supervision (OTS) has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, an institution whose Sensitivity Measure exceeds 200 basis points may be required to deduct an interest rate risk component in calculating its total capital for purposes of the risk-based capital requirement. Increases in interest rates would be expected to have a negative impact on the Bank’s operating results. As of June 30, 2009, the latest date for which information is available, the Bank’s Sensitivity Measure, as measured by the OTS, resulting from a 2% increase in interest rates was a decrease of 14 basis points and would result in a $2.3 million decrease in the NPV of the Bank. The Sensitivity Measure is less than the threshold at which the Bank could be required to hold additional risk-based capital under OTS regulations.

The OTS uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis used in the forthcoming table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

The following table shows the NPV and projected change in the NPV of the Bank at June 30, 2009, the latest date for which information is available, assuming an instantaneous and sustained change in market rates of interest of 100, 200, and 300 basis points. The net portfolio value analysis was unable to produce results for the minus 200 and 300 basis point scenario for the quarter ended June 30, 2009.

Interest Rate Sensitivity of Net Portfolio Value (NPV)


	Net Portfolio Value						NPV as a % of PV of Assets
Change in Rates	$ Amount		$ Change		% Change		NPV Ratio		Change
+ 300 bp	$	92,904	(7,588	)	(8	)%	10.30	%	(62)bp
+ 200 bp		98,230	(2,262	)	(2	)%	10.78	%	(14)bp
+ 100 bp		100,557	65		0	%	10.97	%	5bp
0 bp		100,492	—		—		10.92	%	0bp
- 100 bp		99,792	(701	)	(1	)%	10.82	%	(10)bp

The Bank does not maintain any securities for trading purposes. The Bank does not currently engage in trading activities or use derivative instruments in a material amount to control interest rate risk. In addition, interest rate risk is the most significant market risk affecting the Bank. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Bank’s business activities and operations.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Act”)) as of September 30, 2009 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Principal Financial Officer and other members of the Company’s senior management as of the end of the period preceding the filing of this quarterly report. The Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Principal Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There have been no changes in internal controls over financial reporting (as defined in Rule 13a-15(f) under the Activities) that occurred during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure is met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve controls and procedures over time and to correct any deficiencies that may be discovered in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes that the present design of its disclosure controls and procedures is effective to achieve this goal, future events affecting the Company’s business may cause modifications of disclosure controls and procedures.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None

ITEM 1A.

RISK FACTORS

See the risk factors previously disclosed in the Company’s Form 10-K for the year ended December 31, 2008.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)	The following table sets forth information for the three months ended September 30, 2009 with respect to the repurchase of outstanding common stock.

ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total # of shares Purchased	Average price paid per share	Total # of shares purchased as part of a publicly announced program	Maximum # of shares that may yet be purchased
07/1/09-07/31/09	—	—	—	0
08/1/09-08/31/09	—	—	—	0
09/1/09-09/30/09	86	6.16	—	0

The Company has terminated the buyback plan in connection with its participation in the TARP Capital Purchase Program, however, future purchases may be made by the Company if they are related to employee stock benefit plans, consistent with past practices. The purchases made during the period were tax liability sales related to employee stock benefit plans and are consistent with past practices.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a)

None

(b)

None

ITEM 5.

OTHER INFORMATION.

None

ITEM 6.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

Financial Statements: See Part II—Item 8. Financial Statements and Supplementary Data

(a)(2)

Financial Statement Schedule: All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.

(a)(3)

Exhibits


Regulation S-K Exhibit Number	Document	Reference to Prior Filing or Exhibit Number Attached Hereto

2.0	Plan of acquisition, reorganization, arrangement, liquidation or succession	None

3.1	Charter for First PacTrust Bancorp, Inc.	*

3.2	Articles supplementary to the Charter of the Registrant containing the terms of the Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A.	****

3.3	Bylaws of First PacTrust Bancorp, Inc.	*

4.0	Form of Stock Certificate of First PacTrust Bancorp, Inc.	*

4.1	Form of Preferred Stock Certificate of First PacTrust Bancorp, Inc.	****

4.2	Warrant to purchase shares of the Registrant’s common stock dated November 21, 2008	****

9.0	Voting Trust Agreement	None

10.1	Severance Agreement with Hans Ganz	***

10.2	Severance Agreement with Melanie Yaptangco, formerly Stewart	***

10.3	Severance Agreement with James P. Sheehy	***

10.4	401(k) Employee Stock Ownership Plan	*

10.5	Registrant’s Stock Option and Incentive Plan	**

10.6	Registrant’s Recognition and Retention Plan	**

10.7	Named Executive Officers Salary and Bonus Arrangements for 2009 and Director Fee Arrangements for 2009.	*****

10.8	Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated November 21, 2008, between First PacTrust Bancorp, Inc. and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and the warrant.	****

10.9	Form of Compensation Modification Agreement and Waiver, executed by each of Hans R. Ganz, James P. Sheehy, Melanie M. Yaptangco, Regan J. Lauer, Rachel M. Carrillo, and Lisa R. Goodwin.	****

11.0	Statement regarding computation of ratios	None

14.0	Code of Ethics	***

16.0	Letter regarding change in certifying accountant	None

18.0	Letter regarding change in accounting principles	None


Regulation S-K Exhibit Number	Document	Reference to Prior Filing or Exhibit Number Attached Hereto

21.0	Subsidiaries of the Registrant	*

22.0	Published Report regarding matters submitted to vote of security holders	None

23.0	Consent of Crowe Horwath LLP	None

24.0	Power of Attorney, included in signature pages	None

31.1	Rule 13(a)-14(a) Certification (Chief Executive Officer)	31.1

31.2	Rule 13(a)-14(a) Certification (Chief Financial Officer)	31.2

32.1	Section 1350 of The Sarbanes-Oxley Act Certification (Chief Executive Officer)	32.1

32.2	Section 1350 of The Sarbanes-Oxley Act Certification (Chief Financial Officer)	32.2

*	Filed in First PacTrust’s Registration Statement on Form S-1. Filed on March 28, 2002. Such information is hereby incorporated by reference.

**	Filed as an appendix to the Registrant’s definitive proxy statement filed on March 21, 2003. Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.

***	Filed as an Exhibit to the Company’s annual report on Form 10-K for the year ended December 31, 2005.

****	Filed as an Exhibit to the Registrant’s Current Report on Form 8-K. Filed on November 21, 2008. Such information is hereby incorporated by reference.

*****

Included in the Registrant’s definitive proxy statement filed on March 23, 2009. Such previously filed document is incorporated herein by reference in accordance with Item 601 of Regulation S-K.

(b)	Exhibits—Included, see list in (a)(3).

(c)	Financial Statement Schedules—None

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.


		FIRST PACTRUST BANCORP, INC.

Date: November 6, 2009		/s/ Hans R. Ganz
		Hans R. Ganz President and Chief Executive Officer

Date: November 6, 2009		/s/ Regan Lauer
		Regan Lauer Senior Vice President/ Controller (Principal Financial and Accounting Officer)

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