Banc of California (BANC) 10-Q 2002 Q3 Quarterly report

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, 2002

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 o

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

As of October 31, 2002 the Registrant had 5,290,000 outstanding shares of common stock.

FIRST PACTRUST BANCORP, INC.

Form 10-Q Quarterly Report

Index

			Page
PART I - Financial Information
	Item 1	Financial Statements	1
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	15
	Item 4	Disclosure Controls and Procedures Report	16
PART II - Other Information
	Item 1	Legal Proceedings	17
	Item 2	Changes in Securities	17
	Item 3	Defaults Upon Senior Securities	17
	Item 4	Submission of Matters to a Vote of Securities Holders	17
	Item 5	Other Information	17
	Item 6	Exhibits and Reports on Form 8-K	18
SIGNATURES			19

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 US 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 accounting principles, policies, and guidelines.  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, 2002			December 31, 2001
ASSETS
Cash and due from banks				$	10,263		$	5,228
Federal funds sold					5,925			10,150
Interest-bearing deposits					3,029			2,625
	Total cash and cash equivalents				19,217			18,003
Securities available-for-sale					19,008			13,661
Federal Home Loan Bank stock					2,617			2,509
Loans receivable, net  of allowance of $2,536 and $1,743					350,518			257,216
Premises and equipment, net					5,182			3,863
Servicing agent receivable					9,767			11,687
Other assets					2,156			3,137
	Total assets			$	408,465		$	310,076
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
		Non-interest-bearing		$	5,123		$	4,001
		Interest-bearing			272,838			247,953
			Total deposits		277,961			251,954
Advances from Federal Home Loan Bank					41,000			28,000
Accrued expenses and other liabilities					1,829			1,401
	Total liabilities				320,790			281,355
STOCKHOLDERS' EQUITY
Stockholders’ equity
	Preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding				—			—
	Common stock, $.01 par value per share, 20,000,000 shares authorized; 5,290,000 shares issued and outstanding at September 30, 2002				53			—
	Additional paid-in capital				61,732			—
	Retained earnings				30,554			28,669
	Unearned Employee Stock Ownership Plan shares				(4,951	)		—
	Accumulated other comprehensive income				287			52
		Total stockholders’ equity			87,675			28,721
			Total liabilities and stockholders’ equity	$	408,465		$	310,076

See accompanying notes to consolidated financial statements

1.

First PacTrust Bancorp, Inc.
Consolidated Statements of Income
(In thousands of dollars except share data)
(Unaudited)

			Nine Months Ended September 30,					Three Months Ended September 30,
			2002		2001			2002		2001
Interest and dividend income
	Loans, including fees		$	14,777	$	15,204		$	5,135	$	4,984
	Securities			620		1,209			223		230
	Other interest-earning assets			550		316			333		175
		Total		15,947		16,729			5,691		5,389
Interest expense
	Deposits			5,272		7,034			1,892		2,295
	Federal Home Loan Bank advances			981		2,135			335		776
		Total		6,253		9,169			2,227		3,071
Net interest income				9,694		7,560			3,464		2,318
Provision for loan losses				708		68			269		14
Net interest income after provision for loan losses				8,986		7,492			3,195		2,304
Noninterest income
	Customer service fees			671		724			230		238
	Net gain/(loss) on sale of securities available-for-sale			—		(55	)		—		—
	Other			68		106			20		20
		Total noninterest income		739		775			250		258
Noninterest expense
	Salaries and employee benefits			3,065		2,509			1,130		820
	Occupancy and equipment expense			1,483		1,262			446		407
	Advertising			240		195			63		63
	Professional fees			109		183			39		62
	Stationary, supplies and postage			276		216			97		65
	Data processing			464		213			90		66
	ATM costs			315		278			109		99
	Other general and administrative			569		557			232		200
		Total noninterest expense		6,521		5,413			2,206		1,782
Income before income taxes				3,204		2,854			1,239		780
Income tax expense				1,318		1,196			527		327
	Net income		$	1,886	$	1,658		$	712	$	453
Comprehensive income			$	2,121	$	1,870		$	833	$	467
*Earnings per shares
	Basic		$	.07		N/A		$	.07		N/A
	Diluted		$	.07		N/A		$	.07		N/A

* Note: Earnings per share is calculated based on the period of time from the completion date of the initial public offering, August 22, 2002, through the end of the quarter ended September 30, 2002.

2.

First PacTrust Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)

				Nine Months Ended September 30,
				2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income				$	1,886			1,658
Adjustments to reconcile net income to net cash from operating activities
	Net premium amortization on securities				128			92
	Loss on sale of securities available-for-sale				—			55
	Provision for loan losses				708			68
	Depreciation				404			335
	FHLB stock dividends				(89	)		(89	)
	ESOP Compensation Expense				152			—
Net change in:
		Accrued interest receivable and other assets			816			(321	)
		Accrued interest payable and other liabilities			474			712
			Net cash from operating activities		4,479			2,493
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of loans					(19,403	)		(6,332	)
Net increase in loans					(72,687	)		(14,346	)
(Purchase) redemption of FHLB stock					(19	)		321
Purchase of securities available-for-sale					(10,234	)		(223	)
Principal repayments on mortgage-backed securities					5,159			13,988
Proceeds from sales of securities available-for-sale					—			12,294
Purchase of premises and equipment					(1,723	)		(563	)
	Net cash from investing activities				(98,907	)		5,739
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits					26,007			31,690
Net change in Federal Home Loan Bank open line					—			(28,800	)
Repayments of Federal Home Loan Bank advances					(46,000	)		(10,000	)
Proceeds from Federal Home Loan Bank advances					59,000			13,000
Net proceeds from stock issuance					56,635			—
	Net cash from financing activities				95,642			5,890
Net change in cash and cash equivalents					1,214			13,539
Cash and cash equivalents at beginning of period					18,003			7,699
Cash and cash equivalents at end of period				$	19,217		$	21,238

3.

FIRST PACTRUST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(table amounts in thousands of dollars except share data)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of First PacTrust Bancorp, Inc. (the Company) as of September 30, 2002 and December 31, 2001 and for the three-month and nine-month periods ended September 30, 2002 and 2001.  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 accounting principles generally accepted in the United States of America are not included herein.  These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Form S-1 Registration Statement filed by the Company with the Securities and Exchange Commission.  The December 31, 2001 balance sheet presented herein has been derived from the audited financial statements included in the Form S-1 Registration Statement filed with the Securities and Exchange Commission, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2002.  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 nine months ended September 30, 2002 and 2001 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 Bank is a federally chartered stock savings bank and 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 seven branches located in the San Diego and Riverside counties.

4.

FIRST PACTRUST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(table amounts in thousands of dollars except share data)

Use of Estimates in the Preparation of Financial Statements:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.  The collectibility of loans, fair value of financial instruments, and status of contingencies are particularly subject to change.

Servicing Agent Receivable:  The Bank has contracted with a servicing agent to process payments and service a portion of the Bank’s real estate loan portfolio.  The servicing agent remits cash receipts within 15 days of the end of each month for loan payments received.  These cash amounts are reflected as due from servicing agent on the consolidated statements of financial condition.

Note 3 – Conversion to Stock Form of Ownership

On March 1, 2002, the Board of Directors of Pacific Trust Bank (“the Bank”) adopted a Plan of Conversion to convert from a federally chartered mutual savings bank to a federally chartered stock savings bank with the concurrent formation of a holding company.  The conversion was accomplished through the sale of all of the Bank’s stock to the Company and the sale of the Company’s stock to the public on August 22, 2002.

In connection with the conversion, the Company issued 5,290,000 shares of common stock for gross proceeds of $63.5 million.  The Company loaned $5.1 million to the Bank’s employee stock ownership plan to purchase stock in the offering and incurred $1.7 million of expenses associated with the offering resulting in net proceeds of $56.7 million. The aggregate purchase price was determined by an independent appraisal.  The Bank issued all of its outstanding capital stock to the Company in exchange for one-half of the net proceeds of the offering.  The Company accounted for the purchase in a manner similar to a pooling of interests whereby assets and liabilities of the Bank maintain their historical cost basis in the consolidated company.

Note 4 – Employee Stock Ownership Plan

In connection with the conversion, 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 will be repaid by the ESOP with funds from the Company’s  contributions to the ESOP and earnings on ESOP assets.  Principal payments are scheduled to occur over a ten-year period.

5.

FIRST PACTRUST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(table amounts in thousands of dollars except share data)

Note 5 – Earnings Per Share

Amounts reported as earnings per common share reflect earnings available to common stockholders for the year divided by the weighted average number of common shares outstanding during the year.  Earnings per share is calculated beginning with August 22, 2002, the date of conversion.  The weighted average shares outstanding for the period from conversion through September 30, 2002 are 4,867,065.

Note 6 – Change in Accounting Method

During 2002, the Company adopted Financial Accounting Standard (FAS) No. 145 which was issued in April 2002 and effective for financial statements issued after May 15, 2002. This statement rescinded FAS No. 4 Reporting Gains and Losses from Extinguishment of Debt which previously required the gain or loss from extinguishment of debt to be disclosed as an extraordinary item, net of tax on the income statement. As a result of the change in accounting method, the September 30, 2001 quarterly and year-to-date income statements have been revised to reclassify prepayment penalties on Federal Home Loan Bank advances totaling $340,000 from extraordinary item, net of tax to interest expense.

6.

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, 2002 to its financial condition at December 31, 2001 and the results of operations for the three-month and nine-month periods ended September 30, 2002 to the same periods in 2001.  This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

Comparison of Financial Condition at September 30, 2002 and December 31, 2001

          Our total assets increased by $98.4 million, or 31.7%, to $408.5 million at September 30, 2002 from $310.1 million at December 31, 2001.  The increase reflected growth in cash and cash equivalents, loans receivable, and securities available-for-sale, funded by proceeds raised from the initial public offering as well as an increase in deposits and additional advances from the Federal Home Loan Bank.  Cash and cash equivalents increased $1.2 million, or 6.7%, to $19.2 million at September 30, 2002 from $18.0 million at December 31, 2001 resulting from the timing of normal transaction activity.  The Company maintained excess cash at year-end 2001, to fund the purchase of a loan pool in the first quarter of 2002, which is more fully discussed below.  The cash on hand at September 30, 2002 represented excess cash from the conversion that had not yet been fully deployed into loans and other higher yielding assets.  Net loans increased by $93.3 million, or 36.3%, to $350.5 million at September 30, 2002 from $257.2 million at December 31, 2001.  Our increase in loans resulted from increased volume of one-to-four family mortgage loan originations, largely as a result of the low interest rates being offered due to the decline in the interest rate environment.  The Bank also purchased a $19.4 million pool of one-to-four family residential loans of which $6.5 million remains at September 30, 2002.  Securities classified as available-for-sale increased during this period due to purchases of $10.2 million, partially offset by principal repayments of $5.2 million.  Premises and equipment also increased by $1.3 million, primarily related to the purchase of the Temecula branch location, a previously leased branch facility, which relocated in February 2002.  The servicing agent receivable decreased $1.9 million due to a lower volume of prepayments during the month of September.  Management intends to bring all loan servicing in-house during the fourth quarter of 2002 which will eliminate the servicing agent receivable at that time.  This may result in increased expenses to staff-up the loan processing department.  However these expenses should be more than offset by the reduction in servicing fees currently paid to the third party servicer.

          Total deposits increased by $26.0 million, or 10.3%, to $278.0 million at September 30, 2002 from $252.0 million at December 31, 2001.  The increase primarily reflected growth in certificates of deposit, NOW accounts, savings, money market, and other non-interest bearing accounts.  Certificates of deposit increased $10.7 million, or 8.7%, to $133.7 million.  Money market accounts, and NOW accounts increased by $3.4 million and $5.4 million, respectively.  Savings and non-interest bearing accounts increased by $5.4 million and $1.1 million, respectively.  The additional funding was used to support loan growth.

          Federal Home Loan Bank advances increased $13.0 million, or 46.4 %, to $41.0 million at September 30, 2002 from $28.0 million at December 31, 2001.  The additional advances were used to support loan growth.

7.

          Equity increased $59.0 million to $87.7 million at September 30, 2002 from $28.7 million at December 31, 2001 as a result of net proceeds of $56.7 million raised through the initial public offering completed on August 22, 2002.  This was supplemented by $1.9 million of net income earned for the nine months ended September 30, 2002, and a $235,000 increase in unrealized gain on securities available-for-sale, net of tax.

Comparison of Operating Results for the Nine Months Ended September 30, 2002 and 2001

          General.   Net income for the nine months ended September 30, 2002 was $1.9 million, an increase of $228,000, or 213.8%, from the nine months ended September 30, 2001.  The increase in net income resulted from the fluctuations as described below.

          Interest income.   Interest income decreased by $782,000, or 4.7%, to $15.9 million for the nine months ended September 30, 2002 from $16.7 million for the nine months ended September 30, 2001.  The primary factor for the decrease in interest income was a 152 basis point decrease in the average yield on loans receivable, from 7.95% for the nine months ended September 30, 2001 to 6.43% for the same period in 2002 as a result of the refinancing market environment.  In addition, the majority of the Bank’s loans have an adjustable rate feature, and this decrease reflects the downward repricing of adjustable rate mortgage loans due to a decline in market rates of interest.  The average balance of loans receivable increased $51.4 million, or 20.1%, from $255.1 million for the nine months ended September 30, 2001 to $306.5 million for the quarter ended September 30, 2002.  The increase was primarily the result of loan originations exceeding repayments due to strong demand, reflecting generally lower interest rates in 2002 and the purchase of a $19.4 million pool of residential mortgage loans of which $6.5 million remain at September 30, 2002.

          Interest income on securities decreased by $589,000, or 48.7%, to $620,000 for the nine months ended September 30, 2002.  The decrease resulted from a $5.9 million, or 24.2%, decrease in the average balance of securities, attributable to the increased rate of repayment on collateralized mortgage obligations in a declining interest rate environment.  In addition, the average yield on the securities portfolio was 4.57% for the nine months ended September 30, 2002 compared to 6.71% for the same period in 2001, due to generally lower levels of market rates of interest in 2002.

          Interest income from other interest-earning assets increased $234,000, or 74.1%, to $550,000 for the nine months ended September 30, 2002 from $316,000 for the nine months ended September 30, 2001.  The increase resulted from an increase in the average balance from $6.8 million to $32.8 million, which was due to funds received from principal repayments on loans and collateralized mortgage obligations and an increase in federal funds sold due to the short-term investment of stock subscription proceeds.

          Interest Expense   Interest expense decreased $2.9 million, or 31.8%, to $6.3 million for the nine months ended September 30, 2002 from $9.2 million for the nine months ended September 30, 2001.  The decrease in interest expense resulted primarily from a decrease in the average cost of our interest-bearing liabilities to 2.68% from 4.52%, reflecting the decrease in market rates of interest during the period. This was partially offset by an increase in the

8.

average balance of deposits from $232.0 million for the nine months ended September 30, 2001 to $270.0 million for the same period in 2002.   Interest expense on deposits decreased $1.7 million, or 25.1%, to $5.3 million for the nine months ended September 30, 2002 from $7.0 million for the same period in 2001.  Interest expense on Federal Home Loan Bank advances decreased $1.2 million, or 54.1%, to $981,000 for the nine months ended September 30, 2002 from $2.1 million for the nine months ended September 30, 2001.  The decrease resulted from a 418 basis point decrease in the cost of Federal Home Loan Bank advances from 7.32% for the nine months ended September 30, 2001 to 3.14% for the nine months ended September 30, 2002.  The decrease primarily resulted from a $19.0 million variable rate advance with a rate of 1.83% that was drawn in February 2002 and prepayment penalties of $340,000 incurred during the third quarter of 2001.  Refer to Note 6 to the consolidated financial statements for discussion regarding a change in accounting method.

          Net Interest Income.   Net interest income before provision for loan losses increased  $2.1 million, or 28.2%, to $9.7 million for the nine months ended September 30, 2002 from $7.6 million for the nine months ended September 30, 2001.  The net interest spread remained relatively stable, while the net interest margin increased 15 basis points during the period to 3.68% from 3.53%.  The increase in net interest income primarily reflects the factors discussed above.

          Provision for Loan Losses.   Provisions for loan losses are charged to operations at a level required to reflect probable incurred credit losses in the loan portfolio.  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, and prevailing economic conditions.  Large groups of smaller balance homogenous loans, such as residential real estate, small commercial real estate, and home equity and consumer loans, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions.  Large balance and/or more complex loans, such as multi-family and commercial real estate loans, and classified loans, are evaluated individually for impairment.

          Provisions of $708,000 and $68,000 were made for the nine months ended September 30, 2002 and 2001, respectively.  The provision increased by $640,000 reflecting a $94 million, or 36.3%, increase in gross loans, primarily consisting of residential real estate loans.  This growth continues to be achieved primarily through the use of independent loan originators and through whole loan purchases.  Since the Bank did not have a seasoned portfolio in this type of lending and did not have a related loss history to apply to these types of loans, peer group data adjusted for local economic conditions was used to establish our loan loss allowance, resulting in the $708,000 provision.  Loan delinquencies increased $3.6 million over prior year period to $4.6 million at September 30, 2002, which also contributed to the increased allowance provision.

          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.  We used the same methodology and generally similar assumptions in assessing the allowance for both periods.  The allowance for loan losses as a percentage of loans outstanding increased to .75% at September 30, 2002 from .68% at September 30, 2001.  This increase was primarily the result of a continued growth in the secured portion of Bank’s loan portfolio combined with

9.

current economic conditions.  The level of the allowance is based on estimates and the ultimate losses may vary from the estimates.

          Management assesses the allowance for loan losses at least quarterly.  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, 2002 was maintained at a level that represented management’s best estimate of anticipated losses in the loan portfolio to the extent they were both probable and reasonably estimable.

          Noninterest Income.  Noninterest income decreased $36,000, or 4.7%, to $739,000 for the nine months ended September 30, 2002 from $775,000 for the nine months ended September 30, 2001, primarily as a result of a decrease in loan servicing fees of $35,000 and a decrease of $53,000 in customer service fees on deposit accounts.  Customer service fees decreased as a result of decreased return item fees and decreased month-end checking fees.  Other noninterest income decreased as a result of various declines in miscellaneous smaller balance accounts.  These decreases were partially offset by a $55,000 loss in the prior year on sales of securities.

          Noninterest Expense.  Noninterest expense increased $1.1 million, or 20.4%, to $6.5 million for the nine months ended September 30, 2002 from $5.4 million for the nine months ended September 30, 2001.  This increase was primarily the result of a $556,000 increase in salaries and employee benefits, a $221,000 increase in occupancy and equipment expense, a $251,000 increase in data processing and a $45,000 increase in advertising, partially offset by a $74,000 reduction in professional fees.

          Salaries and employee benefits represented 47.0% and 46.4% of total noninterest expense for the nine months ended September 30, 2002 and September 30, 2001, respectively.  Total salaries and employee benefits increased $556,000, or 22.2%, to $3.1 million for the nine months ended September 30, 2002 from $2.5 million for the same period in 2001.  The increase was primarily due to $152,000 in ESOP compensation expense related to the establishment of the plan in the third quarter, increased wage rates, and staffing increases including staffing at the new branch facility.  The increase in occupancy and equipment was also the result of opening the new branch facility.

          Data processing expense increased as a result of increased volume in both loans and deposits and the write-off of approximately $163,000 of software related to the cancellation of a proposed system conversion.  We had anticipated that the software related to the system conversion could be utilized with another data processor under a modified conversion plan.  We determined, however, that the value of the software was impaired and should be expensed.  The $45,000 increase in advertising was related to the promotion of the new branch, which opened in March 2002, and the relocation of an existing branch in April 2002.

          Income Tax Expense.  Income tax expense increased to $1.3 million for the nine months ended September 30, 2002, from $1.2 million for the nine months ended September 30, 2001.

10.

This increase was primarily a result of an increase in pre-tax income.  The effective tax rate was 41.1% and 41.9% for the nine months ended September 30, 2002 and 2001, respectively.

Comparison of Operating Results for the Three Months Ended September 30, 2002 and 2001

          General.  Net income for the three months ended September 30, 2002 was $712,000, an increase of $259,000 from $453,000 for the three months ended September 30, 2001.  The increase in net income resulted from factors discussed below.

          Interest income. Interest income increased by $302,000, or 5.6%, to $5.7 million for the three months ended September 30, 2002 from $5.4 million for the three months ended September 30, 2001.  The primary factor for the increase in interest income was an increase in the average balance of loans receivable for the comparative periods reflecting higher levels of originations due to strong demand, as a result of generally lower interest rates in 2002, including the purchase of a $19.4 million pool of residential mortgage loans, partially offset by a decrease in the average yield on loans receivable reflecting a strong refinancing market. 

          Interest income on securities decreased by $7,000, or 3.0%, to $223,000 for the three months ended September 30, 2002.  The decrease resulted from a decrease in the average balance of securities, attributable to the increased rate of repayment on collateralized mortgage obligations due to a declining interest rate environment combined with a decrease in the average yield due to generally lower levels of market interest rates in 2002.

          Interest income from other interest earning assets increased $158,000, or 90.3%, to $333,000 for the three months ended September 30, 2002 from $175,000 for the three months ended September 30, 2001.  The increase resulted from an increase in the average balance of these assets, which was due to funds received from principal repayments on loans and collateralized mortgage obligations and stock subscriptions received in anticipation of the stock offering completed on August 22, 2002.

          Interest Expense. Interest expense decreased $844,000, or 27.5%, to $2.2 million for the three months ended September 30, 2002 from $3.1 million for the three months ended September 30, 2001.  The decrease in interest expense resulted primarily from a decrease in the average cost of our interest-bearing liabilities reflecting the decrease in market rates of interest during the period.  Interest expense on deposits decreased $403,000, or 17.6%, to $1.9 million for the three months ended September 30, 2002 from $2.3 million for the same period in 2001.  Interest expense on Federal Home Loan Bank advances decreased $441,000, or 56.8%, to $335,000 for the three months ended September 30, 2002 as compared to $776,000 for the three months ended September 30, 2001.  The decrease primarily resulted from a decrease in the cost of Federal Home Loan Bank advances due to a $19.0 million variable rate advance with a rate of 1.83% that was drawn in February 2002.  Despite the increase in advances as of September 30, 2002, the average balance of Federal Home Loan Bank advances also decreased from the prior quarter due to repayments of overnight borrowings and fixed term advances.  In addition the Company incurred prepayment penalties on Federal Home Loan Bank advances of $340,000 during the third quarter of 2001.  Refer to Note 6 to the consolidated financial statements for discussion regarding a change in accounting method.

          Net Interest Income.  Net interest income before provision for loan losses increased  $1.2 million, or 49.4%, to $3.5 million for the three months ended September 30, 2002 from $2.3

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million for the three months ended September 30, 2001.  The increase primarily reflects the factors discussed above.

          Provision for Loan Losses.  Provisions for loan losses are charged to operations at a level required to reflect probable incurred credit losses in the loan portfolio.  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, and prevailing economic conditions.  Large groups of smaller balance homogenous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors and peer group data adjusted for current economic conditions.  Large balance and/or more complex loans, such as multi-family, commercial real estate loans, and classified loans are evaluated individually for  impairment.

          Provisions of $269,000 and $14,000 were made for the three months ended September 30, 2002 and 2001, respectively.  The provision increased by $255,000 reflecting a $47.7 million, or 15.6%, increase in gross loans, primarily consisting of residential real estate loans.  This growth continues to be achieved primarily through the use of independent loan originators and through whole loan purchases.  Since the Bank did not have a seasoned portfolio in this type of lending and did not have a related loss history to apply to these types of loans, peer group data adjusted for local economic conditions was used to establish our loan loss allowance, resulting in the $269,000 provision.

          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.  We used the same methodology and generally similar assumptions in assessing the allowance for both periods.  The allowance for loan losses as a percentage of loans outstanding increased to .75% at September 30, 2002 from .68% at September 30, 2001.  This increase was primarily the result of a continued growth in the Bank’s loan portfolio.  The level of the allowance is based on estimates and the ultimate losses may vary from the estimates.

          Management assesses the allowance for loan losses at least quarterly.  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, 2002 is maintained at a level that best represents management’s best estimate of anticipated losses in the loan portfolio, and such losses were both probable and reasonably estimable.

          Noninterest Income.  Noninterest income decreased $8,000, or 3.1%, to $250,000 for the three months ended September 30, 2002 from $258,000 for the three months ended September 30, 2001. 

          Noninterest Expense.   Noninterest expense increased $424,000, or 23.8%, to $2.2 million for the three months ended September 30, 2002 from $1.8 million for the three months ended

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September 30, 2001.  This increase was primarily the result of a $310,000 increase in salaries and employee benefits, a $39,000 increase in occupancy and equipment expense, a $24,000 increase in data processing, and a $32,000 increase in other general and administrative costs.

          Salaries and employee benefits represented 51.2% and 46.0% of total noninterest expense for the three months ended September 30, 2002 and September 30, 2001, respectively.  Total salaries and employee benefits increased $310,000, or 37.8%, to $1.1 million for the three months ended September 30, 2002 from $820,000 for the same period in 2001.  The increase was primarily due to $152,000 in ESOP compensation expense related to the establishment of the plan, cost of living increases and additional staffing at the new branch facility.  The increase in occupancy and equipment was also the result of opening the new branch facility.

          Data processing expense increased as a result of increased volume in both loans and deposits. 

          Other noninterest expense increased $32,000 as a result of increases in several smaller individual items, none of which were significant.

          Income Tax Expense.  Income tax expense increased to $527,000 for the three months ended September 30, 2002, from $327,000 for the three months ended September 30, 2001.  The effective tax rate was 42.5% and 41.9% for the three months ended September 30, 2002 and 2001, respectively.

Liquidity and Commitments

          We are required to have enough investments that qualify as 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, we have 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, amortization, prepayments, and maturities of outstanding loans and mortgage-backed securities; maturities of 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 investment 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 and provide funds for its lending activities and to enhance its interest rate risk management.

          Liquidity management is both a daily and long-term function of business management.  Excess liquidity is generally invested in short-term investments such as overnight deposits or

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U.S. Agency securities.  On a longer-term basis, the Bank maintains a strategy of investing in various lending products as described in greater detail under “Business of Pacific Trust Bank – Lending Activities” in the prospectus.  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, 2002, the total approved loan origination commitments outstanding amounted to $4.8 million.  At the same date, unused lines of credit were $18.7 million and outstanding letters of credit totaled $10,000.  Investment and mortgage-backed securities scheduled to mature in one year or less at September 30, 2002 totaled $0.  Certificates of deposit scheduled to mature in one year or less at September 30, 2002, totaled $102.7 million.  Although the average cost of deposits has decreased throughout 2002, management’s policy is to maintain deposit rates at levels that are competitive with other local financial institutions.  Based on the competitive rates and on historical experience, management believes that a significant portion of maturing deposits will remain with the Bank.  In addition, the Bank has the ability at September 30, 2002 to borrow an additional $100.8 million from the Federal Home Loan Bank of San Francisco as a funding source to meet commitments and for liquidity purposes.

Capital

          Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain a “well capitalized” institution in accordance with regulatory standards.  Total equity was $87.7 million at September 30, 2002, or 21.5% of total assets on that date.  As of September 30, 2002, the Bank exceeded all capital requirements of the Office of Thrift Supervision.  The Bank’s regulatory capital ratios at September 30, 2002 were as follows: core capital 21.42%; Tier 1 risk-based capital, 35.36%; and total risk-based capital, 36.41%.  The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively.  The substantial increase in capital ratios from the quarter-ended June 30, 2002 was primarily a result of the capital raised in the initial public offering.

Impact of Inflation

          The consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America.  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.

          Our primary assets and liabilities are monetary in nature.  As a result, interest rates have a more significant impact on our 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 our 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 in the area of noninterest expense.  Such expense items as employee compensation, employee

14.

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 we have made.  We are 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 2% would be required to deduct an interest rate risk component in calculating its total capital for purposes of the risk-based capital requirement.  As of June 30, 2002, the latest date for which information is available, the Bank’s Sensitivity Measure, as measured by the OTS, resulting from a 200 basis point increase in interest rates was 2% and would result in a $1.3 million increase in the NPV of the Bank.  Accordingly, increases in interest rates would be expected to have a negative impact on the Bank’s operating results.  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, 2002, 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.  On June 30, 2002, the yield on the three-month Treasury bill was 1.83%.  As a result, the net portfolio value analysis was unable to produce results for the minus 200 and minus 300 basis point scenario for the quarter ended June 30, 2002.

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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	$	59,292	$	652		1	%		12.26	%		+44 bp
+ 200 bp		59,985		1,345		2	%		12.28			+46 bp
+ 100 bp		59,767		1,126		2	%		12.13			+31 bp
0 bp		58,640		—		—			11.82
- 100 bp		56,127		2,513		-4	%		11.26			-56 bp
- 200 bp		N/A		N/A		N/A			N/A			N/A
- 300 bp		N/A		N/A		N/A			N/A			N/A

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. DISCLOSURE CONTROLS AND PROCEDURES REPORT.

Within the 90-day period prior to filing of this report, an evaluation was carried out under the supervision and with the participation of First PacTrust Bancorp, Inc.’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule [13a-14(c)/15d-14(c)] under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by First PacTrust Bancorp, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, the Company did not make any significant changes in, nor take any corrective actions regarding its internal controls or other factors that could significantly affect these controls.

16.

PART II - - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS .
		None
ITEM 2.	CHANGES IN SECURITIES.
		Use of Proceeds.  On August 22, 2002, the Company completed an offering of securities registered pursuant to the Securities Act of 1933, as amended.  In connection therewith:
		1.	The effective date of the registration statement on Form S-1, as amended (File No. 333-85120) was May 14, 2002.
		2.	The offering of securities was not underwritten.  Keefe, Bruyette, & Wood, Inc. acted as marketing agent.
		3.	The class of securities registered was common stock, $0.01 par value per share.  The amount of such securities registered was 5,290,000 shares at an offering price of $12.00 per share. The offering terminated on August 14, 2002 with the sale of 5,290,000 shares at a price of $12.00 per share.
		4.	The total offering expenses incurred by the Company were approximately $1.7 million, none of which were paid directly or indirectly to directors or officers of the Company or their associates.
		5.	Gross proceeds of the offering were $63.5 million. The Company loaned 5.1 million to the Bank’s employee stock ownership plan to purchase stock in the offering and incurred $1.7 million of expenses associated with the offering resulting in net proceeds of $56.7 million.  One-half of the net proceeds were invested in the Bank and the remaining amount is invested in an interest-bearing deposit at the Bank awaiting deployment into other interest-earning assets.  These uses of proceeds do not represent a material change in the use of proceeds, described in the Company’s prospectus dated May 14, 2002.
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.
		None
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
		None
ITEM 5.	OTHER INFORMATION.
		None

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ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K.
		(a)	Exhibits
			99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 from the Company’s Chief Executive Officer (attached as an exhibit and incorporated herein by reference).
			99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 from the Company’s Executive Vice President (attached as an exhibit and incorporated herein by reference).
		(b)	Reports on Form 8-K.  No reports on Form 8-K were filed by the registrant during the quarter ended September 30, 2002

18.

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 8, 2002	/s/ HANS R. GANZ
	Hans R. Ganz President and Chief Executive Officer
Date: November 8, 2002	/s/ REGAN GALLAGHER
	Regan Gallagher Vice President and Controller (Principal Financial and Accounting Officer)

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