Banc of California (BANC) 10-Q 2004 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, 2004

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  ¨

Check whether the registrant is an accelerated filer.    YES  x.    NO  ¨.

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 4, 2004 the Registrant had 4,644,900 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	8
Item 3	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4	Controls and Procedures	18
PART II -Other Information
Item 1	Legal Proceedings	18
Item 2	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	18
Item 3	Defaults Upon Senior Securities	19
Item 4	Submission of Matters to a Vote of Securities Holders	19
Item 5	Other Information	19
Item 6	Exhibits and Reports on Form 8-K	19
SIGNATURES		20

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 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, 2004			December 31, 2003
ASSETS
Cash and due from banks	$	5,180		$	6,705
Federal funds sold		975			1,110
Interest-bearing deposits		7,278			3,760
Total cash and cash equivalents		13,433			11,575
Interest-bearing deposit in other financial institution		700			500
Securities available-for-sale		98			6,419
Federal Home Loan Bank stock		7,713			8,293
Loans receivable, net of allowance of $4,605 and $4,232		643,914			587,251
Premises and equipment, net		5,176			5,372
Accrued interest receivable		2,221			2,121
Other assets		1,301			2,433
Total assets	$	674,556		$	623,964
LIABILITIES AND EQUITY
LIABILITIES
Deposits
Non-interest-bearing	$	14,577		$	12,327
Interest-bearing		435,869			377,598
Total deposits		450,446			389,925
Advances from Federal Home Loan Bank		142,500			147,000
Accrued expenses and other liabilities		3,230			2,500
Total liabilities		596,176			539,425
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; September 30, 2004- 5,445,000 shares issued, 2003- 5,455,000 shares issued		54			55
Additional paid-in capital		65,127			64,966
Retained earnings		36,818			34,137
Treasury stock, at cost (September 30, 2004 – 800,100 shares, 2003- 393,600 shares)		(17,180	)		(8,016	)
Unearned Employee Stock Ownership Plan shares (September 30, 2004- 306,820 shares, 2003- 338,560 shares)		(3,682	)		(4,063	)
Unearned employee stock award shares (September 30, 2004- 153,649 shares, 2003- 148,000 shares)		(2,776	)		(2,591	)
Accumulated other comprehensive income		19			51
Total stockholders’ equity		78,380			84,539
Total liabilities and stockholders’ equity	$	674,556		$	623,964

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,
	2004		2003		2004		2003
Interest and dividend income
Loans, including fees	$	23,214	$	19,552	$	7,913	$	6,779
Securities		99		373		3		88
Other interest-earning assets		285		218		112		83
Total interest income		23,598		20,143		8,028		6,950
Interest expense
Deposits		5,556		4,397		1,999		1,495
Federal Home Loan Bank advances		2,695		2,216		920		891
Total interest expense		8,251		6,613		2,919		2,386
Net interest income		15,347		13,530		5,109		4,564
Provision for loan losses		450		1,063		194		435
Net interest income after provision for loan losses		14,897		12,467		4,915		4,129
Noninterest income
Customer service fees		914		809		313		286
Net gain on sale of securities		93		0		66		0
Other income		213		138		58		98
Total noninterest income		1,220		947		437		384
Noninterest expense
Salaries and employee benefits		5,257		4,239		1,736		1,549
Occupancy and equipment expense		1,346		1,376		436		460
Advertising		245		323		77		115
Professional fees		229		220		53		48
Stationary, supplies, and postage		285		346		88		104
Data processing expense		584		600		198		203
ATM costs		367		377		125		116
Other general and administrative		804		819		249		299
Total noninterest expense		9,117		8,300		2,962		2,894
Income before income taxes		7,000		5,114		2,390		1,619
Income tax expense		3,017		2,142		1,033		649
Net income	$	3,983	$	2,972	$	1,357	$	970
Comprehensive income	$	3,951	$	2,787	$	1,356	$	922
Earnings per share
Basic	$	.92	$	.61	$	.32	$	.20
Diluted	$	.90	$	.61	$	.32	$	.20

See accompanying notes to consolidated financial statements.

2.

First PacTrust Bancorp, Inc.

Consolidated Statements of Cash Flows

(In thousands of dollars)

(Unaudited)

	Nine Months Ended September 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,983		$	2,972
Adjustments to reconcile net income to net cash from operating activities
Net premium amortization on securities		32			201
Provision for loan losses		450			1,063
Depreciation		352			296
FHLB stock dividends		(253	)		(156	)
ESOP compensation expense		713			571
Stock award compensation expense		492			237
Net change in:
Accrued interest receivable and other assets		1,032			(3,114	)
Accrued interest payable and other liabilities		705			1,718
Net cash from operating activities		7,506			3,788
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(57,112	)		(150,535	)
Increase in other interest bearing assets		(200	)		—
Purchase of FHLB stock		—			(3,559	)
Redemption of FHLB stock		833			—
Purchase of securities available-for-sale		(5,498	)		—
Sale of securities available-for-sale		10,463			—
Net gain on sale of securities available-for-sale		93			—
Principal repayments on mortgage-backed securities		1,269			9,684
Purchase of premises and equipment		(156	)		(553	)
Net cash from investing activities		(50,308	)		(144,963	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		60,521			79,030
Net change in FHLB open line		2,500			51,300
Repayments of FHLB advances		(14,000	)		(20,000	)
Proceeds from FHLB advances		7,000			43,000
Purchase of treasury stock		(10,059	)		(4,020	)
Dividends paid on common stock		(1,302	)		(890	)
Net cash from financing activities		44,660			148,420
Net change in cash and cash equivalents		1,858			7,245
Cash and cash equivalents at beginning of period		11,575			11,506
Cash and cash equivalents at end of period	$	13,433		$	18,751

See accompanying notes to consolidated financial statements.

3.

First PacTrust Bancorp, Inc.

Consolidated Statements of Equity

(In thousands of dollars)

(Unaudited)

	Common Stock			Additional Paid In Capital			Retained Earnings			Treasury Stock			Unearned ESOP Shares			Unearned Stock Awards			Accumulated Other Comprehensive Income			Total
Balance at January 1, 2004	$	55		$	64,966		$	34,137		$	(8,016	)	$	(4,063	)	$	(2,591	)	$	51		$	84,539
Net income		—			—			3,983			—			—			—						3,983
Change in unrealized gain on securities available-for-sale		—			—			—			—			—			—			(32	)		(32	)
Forfeiture and retirement of Stock		(1	)		(171	)		—			(41	)		—			212			—			(1	)
Stock awards earned		—			—			—			—						492			—			492
Issuance of Stock Awards					(47	)					936						(889	)					—
Purchase of 448,300 shares of treasury stock		—			—			—			(10,059	)		—			—						(10,059	)
ESOP shares earned		—			332			—			—			381			—			—			713
Tax Benefit of RRP Shares Vesting					47																		47
Dividends paid ($.30 per share)		—			—			(1,302	)		—			—									(1,302	)
Balance at September 30, 2004	$	54		$	65,127		$	36,818		$	(17,180	)	$	(3,682	)	$	(2,776	)	$	19		$	78,380

See accompanying notes to consolidated financial statements.

4.

FIRST PACTRUST BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(table amounts in thousands of dollars)

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, 2004 and December 31, 2003 and for the three-month and nine-month periods ended September 30, 2004 and 2003. 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 Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. The December 31, 2003 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 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, 2004. 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, 2004 and 2003 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 only business of the Company is the ownership of the Bank. The Bank is a federally chartered stock savings bank and member of the Federal Home Loan Bank (FHLB) system, and 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 the San Diego and Riverside counties in the State of California.

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

5.

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.

EITF 03-1, Other-Than-Temporary Impairment

In March 2004, the FASB Emerging Issues Task Force (“EITF”) reached a consensus regarding EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached is to be applied to other-than-temporary impairment evaluations. In September 2004, the Financial Accounting Standards Board (“FASB”) issued a final FASB Staff Position, FSP EITF Issue 03-01-1, which delays the effective date for the measurement and recognition guidance of EITF 03-01. We are currently evaluating the impact of adopting EITF 03-01.

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, of which $5.1 million was loaned to the Bank’s employee stock ownership plan to purchase stock in the offering. The net proceeds of the offering totaled $61.7 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.

6.

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. Dividends on allocated and/or unearned shares first reduces accrued interest and secondly principal.

Note 5 – Employee Stock Compensation

SOP Plan: A Stock Option Plan (“SOP”) provides for issue of options to directors, officers, and employees. The Company adopted the SOP in April of 2003 under the terms of which 529,000 shares of the Company’s common stock may be awarded. The options become exercisable in equal installments over a five-year period from the date of grant. The options expire ten years from the date of grant. As of September 30, 2004 the Company has awarded 488,500 options net of 43,000 which were forfeited during 2004.

The Corporation applies Accounting Principles Board (APB) Opinion 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized at the date of grant. Had compensation cost been determined based on the fair value at the grant dates for awards under the plan consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Corporation’s net income and earnings per share would have been reduced to the pro forma amounts in the table below. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period.

	September 30, 2004				September 30, 2003
	Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
Net income as reported	$	1,357	$	3,983	$	970	$	2,972
Pro forma net income		1,335		3,923		952		2,942
Earnings per share as reported
Basic		.32		.92		.20		.61
Diluted		.32		.90		.20		.61
Pro forma earnings per share
Basic		.32		.91		.20		.61
Diluted		.31		.89		.20		.61

RRP Plan: A Recognition and Retention Plan (“RRP”) provides for issue of shares to directors, officers, and employees. Compensation expense is recognized over the vesting period of the shares as of the market value at date of grant. Pursuant to its 2003 stock-based incentive plan, the Company awarded 170,000 shares of restricted stock during 2003 and 43,800 during 2004. Of these awarded shares, 12,000 shares were forfeited during 2004. These shares vest over a five year period. The unamortized cost of shares not yet earned (vested) is reported as a reduction of stockholders’ equity. Compensation expense for restricted stock awards totaled approximately $181,000 for the three months ended September 30, 2004 and $492,000 for the nine months ended September 30, 2004. Compensation expense for restricted stock awards totaled approximately $142,000 for the three months ended September 30, 2003 and $236,000 for the nine months ended September 30, 2003.

7.

Note 6 – Earnings Per Share

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

	Three Months Ended Sept 30, 2004		Nine Months Ended Sept 30, 2004		Three Months Ended Sept 30, 2003		Nine Months Ended Sept 30, 2003
Net income as reported (in thousands)	$	1,357	$	3,983	$	970	$	2,972
Weighted average common shares outstanding		4,200,624		4,325,774		4,732,250		4,841,294
Basic earnings per share	$	.32	$	.92	$	.20	$	.61
Earnings per share assuming dilution
Net income available to common shareholders	$	1,357	$	3,983	$	970	$	2,972
Weighted average common shares outstanding		4,200,624		4,325,774		4,732,250		4,841,294
Dilutive effect of stock options		69,806		60,366		34,987		6,098
Dilutive effect of stock awards		23,954		20,850		13,414		3,621
Average common shares and dilutive potential common shares		4,294,384		4,406,990		4,780,651		4,851,013
Diluted earnings per share	$	.32	$	.90	$	.20	$	.61

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, 2004 to its financial condition at December 31, 2003 and the results of operations for the three-month and nine-month periods ended September 30, 2004 to the same periods in 2003. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

8.

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. Interest rate risk is the exposure of net interest income to changes in interest rates.

Comparison of Financial Condition at September 30, 2004 and December 31, 2003

The Company’s total assets increased by $50.6 million, or 8.1%, to $674.6 million at September 30, 2004 from $624.0 million at December 31, 2003. The increase primarily reflected growth in loans receivable which was funded by an increase in deposits. Net loans increased by $56.7 million, or 9.7%, to $643.9 million at September 30, 2004 from $587.3 million at December 31, 2003. The increase in loans resulted from originations of one- to four- family mortgage loan originations largely due to the continued low interest rate environment. The Company continues to utilize brokers as a primary source of loan growth.

Investments decreased by $6.3 million to $98,000 from $6.4 million at December 31, 2003 due to primarily to the sale of securities in 2004.

Total deposits increased by $60.5 million, or 15.5% to $450.4 million at September 30, 2004 from $389.9 million at December 31, 2003. The increase primarily reflected growth in certificates of deposit, NOW accounts and money market deposit accounts due to the opening of a new branch in July of 2003, increased advertising, and new products offered. Certificates of deposit increased $28.5 million, or 14.0%, to $231.9 million primarily due to increased institutional jumbo certificates of deposit and additional $7.0 million in brokered certificates of deposits. NOW accounts increased by $14.9 million or 26.7% due primarily to growth in a new high yield checking account offered. Money market deposit accounts also increased by $10.7 million, or 16.4%, to $76.3 million.

Federal Home Loan Bank advances decreased $4.5 million, or 3.1%, to $142.5 million at September 30, 2004 from $147.0 million at December 31, 2003 primarily due to advances of $14.0 maturing during the three month period ending September 30, 2004. Additionally, $7.0 million of new fixed rate FHLB advances were obtained during the third quarter. Increased deposit growth also helped fund loan growth reducing the amount of additional advances needed during the period. The Company interchanges the use of deposits or borrowings to fund assets depending on various factors including liquidity and asset liability management.

Equity decreased $6.2 million to $78.4 million at September 30, 2004 from $84.5 million at December 31, 2003. The decrease resulted from the purchase of 448,300 shares of treasury stock for $10.1 million, the payment of dividends of $1.3 million, which was supplemented by $4.0 million of income earned during the nine months ended September 30, 2004.

9.

Comparison of Operating Results for the Nine Months Ended September 30, 2004 and 2003

General.Net income for the nine months ended September 30, 2004 was $4.0 million, an increase of $1.0 million, or 34.0%, from the nine months ended September 30, 2003. The increase in net income resulted from the fluctuations described below.

Interest income. Interest income increased by $3.5 million, or 17.2%, to $23.6 million for the nine months ended September 30, 2004 from $20.1 million for the nine months ended September 30, 2003. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $144.9 million, or 30.7%, from $472.7 million for the nine months ended September 30, 2003 to $617.6 million for the nine months ended September 30, 2004. The increase was primarily the result of loan originations exceeding repayments due to strong demand, reflecting generally low interest rates in 2004. The growth consisted primarily of increases in single family and multifamily mortgages. The Company advertises in the local marketplace, offers competitive rates and does not expect the composition of the loan growth to change. A 50 basis point decrease in the average yield on loans receivable, from 5.51% for the nine months ended September 30, 2003 to 5.01% for the nine months ended September 30, 2004, negatively impacted interest income, and was primarily due to the continued strong refinance market due to lower market rates of interest. Contributing to this decrease was also the rollover of the Company’s significant adjustable rate loan portfolio adjusting downward from the higher rates a few years ago.

Interest income on securities decreased by $274,000, or 73.5%, to $99,000 for the nine months ended September 30, 2004 due to the overall decrease in the portfolio resulting primarily from sales of securities of $10.5 million. The average yield on the securities portfolio increased slightly from 3.34% for the nine months ended September 30, 2003 to 3.35% for the nine months ended September 30, 2004 as a result of the significant decrease in the average balance of the portfolio.

Interest Expense. Interest expense increased $1.6 million, or 24.8%, to $8.3 million for the nine months ended September 30, 2004. The increase in interest expense resulted primarily from an increase of $105.5 million in the average balance of deposits for the nine months ended September 30, 2003 to $413.0 million for the nine months ended September 30, 2004, and a $27.7 million increase in the average balance of FHLB advances from $114.7 million for the first nine months of 2003 to $142.5 million for the same period in 2004. This was partially reduced by a decrease in the average cost of our interest-bearing liabilities from 2.09% to 1.99% primarily due to maturing CD’s rolling into new lower yielding products. Interest expense on deposits increased $1.2 million, or 26.4%, to $5.6 million for the nine months ended September 30, 2004 from $4.4 million for the same period in 2003. Interest expense on Federal Home Loan Bank advances increased $479,000, or 21.6%, to $2.7 million for the nine months ended September 30, 2004 from $2.2 million for the nine months ended September 30, 2003.

Net Interest Income.Net interest income before provision for loan losses increased $1.8 million, or 13.4%, to $15.3 million for the nine months ended September 30, 2004 from $13.5 million for the nine months ended September 30, 2003 as a result of the factors discussed above. The overall increase in net interest income was negatively impacted by a decrease in the net interest spread of 32 basis points to 2.95% and a decrease in the net interest margin of 39 basis points during the period to 3.21%. The overall increase in net interest income primarily reflects the factors discussed above. The Company is not currently expecting the net interest margin to increase in the near term.

10.

Provision for Loan Losses.Provisions for loan losses were 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 $450,000 and $1,063,000 were made for the nine months ended September 30, 2004 and 2003, respectively. Although a net increase in loans has occurred during the nine months ended September 30, 2004, the provision decreased by $613,000 over the prior year due to slower growth in loans in 2004 compared to the same period in 2003 as well as continued low levels of charge-offs and nonperforming assets.

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. The Company 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 remained equal to the prior period at .71%. 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 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, 2004 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 increased $273,000, or 28.8% to $1.2 million for the nine months ended September 30, 2004 from $947,000 for the nine months ended September 30, 2003, primarily as a result of an increase of $105,000 in customer service fees on deposit accounts, a $93,000 gain made on the sale of securities during the second quarter and third quarter of 2004 and an increase of $80,000 in mortgage loan prepayment penalties.

Noninterest Expense.Noninterest expense increased $817,000, or 9.8%, to $9.1 million for the nine months ended September 30, 2004 from $8.3 million for the nine months ended September 30, 2003. This increase was primarily the result of a $1.0 million increase in salaries and employee benefits decreased by a reduction in advertising expenses of $78,000.

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Salaries and employee benefits represented 57.7% and 51.1% of total noninterest expense for the nine months ended September 30, 2004 and September 30, 2003, respectively. Total salaries and employee benefits increased $1.0 million, or 24.0%, to $5.3 million for the nine months ended September 30, 2004 from $4.2 million for the same period in 2003. The increase was primarily due to an increase of $272,000 in salary expense due to an increase of 18 full time equivalents including staffing for the new Rancho Bernardo branch facility and an increase of $255,000 in RRP compensation expense related to the establishment of the plan in April 2003 and additional awards made in 2004. Other contributing factors included an increase of $206,000 in the bonus compensation expense due to changes in the bonus structure from the prior period, an increase of $149,000 in ESOP compensation expense resulting from an increase in the company’s stock price for the period ended September 30, 2004 compared to the same period in 2003, and an increase of $118,000 in employee taxes, health insurance and other employee benefits resulting primarily from the increase in number of employees.

Advertising expenses decreased $78,000 as a result of higher expenses incurred in the prior year for advertising and promotional item purchases for the opening of the new Rancho Bernardo branch facility in 2003.

Income Tax Expense.Income tax expense increased by $875,000 to $3.0 million for the nine months ended September 30, 2004, from $2.1 million for the nine months ended September 30, 2003. This increase was primarily a result of an increase in pre-tax income. The effective tax rate was 43.1% and 41.9% for the nine months ended September 30, 2004 and 2003, respectively.

Comparison of Operating Results for the Three Months Ended September 30, 2004 and 2003

General.Net income for the three months ended September 30, 2004 was $1.4 million, an increase of $387,000, or 39.9%, from the three months ended September 30, 2003. The increase in net income resulted from the fluctuations described below.

Interest income. Interest income increased by $1.1 million, or 15.5%, to $8.0 million for the three months ended September 30, 2004 from $7.0 million for the three months ended September 30, 2003. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $111.3 million, or 21.1%, from $526.7 million for the three months ended September 30, 2003 to $638.0 million for the quarter ended September 30, 2004. The increase was primarily the result of loan originations exceeding repayments due to strong demand, reflecting generally low interest rates in 2004. A 19 basis point decrease in the average yield on loans receivable, from 5.15% for the three months ended September 30, 2003 to 4.96% for the three months ended September 30, 2004, negatively impacted interest income, and was primarily due to the continued strong refinance market due to lower market rates of interest. The growth consisted primarily of increases in single family and multifamily mortgages. The Company advertises in the local marketplace, offers competitive rates and does not expect the composition or growth of the loan portfolio to change.

Interest income on securities decreased by $85,000, or 96.6%, to $3,000 for the three months ended September 30, 2004 due to the overall decrease in the securities portfolio

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resulting primarily from sales of securities of $10.5 million. The average yield on the securities portfolio was 0.84% for the three months ended September 30, 2004 compared to 3.00% for the same period in 2003 again due to the decline in the securities portfolio.

Interest Expense. Interest expense increased $533,000, or 22.3%, to $2.9 million for the three months ended September 30, 2004. The increase in interest expense resulted primarily from an increase in market interest rates compared to the same period in the prior year and an increase in the average balance of deposits and FHLB advances as compared to the prior year’s quarter. The average balance of deposits increased from $329.0 million for the three months ended September 30, 2003 to $428.6 million for the three months ended September 30, 2004. Interest expense on deposits increased $504,000, or 33.7%, to $2.0 million for the three months ended September 30, 2004 from $1.5 million for the same period in 2003. Interest expense on Federal Home Loan Bank advances increased $29,000, or 3.3%, to $920,000 for the three months ended September 30, 2004 from $891,000 for the three months ended September 30, 2003. The average balance of FHLB advances increased $4.9 million from $140.4 million in 2003 to $145.3 million for the same period in 2004. The average cost of the Company’s interest-bearing liabilities remained equal at 2.04% for both quarters.

Net Interest Income.Net interest income before provision for loan losses increased $545,000, or 11.9%, to $5.1 million for the three months ended September 30, 2004 from $4.6 million for the three months ended September 30, 2003. The net interest spread decreased 12 basis points to 2.84%, while the net interest margin decreased 18 basis points during the period to 3.12%. The increase in net interest income primarily reflects the factors discussed above. The Company is not currently expecting the net interest margin to increase in the near term.

Provision for Loan Losses.Provisions for loan losses were 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 $194,000 and $435,000 were made for the three months ended September 30, 2004 and 2003, respectively. The provision decreased by $241,000 due to slower growth in loans during the third quarter of 2004 as well as continued low levels of charge-offs and nonperforming assets.

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. The Company 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 remained equal to the prior period at .71%. This decrease was primarily the result of a continued low levels of charge-offs and non-performing assets. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates.

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Management assesses the allowance for loan losses 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, 2004 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 increased $53,000, or 13.8% to $437,000 for the three months ended September 30, 2004 from $384,000 for the three months ended September 30, 2003, primarily as a result of a $66,000 net gain on sale of securities.

Noninterest Expense.Noninterest expense increased $68,000, or 2.4%, to $3.0 million for the three months ended September 30, 2004 from $2.9 million for the three months ended September 30, 2003. This increase was primarily the result of a $187,000 increase in salaries and employee benefits. General and other administrative expenses decreased $50,000, advertising and professional expense decreased $33,000, and occupancy and equipment expense decreased $24,000 as a result of higher expenses incurred in the prior year due to core system conversion.

Salaries and employee benefits represented 58.6% and 53.5% of total noninterest expense for the three months ended September 30, 2004 and September 30, 2003, respectively. Total salaries and employee benefits increased $187,000, or 12.1%, to $1.7 million for the three months ended September 30, 2004 from $1.5 million for the same period in 2003. The increase was primarily due to an increase of $70,000 in the bonus compensation expense for the quarter ended September 30, 2004 due to changes in the bonus plan for 2004, and a $38,000 in salary expense due to an increase of 18 full time equivalents including staffing for the new Rancho Bernardo branch facility. Other contributing factors included an increase of $39,000 in RRP compensation due to additional RRP awards granted in 2004. Additionally, an increase of $36,000 in ESOP compensation expense resulting from an increase in the company’s stock price, compared to the same period of 2003.

Income Tax Expense.Income tax expense increased to $1.0 million for the three months ended September 30, 2004, from $649,000 for the three months ended September 30, 2003. This increase was primarily a result of an increase in pre-tax income. The effective tax rate was 43.2% and 40.1% for the three months ended September 30, 2004 and 2003, respectively.

Liquidity and Commitments

The Bank is 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, the Company 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.

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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, Federal Home Loan Bank advances, 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 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 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, 2004, the total approved loan origination commitments outstanding amounted to $4.4 million. At the same date, unused lines of credit were $21.8 million and outstanding letters of credit totaled $20,000. There are no securities scheduled to mature in one year or less as of September 30, 2004. Certificates of deposit scheduled to mature in one year or less at September 30, 2004, totaled $134.0 million. Although the average cost of deposits has increased throughout 2004, 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, 2004 to borrow an additional $117.4 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 $78.4 million at September 30, 2004, or 11.6% of total assets on that date. As of September 30, 2004, the Bank exceeded all capital requirements of the Office of Thrift Supervision. The Bank’s regulatory capital ratios at September 30, 2004 were as follows: core capital 10.10%; Tier 1 risk-based capital, 16.36%; and total risk-based capital, 17.48%. The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively.

15.

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 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 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 2.0% 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. As of June 30, 2004, the latest date for which information is available, the Bank’s Sensitivity Measure, as measured by the OTS, resulting from a 2.0% increase in interest rates was 247 basis points and would result in a $19.6 million decrease 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 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

16.

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, 2004, 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, 2004, the yield on the three-month Treasury bill was 1.31%. 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, 2004.

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	$	52,276	(32,238	)	(38	)%	8.24	%	(419	)bp
+ 200 bp		64,917	(19,597	)	(23	)%	9.97	%	(247	)bp
+ 100 bp		75,975	(8,539	)	(10	)%	11.40	%	(104	)bp
0 bp		84,514	—		—		12.44	%	0	bp
- 100 bp		89,305	4,791		6	%	12.96	%	52	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.

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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, 2004 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Principal Financial Officer and several other members of the company’s senior management. 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, 2004 that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.

The Company intends to continually review and evaluate the design and effectiveness of our disclosure controls and procedures and to improve the Company’s controls and procedures over time and to correct any deficiencies that the Company may discover 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 our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

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
7/1/04-7/31/04	no activity for the period
8/1/04-8/30/04	51,000	$23.55	51,000	126,895
9/1/04-9/30/04	no activity for the period

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A 10% buyback totaling 524,300 shares was authorized by the company’s board of directors commencing on August 22, 2003 to be conducted at prevailing market prices. As of April 16, 2004 this 10% buyback was completed. On May 17, 2004, a 5% buyback totaling 237,895 shares was authorized by the Company’s board of directors commencing on May 17, 2004 to be conducted at prevailing market prices.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

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

None

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

31.1 Section 13a-14(a) Certification

31.2 Section 13a-14(a) Certification

32.1 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).

32.2 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 Senior Vice President (attached as an exhibit and incorporated herein by reference).

(b) Reports on Form 8-K.

On July 30, the Company filed a current report on Form 8K to announce second quarter earnings.

On August 25, the Company filed a current report on Form 8K declaring a dividend of 11 cents per share, payable September 24 to shareholders as of September 11, 2004.

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SIGNATURES

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

	FIRST PACTRUST BANCORP, INC.
Date: November 9, 2004	/s/ Hans R. Ganz
	Hans R. Ganz
	President and Chief Executive Officer
Date: November 9, 2004	/s/ Regan Gallagher
	Regan Gallagher
	Senior Vice President/ Controller
	(Principal Financial and Accounting Officer)

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