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

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

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

Assets. The Company's total assets increased by $17.1 million, or 2.0%, to $893.6 million at June 30, 2009 from $876.5 million at December 31, 2008. The increase primarily reflected the growth in the balance of available-for-sale securities portfolio in the amount of $26.0 million, and an increase in other real estate owned of $8.0 million, reduced by a decrease in loans of $11.5 million.

Investments. Securities classified as available-for-sale of $43.5 million at June 30, 2009 increased $26.0 million from December 31, 2008 due to the purchase of mortgage-backed securities during the period totaling $30.3 million.

Loans. Loans receivable, net of valuation allowances, decreased by $11.5 million, or 1.5%, to $781.6 million at June 30, 2009 from $793.0 million at December 31, 2008. This was the result of loan principal repayments, charge offs and foreclosures exceeding loan production during the six months ended June 30, 2009. Loan production for the period ended June 30, 2009 was $42.7 million. The loan production was primarily attributable to growth in the Company's Green account loan product. The Company's ability to originate loans has been largely unaffected by the turmoil in the secondary mortgage markets given that all loans originated are kept in portfolio. The Company's strong capital ratios coupled with being a portfolio lender has allowed the Company to take advantage of the current market and compete with other lenders who have liquidity or capital constraints and have reduced lending operations.

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

                                                       June 2009                 December 2008
                                                  Amount        Percent       Amount        Percent
Real Estate:
One- to four-family                              $ 445,163        56.09 %    $ 460,316        56.92 %
Commercial and multi-family                         94,056        11.85         98,062        12.12
Construction                                         2,472         0.31         17,835         2.21
Consumer:
Real estate secured-first trust deeds (Green
acct)*                                             210,744        26.56        192,586        23.81
Real estate secured-second trust deeds (Green
acct)*                                               8,949         1.13          8,252         1.02
Other real estate and land secured (Green
acct)*                                              19,845         2.50         18,253         2.26

Green account subtotal                             239,538        30.19        219,091        27.09
Other                                               11,785         1.49         12,313         1.52
Commercial                                             592         0.07          1,133         0.14
Total loans                                        793,606       100.00 %      808,750       100.00 %

Net deferred loan origination costs                  2,555                       2,581

Allowance for loan losses                          (14,603 )                   (18,286 )

Total loans receivable, net                      $ 781,558                   $ 793,045

* At 6/30/09, these totals included $239.5 million of the Company's Green account loans, of which $219.7 million was secured by one-to four- family properties, $15.1 million was secured by commercial properties, $2.9 million was secured by multi-family properties and $1.8 million was secured by land. At 12/31/08, these totals included $219.1 million of the Company's Green account loans, of which $200.8 million was secured by one-to four- family properties, $14.9 million was secured by commercial properties, $2.5 million was secured by multi-family properties and $798 thousand was secured by land.

At June 30, 2009, the Company had a total of $325.7 million in interest-only mortgage loans (including Green accounts) and $36.3 million in loans with the potential for negative amortization. At December 31, 2008, the Company had a total of $347.6 million in interest-only mortgage loans and $37.3 million in loans with the potential for negative amortization. The Company no longer originates loans with the potential for negative amortization. The Company continues to originate interest-only loans and growth in those loans is primarily attributable to growth in the Company's Green account loan product which, by its nature, is an interest-only product. Negatively amortizing and interest-only loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization which could result in a larger amount outstanding. However, management believes the risk is mitigated through the Company's loan terms and underwriting standards.

Allowance for Loan Losses. The allowance for loan losses at June 30, 2009 was $14.6 million, which represented 1.8% of the loans outstanding at June 30, 2009, as compared to $18.3 million, or 2.3%, of the loans outstanding at December 31, 2008. The decline in the percentage of allowance to loans outstanding was a direct result of the increase in loan charge-offs during the period for which specific reserves had been previously provided.

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

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

                                     Six Months Ended           Year Ended
                                       June 30, 2009         December 31, 2008
      Balance, beginning of period   $          18,286      $             6,240
      Provision for loan losses                  9,686                   13,547
      Total loans charged off                  (13,370 )                 (1,551 )
      Total recoveries                               1                       50

      Balance, end of period                    14,603                   18,286

Charge-offs totaled $13.4 million for the period ending June 30, 2009 of which $10.4 million was attributed to two construction loans that were written down to current estimated fair values.

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

                                                     Loans Delinquent For:                                 Total
                                                                                                  Loans Delinquent 60 days
                                            60-89 Days              Greater than 90 days                  or more
                                                  Principal                     Principal                        Principal
                                       Number      Balance          Number       Balance           Number         Balance
                                      of Loans    of Loans         of Loans      of Loans         of Loans        of Loans
One- to four-family                          8   $     6,885              13    $   12,141                21    $     19,026
Commercial and multi-family real
estate                                      -             -               -             -                 -               -
Home equity                                  3           196              -             -                  3             196
Real estate secured-first trust
deeds (Green acct)                           1         1,049               2         2,019                 3           3,068
Real estate secured-second trust
deeds (Green acct)                          -             -                1           514                 1             514
Construction                                -             -                1         2,472                 1           2,472
Commercial                                  -             -               -             -                 -               -
Land                                        -             -                3         1,812                 3           1,812
Consumer                                    -             -                1             5                 1               5

                                            12   $     8,130              21    $   18,963                33    $     27,093

Delinquent loans to total gross
loans                                                   1.02 %                        2.39 %                            3.41 %

Non-performing Assets. The table below, in thousands of dollars, sets forth the amounts and categories of non-performing assets and includes those loans on nonaccrual status (which are listed above in the nonaccrual loan table), loans that have been restructured resulting in a troubled debt classification and impaired loans. The Company ceases accruing interest, and therefore classifies as nonaccrual, any loan as to which principal or interest has been in default for a period of greater than 90 days, or if repayment in full of interest or principal is not expected. Of the non-performing loan balance, six loans totaling $3.1 million were current as of June 30, 2009 but were still considered impaired.

                                                          June, 2009          December, 2008
Non-performing loans:
One- to four-family                                      $     15,886         $         9,745
Commercial and Multi-family real estate                            -                       -
Home equity                                                        -                       92
Real estate secured-first trust deeds (Green acct)              2,373                     790
Real estate secured-second trust deeds (Green acct)               514                      -
Construction                                                    2,472                  17,835
Commercial                                                         -                       -
Land                                                            1,812                   9,377
Consumer                                                           -                       -

Total                                                    $     23,057         $        37,839
Troubled debt restructured loans:
One- to four-family                                      $        409         $         3,538
Commercial and Multi-family real estate                         8,502                   5,412
Home equity                                                        -                       -
Real estate secured-first trust deeds (Green acct)                320                      -
Real estate secured-second trust deeds (Green acct)                -                       -
Construction                                                       -                       -
Commercial                                                         -                       -
Land                                                            9,378                      -
Consumer                                                           -                       -

Total                                                    $     18,609         $         8,950

Total non-performing loans                               $     41,666         $        46,789

Real estate owned, net                                          8,147                     158
Total non-performing assets                              $     49,813         $        46,947

Non-performing assets to total assets                            5.57 %                  5.36 %

Total non-performing loans decreased $5.1 million to $41.7 million at June 30, 2009 compared to $46.8 million at December 31, 2008. The Company utilizes estimated current fair values when assessing loan loss provisions for non-performing collateral dependent loans. During the six months ended June 30, 2009, the Company charged off any specific loan allowances that have been outstanding for at least 180 days or any that management deemed as loss.

Real estate owned assets. At June 30, 2009, other real estate acquired in settlement of loans totaled $8.1 million, compared to $158 thousand at December 31, 2008, based on the estimated fair value of the collateral, and primarily consisted of one participation construction property and five single family properties totaling $2.8 million currently held for sale. The Company's share of the participation construction property totals $5.3 million. As a result of recent actions taken by the FDIC, a new lead lender has been established on the construction property in which the Bank is a participant. The Company is hopeful that these recent developments will prompt a timely resolution.

Deposits. Total deposits increased by $30.4 million, or 5.1%, to $628.6 million at June 30, 2009 from $598.2 million at December 31, 2008. Savings accounts increased $24.4 million, or 25.2%, to $121.3 million and certificate of deposit accounts increased $15.4 million, or 4.2%, to $380.8 million due to competitive rate offering terms. Money market accounts decreased $11.8 million, or 14.5%, to $70.0 million as customers shifted funds into accounts offering substantially higher rates paid by the Bank as well as other competitors.

FHLB Advances. Due to the increase in deposit balances, the Company's Federal Home Loan Bank advances decreased $9.5 million to $165.5 million.

Equity. Equity decreased $3.1 million, or 3.1% to $95.6 million at June 30, 2009 from $98.7 million at December 31, 2008. The net decrease was primarily due to total net loss of $1.9 million, the payment of dividends on common stock in the amount of $567 thousand and the payment of dividends on preferred stock in the amount of $481 thousand. Equity increased primarily due to ESOP shares earned of $159 thousand and stock awards earned of $65 thousand.

Comparison of Operating Results for the Six Months ended June 30, 2009 and 2008

General. Net loss for the six months ended June 30, 2009 was $1.9 million, reflecting a $1.3 million, or 200.5% decrease over the same period of the prior year. The decrease resulted from the fluctuations described below.

Interest Income. Interest income increased by $1.6 million, or 7.0%, to $24.2 million for the six months ended June 30, 2009 from $22.6 million for the six months ended June 30, 2008. This was due to an $87.7 million increase in average interest earning assets from $760.0 million for the six months ended June 30, 2008 to $847.7 million for the six months ended June 30, 2009.

Interest income on securities increased $1.7 million to $1.8 million for the six months ended June 30, 2009 from $75 thousand for the six months ended June 30, 2008. This increase was due to a $33.5 million increase in the average balance of the securities portfolio directly resulting from the security purchases made during the period.

Interest income on loans increased $87 thousand, or 0.4% to $22.3 million for the six months ended June 30, 2009 from $22.2 million for the six months ended June 30, 2008. The primary factor for the increase was a $52.5 million increase in the average balance of loans receivable from $740.7 million for the six months ended June 30, 2008 to $793.2 million for the six months ended June 30, 2009. The increase in interest income on loans receivable was partially reduced by a 38 basis point reduction in the average yield on loans receivable to 5.62% due to a general decline in market interest rates from the prior period. Loan interest income was also reduced by the loans on nonaccrual status in which the Company ceased to accrue interest.

Interest income on other interest-earning assets decreased $238 thousand to $48 thousand for the six months ended June 30, 2009 from $286 thousand for the six months ended June 30, 2008 as the Federal Home Loan Bank of San Francisco did not pay stock dividends for the six months ended June 30, 2009. Future dividends received will be subject to economic conditions and the ability of the Federal Home Loan Bank of San Francisco to pay them.

Interest Expense. Interest expense decreased $1.8 million or 14.9%, to $10.0 million for the six months ended June 30, 2009. Interest expense on deposits decreased $2.2 million, or 23.6%, to $7.2 million for the six months ended June 30, 2009 from $9.4 million for the same period in 2008. Although the average balance of deposits increased $51.6 million from $557.4 million for the six months ended June 30, 2008 to $609.0 million for the six months ended June 30, 2009, interest expense was reduced by an 82 basis point decrease in the Company's cost of funds. This decline in the Company's cost of funds reflects the overall decrease in short term market interest rates as a result of the Federal Open Market Committee of the Federal Reserve Board's ("FOMC") decision in 2008 to substantially reduce the overnight lending rate in response to the continued liquidity crisis in the credit markets and recessionary concerns.

Interest expense on Federal Home Loan Bank advances increased $466 thousand, or 19.8%, to $2.8 million for the six months ended June 30, 2009 from $2.4 million for the same period in 2008 due to a $32.7 million increase in the average balance of the Federal Home Loan Bank advances which were used to fund loan demand. Although interest expense on Federal Home Loan Bank advances increased, rates paid on those advances decreased by 12 basis points again due to the decrease in market interest rates.

Net Interest Income. As a result of the combined effect of the factors mentioned above, net interest income before the provision for loan losses increased $3.4 million, or 30.8%, to $14.2 million for the six months ended June 30, 2009 from $10.8 million for the six months ended June 30, 2008. Due to the substantial decline in the Company's cost of funds as a result of the decrease in short term market interest rates, the Company's margins have substantially increased over the prior period with the net interest spread increasing 58 basis points to 3.14%, and the net interest margin increasing 49 basis points to 3.34%.

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

Provisions for loan losses are charged to operations at a level required to reflect probable incurred credit losses in the loan portfolio. In this regard, approximately 95% of the Company's loans are to individuals and businesses in southern California. California, in general, and more specifically, San Diego and Riverside Counties, continue to be amongst the distressed real estate markets in the country. A provision for loan losses of $9.7 million was recorded for the six months ended June 30, 2009 compared to a $5.9 million provision for loan losses recorded for the six months ended June 30, 2008. Increased provision levels reflect the continued deterioration in the housing markets during the period and the resulting increase in the Company's non-performing loan balances, as well as an increase in loans charged off. Year-to-date net charge-offs totaled $13.4 million compared to $742 thousand at June 30, 2008. The current year net charge-offs consisted primarily of two construction loans totaling $10.1 million. During the period the Company charged off any specific loan allowances that have been outstanding for at least 180 days or any that management deemed as loss. In addition, the Company increased the FAS 5 factors related to certain home equity loan products due to the continued market deterioration.

Noninterest Income. Noninterest income decreased $250 thousand, or 21.9%, to $893 thousand for the six months ended June 30, 2009 compared to $1.1 million for the same period of the prior year primarily due to decreased performance of the bank owned life insurance investment as a result of current market conditions, as well as a decrease in various customer service fees.

Noninterest Expense. Noninterest expense increased $944 thousand, or 13.8%, to $7.8 million for the six months ended June 30, 2009 compared to $6.9 million for the same period of the prior year. This net increase was primarily the result of a $656 thousand increase in FDIC expenses and a $489 thousand increase in other general and administrative expenses. Additionally, salaries and employee benefit expenses decreased $157 thousand and advertising expenses decreased $88 thousand.

The FDIC expenses increased $656 thousand due to an increase in FDIC deposit insurance premiums, including a special assessment of approximately $400 thousand. The strains recently experienced in the financial markets have resulted in the FDIC imposing an emergency special assessment of five basis points on each insured depository institution's total assets minus Tier 1 Capital as of June 30, 2009.

Other general and administrative expenses increased $489 thousand during the six months ended June 30, 2009, and was primarily the result of an increase in loan servicing and foreclosure expenses of $427 thousand during the period.

Salaries and employee benefits represented 43.5% and 51.7% of total noninterest expense for the six months ended June 30, 2009 and June 30, 2008, respectively. Total salaries and employee benefits decreased $157 thousand, or 4.4%, to $3.4 million for the six months ended June 30, 2009 from $3.5 million for the same period in 2008 primarily due to lower ESOP compensation expenses resulting from a decrease in the fair market value of the Company's stock compared to the prior year. Additionally, stock award and option expenses decreased as a result of a large portion of the awards fully vesting in April, 2009.

Advertising expenses decreased $88 thousand, or 48.1% to $95 thousand resulting from fewer marketing and radio ads for the period ending June 30, 2009.

Income Tax Expense/(Benefit). An income tax benefit of $523 thousand was recorded for the six months ended June 30, 2009 due to the net loss incurred. The effective tax rate was (21.6%) and (17.8%) for the periods ending June 30, 2009 and 2008, respectively. The effective tax rate for the current period was based on projected net income for the year under the guidelines of FIN18.

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

General. Net income for the three months ended June 30, 2009 was $685 thousand, reflecting a $2.5 million increase over the same period of the prior year. The increase resulted from the fluctuations described below.

Interest Income. Interest income increased by $864 thousand, or 7.7%, to $12.1 million for the three months ended June 30, 2009 from $11.2 million for the three months ended June 30, 2008. This was due to a $71.1 million increase in the average balance of interest earning assets from $775.7 million for the six months ended June 30, 2008 to $846.8 million for the six months ended June 30, 2009.

Interest income on securities increased to $1.1 million for the three months ended June 30, 2009 primarily due to a $41.8 million increase in the average balance of the securities portfolio resulting from mortgage backed security purchases made during the current year.

Interest income on loans decreased $115 thousand, or 1.0% to $11.0 million for the three months ended June 30, 2009 from $11.1 million for the three months ended June 30, 2008. Although the average balance of loans receivable increased $29.7 million, interest income on loans decreased primary due to an $14.5 million increase in the non-performing loan balance on which the Company ceased to accrue interest during the three months ended June 30, 2009 compared to the prior's year quarter, as well as a 28 basis point reduction in the average yield on loans receivable to 5.56% due to a general decline in market interest rates during the same period.

Interest income on other interest-earning assets decreased $119 thousand to $32 thousand for the three months ended June 30, 2009 from $151 thousand for the three months ended June 30, 2008 as the Federal Home Loan Bank of San Francisco did not pay stock dividends for the second quarter of 2009. Future dividends . . .