**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**




**FORM
10 - KSB**




**ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D)**


**OF
THE SECURITIES EXCHANGE ACT OF 1934**




**For
the fiscal year ended December 31, 2004**




Commission
File Number **333-118859** ****




**PACIFIC
COAST NATIONAL BANCORP**


(Exact
name of registrant as specified in its charter)




**California**
    
    **61-1453556**(State
      or other jurisdiction of
    
    (I.R.S.
      Employerincorporation
      or organization)
    
    Identification
      No.)




**905
      Calle Amanecer, Suite 100, San Clemente, California
      92673**(Address
      of principal executive offices, including zip code)**(949)
      361-4300**(Registrant’s
      telephone number, including area code)Securities
      registered pursuant to Section 12(b) of the Act: NoneSecurities
      registered pursuant to Section 12(g) of the Act: NoneCommon
      Stock, par value$.01
      per share





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




Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act.)


Yes o No x




As of
December 31, 2004, the last business day of the registrant’s most recently
completed fiscal year, no shares of the common stock of the registrant was
issued or outstanding.




**Documents
Incorporated by Reference:** None.











**PACIFIC
COAST NATIONAL BANCORP**




INDEX


PAGEPART
      I
    
    
    
    
    
    2ITEM
      1.
    
    
    BUSINESS.
    
    
    2ITEM
      2.
    
    
    PROPERTIES.
    
    
    17ITEM
      3.
    
    
    LEGAL
      PROCEEDINGS.
    
    
    17ITEM
      4.
    
    
    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
    
    
    17PART
      II
    
    
    
    
    
    17ITEM
      5.
    
    
    MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
    
    
    17ITEM
      6.
    
    
    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION.
    
    
    18ITEM
      7.
    
    
    SELECTED
      FINANCIAL DATA.
    
    
    22ITEM
      8.
    
    
    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
    
    
    21ITEM
      8A.
    
    
    CONTROLS AND PROCEDURES.
    
    
    21PART
      III
    
    
    
    
    
    21ITEM
      9.
    
    
    DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT.
    
    
    21ITEM
      10.
    
    
    EXECUTIVE
      COMPENSATION.
    
    
    23ITEM
      11.
    
    
    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
    
    
    26ITEM
      12.
    
    
    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS.
    
    
    26ITEM
      13.
    
    
    EXHIBITS.
    
    
    26ITEM
      14.
    
    
    PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
    
    
    26
  i
  PART I
  **ITEM
1.** **Business.**




**Overview**




Pacific
Coast National Bancorp . Pacific
Coast National Bancorp (the “Company”) was organized as a California corporation
on July 2, 2003 to serve as a bank holding company for Pacific Coast
National Bank (the “Bank”). As part of its organizational activities, the
Company has filed an application with the Federal Reserve to become a bank
holding company, which application was approved on April 11, 2005.
Initially, the Company will have no material business operations other than
owning and managing the Bank.




The
Company commenced its initial public offering on November 22, 2004 to raise the
capital required to capitalize its proposed wholly-owned banking subsidiary, the
Bank. The Company expects to use at least $14.5 million of the proceeds of its
initial public offering to capitalize the Bank if it sells 1,700,000 shares and
at least $16.5 million to capitalize the Bank if it sells 1,900,000 shares. As
of December 31, 2004, the Company held in escrow $2.7 million.




Pacific
Coast National Bank . On June
2, 2004, the organizers of the Bank filed an application with the Office of the
Comptroller of the Currency (Comptroller) to organize the Bank as a national
bank and with the Federal Deposit Insurance Corporation (FDIC) for federal
deposit insurance. The Bank has received the regulatory approvals of the
Comptroller and the FDIC; however, these regulatory approvals are subject to
certain conditions that the Bank must satisfy before receiving a license to
commence banking operations, including: (1) capitalizing the Bank with at least
$14.5 million, and (2) implementing appropriate banking policies and procedures.
The Bank expects to receive all necessary final regulatory approvals and begin
banking operations in May 2005.




**Philosophy
and strategy**




Pacific
Coast National Bank will operate as a full-service community bank, offering
sophisticated financial products while emphasizing prompt, personalized customer
service. The Bank believes that this philosophy, encompassing the service
aspects of community banking, will distinguish the Bank from its
competitors.




To carry
out its philosophy, the Bank’s business strategy will involve the
following:




·
    Capitalizing
      on the diverse community involvement, professional expertise and personal
      and business contacts of its directors and executive
    officers;




·
    Hiring
      and retaining experienced and qualified banking
  personnel;




·
    Providing
      individualized attention with consistent, local decision-making
      authority;




·
    Utilizing
      technology and strategic outsourcing to provide a broad array of
      convenient products and services;




·
    Operating
      from highly visible and accessible banking offices in close proximity to a
      concentration of targeted commercial businesses and
      professionals;




·
    Attracting
      its initial customer base by offering competitive interest rates on its
      deposit accounts;




·
    Encouraging
      the initial shareholders of the Company to become customers;
      and




·
    Implementing
      a strong marketing program.




1




**Market
opportunities**




Primary
service areas . The
Bank’s primary service areas will be the San Clemente and Encinitas banking
markets, which it will serve from two locations. The main office will be located
at 905 Calle Amanecer, Suite 100, San Clemente, California, and the Bank will
also have a full-service branch office at 499 North El Camino Real, Suite C-100,
Encinitas, California. The Bank believes that it will draw most of its customer
deposits and conduct most of its lending transactions from and within its
primary service areas. These primary service areas represent a diverse market
with a growing population and economy. According to data obtained from the
United States Census and ESRI Business Information Systems, between 2000 and
2003, the population of the San Clemente area grew 5.6%, and the population of
the Encinitas area grew more than 6.4%. This population growth has attracted
many businesses to the area and led to growth in the local service economy, and,
while the Bank cannot be certain, it expects this trend to continue. The Bank
believes that the community will enthusiastically welcome and support a new
locally-owned and operated commercial bank.




Local
economy . The
Bank believes that its proposed banking market represents a unique market with a
diversified and growing customer base. It also believes that the primary service
areas present an environment that will support its formation and growth. As a
community bank, the Bank will be designed to serve the needs of the residents
and small- to medium-sized businesses within this growing economy.




According
to data compiled by the United States Census and ESRI Business Information
Systems, personal and family income figures in the Bank’s proposed primary
service areas have grown steadily over the same period. In 2003, median
household income in the San Clemente market area was $71,875, as compared with
$62,738 for 2000, which represents an increase of more than 14%. Likewise,
median household income in 2003 in the Encinitas market area was $58,503, as
compared with $52,252 for 2000, which represents an increase of almost 12%.
Continued population growth has attracted many businesses to the area and has
led to growth in the local service economy, and, while management cannot be
certain, it expects these trends to continue.




**Business
strategy**




Management
philosophy . The
Bank will be a full-service commercial bank dedicated to providing superior
customer service to the individuals and businesses in the communities it serves.
The Bank will offer a sophisticated array of financial products while
emphasizing prompt, personalized customer service. Management believes that this
philosophy, encompassing the service aspects of community banking, will
distinguish the Bank from its competitors. The Bank will endeavor to hire the
most qualified and experienced people in the market who share its commitment to
customer service and believes that this is an opportunity for a locally-owned
and locally-managed community bank to acquire a significant market share by
offering an alternative to the less personal service offered by many larger
banks. Accordingly, the Bank will implement the following operating and growth
strategies.




Operating
strategy . In
order to achieve the level of prompt, responsive service that the Bank believes
will be necessary to attract customers and to develop its image as a local bank
with a community focus, the Bank will employ the following operating strategies:




·
    *Experienced
      senior management*.
      The Bank’s senior management possesses extensive experience in the banking
      industry, as well as substantial business and banking contacts in its
      primary service areas. For example, its proposed Chief Executive Officer,
      Colin Forkner, has 40 years of banking experience. Michael Hahn, its
      proposed President and Chief Operating Officer, has more than 20 years of
      banking experience. Combined, the four senior-most members of the Bank’s
      proposed management team have more than 120 years of banking
      experience.




·
    *Quality
      employees*.
      The Bank will strive to hire highly trained and seasoned staff. It plans
      to train its staff to answer questions about all of its products and
      services so that the first employee the customer encounters can resolve
      any questions the customer may have.




·
    *Community-oriented
      board of directors*.
      All of the Bank’s proposed directors are either experienced bankers or
      local business and community leaders. Many of its directors are residents
      of the Bank’s primary service areas, and most have significant business
      ties to the primary service areas, enabling them to be sensitive and
      responsive to the needs of the community. Additionally, the board of
      directors represents a wide variety of business experience and community
      involvement. The Company expects that the directors will bring substantial
      business and banking contacts to the Bank.




2




**·**
    *Highly
      visible site*.
      The Bank’s main office is highly visible and located in close proximity to
      major traffic arteries. The main office location will be located at 905
      Calle Amanecer, Suite 100, San Clemente, California in an area that will
      provide easy access to potential banking customers living and working in
      the San Clemente area. The Bank will also operate another full-service
      banking office at 499 North El Camino Real, Suite C-100, Encinitas,
      California, located at the intersection of North El Camino Real and Garden
      View, to serve the expanding Encinitas area. Management believes that
      these sites will give the Bank a highly visible presence in a market that
      is dominated by branch offices of banks headquartered out of the area.




·
    *Distinct
      name.*The Bank has filed for service marks for the name, “Pacific Coast National
      Bank.” The Bank believes that a distinctive name will enable the Bank to
      stand out from the pack and also will be memorable to its customer
      base.




·
    *Individual
      customer focus*.
      The Bank will focus on providing individual service and attention to its
      target customers, which include individuals and small- to medium-sized
      businesses. As the employees, officers and directors become familiar with
      the Bank’s customers on an individual basis, the Bank will be able to
      respond to credit requests more quickly and be more flexible in approving
      complex loans based on collateral quality and personal knowledge of the
      customer.




·
    *Officer
      and director call program*.
      The Bank intends to implement an active officer and director call program
      to promote the Bank’s philosophy. The purpose of this call program will be
      to visit prospective customers and to describe the Bank’s products,
      services and philosophy.




·
    *Marketing
      and advertising*.
      The Bank has engaged a professional marketing company to assist it in
      planning a targeted marketing program through local newspaper advertising,
      radio and direct-mail campaigns. They will assist management to develop
      the Bank’s image as a locally-owned and operated bank with an emphasis on
      quality service and personal relationships.




Growth
strategies . Because
the Bank believes that the growth and expansion of its operations will be
significant factors in its success, the Bank plans to implement the following
growth strategies:




·
    *Capitalize
      on its community orientation*.
      The Bank plans to capitalize on its position as an independent,
      locally-owned community bank to attract individuals and small- to
      medium-sized business customers that may be underserved by larger banking
      institutions in its market area.




·
    *Emphasize
      local decision-making*.
      The Bank will emphasize local decision-making by experienced bankers. This
      will help the Bank attract local businesses and service-minded customers.




·
    *Attract
      experienced lending officers*.
      The Bank will seek to hire experienced, well-trained lending officers
      capable of soliciting loan business immediately. By hiring experienced
      lending officers, the Bank will be able to grow much more rapidly than it
      would if it hired inexperienced lending
officers.




·
    *Offer
      fee-generating products and services*.
      The Bank’s range of services, pricing strategies, interest rates paid and
      charged and hours of operation will be structured to attract the Bank’s
      target customers and increase its market share. The Bank will strive to
      offer the small business person, professional, entrepreneur and consumer
      the best loan services available while charging competitively for these
      services and utilizing technology and strategic outsourcing to increase
      fee revenues.




**Lending
services**




Lending
policy . The
Bank will offer a full range of lending products, including commercial loans to
small- to medium-sized businesses, professionals, and consumer loans to
individuals. Management understands that the Bank will be competing for these
loans with competitors who are well established in its primary market area and
have greater resources and lending limits. As a result, the Bank may initially
have to offer more flexible pricing and terms to attract borrowers. Management
feels that a quick response to credit requests will provide the Bank a
competitive advantage.




3





The
Bank’s loan approval policies will provide for various levels of officer lending
authority. When the amount of total loans to a single borrower exceeds that
individual officer’s lending authority, an officer with a higher lending limit
or the Bank’s loan committee will determine whether to approve the loan request.
The Bank will not make loans to any of its directors or executive officers
unless its board of directors, excluding the interested party, first approves
the loan, and the terms of the loan are no more favorable than would be
available to any comparable borrower.




Lending
limits . The
Bank’s lending activities will be subject to a variety of lending limits.
Differing limits apply based on the type of loan or the nature of the borrower,
including the borrower’s relationship to the Bank. In general, however, the Bank
will be able to loan any one borrower a maximum amount equal to 15% of the
Bank’s capital and surplus and allowance for loan losses.




The legal
limit will increase or decrease as the Bank’s capital increases or decreases as
a result of its earnings or losses, among other reasons.




Credit
risks . The
principal economic risk associated with each category of loans that the Bank
expects to make is the creditworthiness of the borrower. Borrower
creditworthiness is affected by general economic conditions and the strength of
the relevant business market segment. General economic factors affecting a
borrower’s ability to repay include interest, inflation and employment rates, as
well as other factors affecting a borrower’s customers, suppliers and employees.
The well-established financial institutions in the Bank’s primary service areas
are likely to make proportionately more loans to medium- to large-sized
businesses than the Bank will make. Many of the Bank’s anticipated commercial
loans will likely be made to small- to medium-sized businesses that may be less
able to withstand competitive, economic and financial pressures than larger
borrowers.




Real
estate loans . The
Bank will make commercial real estate loans, construction and development loans,
small business loans and residential real estate loans. These loans include
commercial loans where the Bank takes a security interest in real estate out of
an “abundance of caution” and not as the principal collateral for the loan.




·
    *Construction
      and development loans*.
      The Bank will consider making owner-occupied construction loans with a
      pre-approved take-out loan. The Bank will also consider construction and
      development loans on a pre-sold basis. If the borrower has entered into an
      agreement to sell the property prior to beginning construction, then the
      loan is considered to be on a pre-sold basis. If the borrower has not
      entered into an agreement to sell the property prior to beginning
      construction, then the loan is considered to be on a speculative basis.
      Construction and development loans are generally made with a term of six
      to twelve months and interest is paid quarterly. The ratio of the loan
      principal to the value of the collateral as established by independent
      appraisal typically will not exceed industry standards. Speculative loans
      will be based on the borrower’s financial strength and cash flow position.
      Loan proceeds will be disbursed based on the percentage of completion and
      only after the project has been inspected by an experienced construction
      lender or third-party inspector. Risks associated with construction loans
      include fluctuations in the value of real estate and new job creation
      trends.




·
    *Commercial
      real estate*.
      Commercial real estate loan terms generally will be limited to five years
      or less, although payments may be structured on a longer amortization
      basis. Interest rates may be fixed or adjustable, although rates typically
      will not be fixed for a period exceeding 12 months. The Bank will
      generally charge an origination fee for its services. The Bank generally
      will require personal guarantees from the principal owners of the property
      supported by a review by the Bank’s management of the principal owners’
      personal financial statements. Risks associated with commercial real
      estate loans include fluctuations in the value of real estate, new job
      creation trends, tenant vacancy rates and the quality of the borrower’s
      management. The Bank will limit its risk by analyzing borrowers’ cash flow
      and collateral value on an ongoing basis.




·
    *Residential
      real estate*.
      The Bank’s residential real estate loans will consist of residential
      second mortgage loans, residential construction loans and traditional
      mortgage lending for one-to-four family residences. The Bank expects that
      any long-term fixed rate mortgages will be underwritten for resale to the
      secondary market. The Bank will offer primarily adjustable rate mortgages.
      The majority of fixed rate loans will be sold in the secondary mortgage
      market. All loans will be made in accordance with the Bank’s appraisal
      policy with the ratio of the loan principal to the value of collateral as
      established by independent appraisal not exceeding 80%, unless the
      borrower has private mortgage insurance. Management expects that these
      loan-to-value ratios will be sufficient to compensate for fluctuations in
      real estate market value and to minimize losses that could result from a
      downturn in the residential real estate market.




4





Commercial
loans . The
Bank expects that loans for commercial purposes in various lines of businesses
will be one of the components of its loan portfolio. The target commercial loan
market will be retail establishments and small- to medium-sized businesses. The
terms of these loans will vary by purpose and by type of underlying collateral,
if any. The commercial loans will primarily be underwritten on the basis of the
borrower’s ability to service the loan from income. The Bank will typically make
equipment loans for a term of five years or less at fixed or variable rates,
with the loan fully amortized over the term. Loans to support working capital
will typically have terms not exceeding one year and will usually be secured by
accounts receivable, inventory or personal guarantees of the principals of the
business. For loans secured by accounts receivable or inventory, principal will
typically be repaid as the assets securing the loan are converted into cash, and
for loans secured with other types of collateral, principal will typically be
due at maturity. The quality of the commercial borrower’s management and its
ability both to properly evaluate changes in the supply and demand
characteristics affecting its markets for products and services and to
effectively respond to such changes are significant factors in a commercial
borrower’s creditworthiness.




Consumer
loans . The
Bank will make a variety of loans to individuals for personal, family and
household purposes, including secured and unsecured installment and term loans,
second mortgages, home equity loans and home equity lines of credit. The
amortization of second mortgages will generally not exceed 15 years and the
rates will generally not be fixed for over 12 months. Repayment of consumer
loans depends upon the borrower’s financial stability and is more likely to be
adversely affected by divorce, job loss, illness and personal hardships than
repayment of other loans. Because many consumer loans are secured by depreciable
assets such as boats, cars and trailers, the loan should be amortized over the
useful life of the asset. The loan officer will review the borrower’s past
credit history, past income level, debt history and, when applicable, cash flow
and determine the impact of all these factors on the ability of the borrower to
make future payments as agreed. Management expects that the principal
competitors for consumer loans will be the established banks and finance
companies in the Bank’s market areas.




Composition
of portfolio . The
following table sets forth management’s estimate of the percentage composition
of the Bank’s loan portfolio during its first three years of
business.




PercentageCommercial
      real estate
    
    
    23
    %Construction
      - commercial
    
    
    16
    %Construction
      - residential
    
    
    11
    %Commercial
    
    
    38
    %Consumer
    
    
    12
    %**Total**
    
    
    100
    %





**Investments**




In
addition to loans, the Bank will make other investments primarily in obligations
of the United States or obligations guaranteed as to principal and interest by
the United States and other taxable securities. No investment in any of those
instruments will exceed any applicable limitation imposed by law or regulation.
The asset-liability management committee will review the investment portfolio on
an ongoing basis in order to ensure that the investments conform to the Bank’s
policy as set by its board of directors.




**Asset
and liability management**




The
asset-liability management committee will oversee the Bank’s assets and
liabilities and will strive to provide a stable, optimized net interest margin,
adequate liquidity and a profitable after-tax return on assets and return on
equity. The committee will conduct these management functions within the
framework of written loan and investment policies that the Bank will adopt. The
committee will attempt to maintain a balanced position between rate sensitive
assets and rate sensitive liabilities. Specifically, it will chart assets and
liabilities on a matrix by maturity, effective duration and interest adjustment
period and attempt to manage any gaps in maturity ranges.




5


****


**Deposit
services**




The will
seek to establish a broad base of core deposits, including savings accounts,
checking accounts, money market accounts, NOW accounts, a variety of
certificates of deposit and individual retirement accounts. The Bank intends
initially to leverage the Company’s initial shareholder base, which is expected
to be comprised primarily of residents of the Bank’s primary service areas, into
a source of core deposits. In addition, the Bank will implement an aggressive
marketing program in its primary service areas and will feature a broad product
line and competitive rates and services. The primary sources of deposits will be
residents of, and businesses and their employees located in, the Bank’s primary
service areas. The Bank plans to obtain these deposits through personal
solicitation by its officers and directors, direct mail solicitations and
advertisements published in the local media.




**Other
banking services**




Other
anticipated banking services include cashier’s checks, travelers’ checks, direct
deposit of payroll and Social Security checks, night depository, bank-by-mail,
Internet banking, automated teller machine cards and debit cards. The Bank plans
to become associated with one or more nationwide networks of automated teller
machines that its customers will be able to use throughout California and other
regions. The Bank also plans to offer credit card and merchant card services
through a correspondent as an agent for the Bank. The Bank also may offer
expanded financial services, such as insurance, financial planning, investment
and trust services; in each case, if offered, the Bank would expect initially to
do so through strategic partners. The Bank does not plan initially to exercise
trust powers and may do so in the future only with the prior approval of the
Comptroller.




**Employees**




The
success of the Bank will depend, in part, on its ability to attract, retain and
motivate highly qualified management and other personnel, for whom competition
is intense. When the Bank begins operations, management expects that the Bank
will have 20 full-time equivalent employees. The Company does not expect that it
will have any employees who are not also employees of the Bank.




**Special
cautionary notice regarding forward-looking information**




Statements
contained in this Annual Report on Form 10-KSB that are not purely historical
are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including the Company’s and Bank’s
expectations, intentions, beliefs, or strategies regarding the future. Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “will continue,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and
“outlook,” and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout
this document. All
forward-looking statements concerning economic conditions, rates of growth,
rates of income or values as may be included in this document are based on
information available to the Company on the dates noted, and the Company assumes
no obligation to update any such forward-looking statements. It is important to
note that the actual results of the Company or the Bank may differ materially
from those in such forward-looking statements due to fluctuations in interest
rates, inflation, government regulations, economic conditions, customer
disintermediation and competitive product and pricing pressures in the
geographic and business areas in which the Company and the Bank conduct
operations, including their respective plans, objectives, expectations and
intentions and other factors discussed under the section entitled “Risk
Factors,” in the Company’s Prospectus contained in its Registration Statement on
Form SB-2, which was declared effective on November 10, 2004, including the
following:




●
    the
      Company and Bank must receive regulatory approvals before they may open
      for business;




●
    the
      Bank must satisfy certain conditions following regulatory approval before
      it may open for business;




●
    any
      delay in beginning banking operations will result in additional
      losses;




●
    the
      Company has no operating history upon which to base an estimate of its
      future financial performance;




●
    the
      Company expects to incur losses during its initial years of
      operations;




6




●
    failure
      of the Company or the Bank to implement its business strategies may
      adversely affect its financial performance.




●
    the
      Company’s profitability will be affected by the ability of Bank management
      to measure and limit credit risk associated with the Bank’s loan
      portfolio;




●
    the
      Bank’s emphasis on commercial business and commercial real estate lending
      may result in greater credit risk;




●
    departures
      of key personnel or directors
      may impair the Bank’s operations;




●
    the
      Bank will face intense competitionfrom a variety of competitors;




●
    the
      Bank’s legal lending limits may impair its ability to attract
      borrowers;




●
    an
      economic downturn, especially one affecting the Bank’s primary service
      areas, may have an adverse effect on its financial
      performance;




●
    monetary
      policy and other economic factors could adversely affect the Bank’s
      profitability;




●
    the
      Bank could be negatively affected by changes in interest rates.




●
    the
      determination of the offering price was arbitrary, and you may be unable
      to resell your shares at or above the offering
price;




●
    the
      Company’s ability
      to pay dividends is limited;




●
    the
      Company and Bank are subject to extensive regulatory oversight,
      which could restrain growth and profitability;
      and




●
    the
      Company may not be able to raise additional capital on terms favorable to
      it.




These
factors and the risk factors referred to in the Company’s Prospectus, dated
November 22, 2004, could cause actual results or outcomes to differ materially
from those expressed in any forward-looking statements made by us, and you
should not place undue reliance on any such forward-looking statements. Any
forward-looking statement speaks only as of the date on which it is made and the
Company does not undertake any obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for the
Company to predict which will arise. In addition, the Company cannot assess the
impact of each factor on the business of the Company or the Bank or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements.




**SUPERVISION
AND REGULATION**




Banking
is a complex, highly regulated industry. Consequently, the growth and earnings
performance of the Company and the Bank can be affected, not only by management
decisions and general and local economic conditions, but also by the statutes
administered by, and the regulations and policies of, various governmental
regulatory authorities. These authorities include, but are not limited to, the
Federal Reserve, the FDIC, the Comptroller, the Internal Revenue Service and
state taxing authorities. The effect of these statutes, regulations and policies
and any changes to any of them can be significant and cannot be
predicted.




The
primary goals of the Bank regulatory scheme are to maintain a safe and sound
banking system and to facilitate the conduct of sound monetary policy. In
furtherance of these goals, Congress has created several largely autonomous
regulatory agencies and enacted numerous laws that govern banks, bank holding
companies and the banking industry. The system of supervision and regulation
applicable to the Company and the Bank establishes a comprehensive framework for
their respective operations and is intended primarily for the protection of the
FDIC’s deposit insurance funds, the Bank’s depositors and the public, rather
than the shareholders and creditors. The following is an attempt to summarize
some of the relevant laws, rules and regulations governing banks and bank
holding companies, but does not purport to be a complete summary of all
applicable laws, rules and regulations governing banks and bank holding
companies. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.




7


****


**Pacific
Coast National Bancorp**




General . Upon
its acquisition of all of the capital stock of the Bank following receipt of
Federal Reserve approval, the Company will be a bank holding company registered
with, and subject to regulation by, the Federal Reserve under the “Bank Holding
Company Act of 1956, as amended” (Bank Holding Company Act). The Bank Holding
Company Act and other federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations.




In
accordance with Federal Reserve policy, the Company is expected to act as a
source of financial strength to the Bank and commit resources to support the
Bank. This support may be required under circumstances when the Company might
not be inclined to do so absent this Federal Reserve policy. As discussed below,
the Company could be required to guarantee the capital plan of the Bank if it
becomes undercapitalized for purposes of banking regulations.




Certain
acquisitions . The
Bank Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before (i) acquiring more than five
percent of the voting stock of any bank or other bank holding company, (ii)
acquiring all or substantially all of the assets of any bank or bank holding
company, or (iii) merging or consolidating with any other bank holding
company.




Additionally,
the Bank Holding Company Act provides that the Federal Reserve may not approve
any of these transactions if it would result in or tend to create a monopoly or
substantially lessen competition or otherwise function as a restraint of trade,
unless the anti-competitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. The Federal Reserve’s consideration of financial resources generally
focuses on capital adequacy, which is discussed below. As a result of the
Patriot Act, which is discussed below, the Federal Reserve is also required to
consider the record of a bank holding company and its subsidiary bank(s) in
combating money laundering activities in its evaluation of bank holding company
merger or acquisition transactions.




Under the
Bank Holding Company Act, if adequately capitalized and adequately managed, any
bank holding company located in California may purchase a bank located outside
of California. Conversely, an adequately capitalized and adequately managed bank
holding company located outside of California may purchase a bank located inside
California. In each case, however, restrictions currently exist on the
acquisition of a bank that has only been in existence for a limited amount of
time or will result in specified concentrations of deposits.




Change
in bank control . Subject
to various exceptions, the Bank Holding Company Act and the “Change in Bank
Control Act of 1978,” together with related regulations, require Federal Reserve
approval prior to any person or company acquiring “control” of a bank holding
company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. With respect to the Company, control is rebuttably presumed to exist if
a person or company acquires 10% or more, but less than 25%, of any class of
voting securities.




Permitted
activities .
Generally, bank holding companies are prohibited under the Bank Holding Company
Act, from engaging in or acquiring direct or indirect control of more than 5% of
the voting shares of any company engaged in any activity other than (i) banking
or managing or controlling banks or (ii) an activity that the Federal Reserve
determines to be so closely related to banking as to be a proper incident to the
business of banking.




Activities
that the Federal Reserve has found to be so closely related to banking as to be
a proper incident to the business of banking include:




·
    factoring
      accounts receivable;




·
    making,
      acquiring, brokering or servicing loans and usual related activities;




·
    leasing
      personal or real property;




8






·
    operating
      a non-bank depository institution, such as a savings association;




·
    trust
      company functions;




·
    financial
      and investment advisory activities;




·
    conducting
      discount securities brokerage activities;




·
    underwriting
      and dealing in government obligations and money market instruments;




·
    providing
      specified management consulting and counseling activities;




·
    performing
      selected data processing services and support services;




·
    acting
      as agent or broker in selling credit life insurance and other types of
      insurance in connection with credit transactions;
and




·
    performing
      selected insurance underwriting activities.




Despite
prior approval, the Federal Reserve has the authority to require a bank holding
company to terminate an activity or terminate control of or liquidate or divest
certain subsidiaries or affiliates when the Federal Reserve believes the
activity or the control of the subsidiary or affiliate constitutes a significant
risk to the financial safety, soundness or stability of any of its banking
subsidiaries. A bank holding company that qualifies and elects to become a
financial holding company is permitted to engage in additional activities that
are financial in nature or incidental or complementary to financial activity.
The Bank Holding Company Act expressly lists the following activities as
financial in nature:




·
    lending,
      exchanging, transferring, investing for others, or safeguarding money or
      securities;




·
    insuring,
      guaranteeing or indemnifying against loss or harm, or providing and
      issuing annuities, and acting as principal, agent or broker for these
      purposes, in any state;




·
    providing
      financial, investment or advisory services;




·
    issuing
      or selling instruments representing interests in pools of assets
      permissible for a bank to hold directly;




·
    underwriting,
      dealing in or making a market in securities;




·
    other
      activities that the Federal Reserve may determine to be so closely related
      to banking or managing or controlling banks as to be a proper incident to
      managing or controlling banks;




·
    foreign
      activities permitted outside of the United States if the Federal Reserve
      has determined them to be usual in connection with banking operations
      abroad;




·
    merchant
      banking through securities or insurance affiliates; and




·
    insurance
      company portfolio investments.




To
qualify to become a financial holding company, the Bank and any other depository
institution subsidiary that the Company may own at the time must be well
capitalized and well managed and must have a Community Reinvestment Act rating
of at least satisfactory. Additionally, the Company would be required to file an
election with the Federal Reserve to become a financial holding company and to
provide the Federal Reserve with 30 days’ written notice prior to engaging in a
permitted financial activity. A bank holding company that falls out of
compliance with these requirements may be required to cease engaging in some of
its activities. The Federal Reserve serves as the primary “umbrella” regulator
of financial holding companies, with supervisory authority over each parent
company and limited authority over its subsidiaries. Expanded financial
activities of financial holding companies generally will be regulated according
to the type of such financial activity: banking activities by banking
regulators, securities activities by securities regulators and insurance
activities by insurance regulators. The Company currently has no plans to make a
financial holding company election.




9





Sound
banking practice . Bank
holding companies are not permitted to engage in unsound banking practices. For
example, the Federal Reserve’s Regulation Y requires a holding company to give
the Federal Reserve prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases in the preceding year, is equal to 10% or
more of the company’s consolidated net worth. The Federal Reserve may oppose the
transaction if it believes that the transaction would constitute an unsafe or
unsound practice or would violate any law or regulation. As another example, a
holding company could not impair its subsidiary bank’s soundness by causing it
to make funds available to non-banking subsidiaries or their customers if the
Federal Reserve believed it not prudent to do so.




The
“Financial Institutions Reform, Recovery and Enforcement Act of 1989” (FIRREA)
expanded the Federal Reserve’s authority to prohibit activities of bank holding
companies and their non-banking subsidiaries which represent unsafe and unsound
banking practices or which constitute violations of laws or regulations. FIRREA
increased the amount of civil money penalties which the Federal Reserve can
assess for activities conducted on a knowing and reckless basis, if those
activities caused a substantial loss to a depository institution. The penalties
can be as high as $1,000,000 for each day the activity continues. FIRREA also
expanded the scope of individuals and entities against which such penalties may
be assessed.




Anti-tying
restrictions . Bank
holding companies and affiliates are prohibited from tying the provision of
services, such as extensions of credit, to other services offered by a holding
company or its affiliates.




Dividends .
Consistent with its policy that bank holding companies should serve as a source
of financial strength for their subsidiary banks, the Federal Reserve has stated
that, as a matter of prudence, the Company, as a bank holding company, generally
should not maintain a rate of distributions to shareholders unless its available
net income has been sufficient to fully fund the distributions, and the
prospective rate of earnings retention appears consistent with the bank holding
company’s capital needs, asset quality and overall financial condition. In
addition, the Company is subject to certain restrictions on the making of
distributions as a result of the requirement that the Bank maintain an adequate
level of capital as described below. As a California corporation, the Company is
restricted under the California Corporations Code from paying dividends under
certain conditions.




**Pacific
Coast National Bank**




The Bank
will be subject to the supervision, examination and reporting requirements of
the National Bank Act and the regulations of the Comptroller. The Comptroller
will regularly examine the Bank’s operations and will have the authority to
approve or disapprove mergers, the establishment of branches and similar
corporate actions. The Comptroller will also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law. The Bank will also be subject to numerous state and federal
statutes and regulations that affect its business, activities and operations.
The Bank’s deposits will be insured by the FDIC to the maximum extent provided
by law.




Branching .
National banks are required by the National Bank Act to adhere to branching laws
applicable to state banks in the states in which they are located. Under current
California law, banks are permitted to establish branch offices throughout
California with prior regulatory approval. In addition, with prior regulatory
approval, banks are permitted to acquire branches of existing banks located in
California. Finally, banks generally may branch across state lines by merging
with banks in other states if allowed by the applicable states’ laws. California
law, with limited exceptions, currently permits branching across state lines
through interstate mergers. Under the Federal Deposit Insurance Act, states may
“opt-in” and allow out-of-state banks to branch into their state by establishing
a new start-up branch in the state. California law currently permits de novo
branching into the state of California on a reciprocal basis, meaning that an
out-of-state bank may establish a new start-up branch in California only if its
home state has also elected to permit de novo branching into that state.




Prompt
corrective action . The
“Federal Deposit Insurance Corporation Improvement Act of 1991” (FDICIA)
established a system of prompt corrective action to resolve the problems of
undercapitalized financial institutions. Under this system, the federal banking
regulators have established five capital categories (“well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized”
and “critically undercapitalized”), and all institutions are assigned one such
category. Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is “critically
undercapitalized.” The federal banking agencies have specified by regulation the
relevant capital level for each category. An institution that is categorized as
“undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized” is required to submit an acceptable capital restoration plan
to its appropriate federal banking agency. A bank holding company must guarantee
that a subsidiary depository institution meets its capital restoration plan,
subject to various limitations. The controlling holding company’s obligation to
fund a capital restoration plan is limited to the lesser of 5% of an
“undercapitalized” subsidiary’s assets at the time it became “undercapitalized”
or the amount required to meet regulatory capital requirements. An
“undercapitalized” institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches or engaging
in any new line of business, except under an accepted capital restoration plan
or with FDIC approval. The regulations also establish procedures for downgrading
an institution to a lower capital category based on supervisory factors other
than capital.




10





Deposit
insurance assessments . Banks
must pay assessments to the FDIC for federal deposit insurance protection. The
FDIC has adopted a risk-based assessment system as required by FDICIA. Under
this system, FDIC-insured depository institutions pay insurance premiums at
rates based on their risk classification. Institutions assigned to higher risk
classifications (that is, institutions that pose a higher risk of loss to their
respective deposit insurance funds) pay assessments at higher rates than
institutions that pose a lower risk. An institution’s risk classification is
assigned based on its capital levels and the level of supervisory concern the
institution poses to the regulators. In addition, the FDIC can impose special
assessments in certain instances. The FDIC may terminate its insurance of
deposits if it finds that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, rule, order, or condition imposed by
the FDIC.




Expanded
financial activities . Similar
to bank holding companies, the “Gramm-Leach-Bliley Financial Services
Modernization Act of 1999” expanded the types of activities in which a bank may
engage. Generally, a bank may engage in activities that are financial in nature
through a “financial subsidiary” if the bank and each of its depository
institution affiliates are “well capitalized,” “well managed” and have at least
a “satisfactory” rating under the Community Reinvestment Act. However,
applicable law and regulation provide that the amount of investment in these
activities generally is limited to 45% of the total assets of the Bank, and
these investments are deducted when determining compliance with capital adequacy
guidelines. Further, the transactions between the Bank and this type of
subsidiary are subject to a number of limitations.




Expanded
financial activities of national banks generally will be regulated according to
the type of such financial activity: banking activities by banking regulators,
securities activities by securities regulators and insurance activities by
insurance regulators. The Bank currently has no plans to conduct any activities
through financial subsidiaries.




Community
Reinvestment Act . The
Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal
Reserve, the FDIC, or the Comptroller, shall evaluate the record of each
financial institution in meeting the credit needs of its local community,
including low and moderate-income neighborhoods. These facts are also considered
in evaluating mergers, acquisitions, and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on the Bank. Because the Bank’s aggregate assets
will be less than $250 million when the Bank opens for business, under the
Gramm-Leach-Bliley Act, the Bank is subject to a Community Reinvestment Act
examination only once every 60 months if it receives an outstanding rating, once
every 48 months if it receives a satisfactory rating and as needed if its rating
is less than satisfactory. Additionally, the Bank must publicly disclose the
terms of various Community Reinvestment Act-related agreements.




Other
regulations .
Interest and other charges collected or contracted for by the Bank will be
subject to state usury laws and federal laws concerning interest rates. The
Bank’s loan operations are also subject to federal laws applicable to credit
transactions, such as:




·
    the
      federal “Truth-In-Lending Act,” governing disclosures of credit terms to
      consumer borrowers;




11






·
    the
      “Home Mortgage Disclosure Act of 1975,” requiring financial institutions
      to provide information to enable the public and public officials to
      determine whether a financial institution is fulfilling its obligation to
      help meet the housing needs of the community it serves;




·
    the
      “Equal Credit Opportunity Act,” prohibiting discrimination on the basis of
      race, creed or other prohibited factors in extending credit;




·
    the
      “Fair Credit Reporting Act of 1978,” governing the use and provision of
      information to credit reporting agencies;




·
    the
      “Fair Debt Collection Act,” governing the manner in which consumer debts
      may be collected by collection agencies; and




·
    the
      rules and regulations of the various federal agencies charged with the
      responsibility of implementing these federal laws.




The
deposit operations of the Bank will be subject to:




·
    the
      “Right to Financial Privacy Act,” which imposes a duty to maintain
      confidentiality of consumer financial records and prescribes procedures
      for complying with administrative subpoenas of financial records; and




·
    the
      “Electronic Funds Transfer Act” and Regulation E issued by the Federal
      Reserve to implement that act, which govern automatic deposits to and
      withdrawals from deposit accounts and customers’ rights and liabilities
      arising from the use of automated teller machines and other electronic
      banking services.




Dividends . The
Bank is required by federal law to obtain prior approval of the Comptroller for
payments of dividends if the total of all dividends declared by its board of
directors in any year will exceed its net profits earned during the current year
combined with its retained net profits of the immediately preceding two years,
less any required transfers to surplus. In addition, the Bank will be unable to
pay dividends unless and until it has positive retained earnings. The Company
expects to commence operations with an accumulated deficit as a result of
organizational expenses attributable to the Bank and to generate losses during
its early periods of operations. Accordingly, the Bank will be unable to pay
dividends until the accumulated deficit is eliminated.




In
addition, under FDICIA, the Bank may not pay any dividend if the payment of the
dividend would cause the Bank to become undercapitalized or in the event the
Bank is “undercapitalized.” The Comptroller may further restrict the payment of
dividends by requiring that a financial institution maintain a higher level of
capital than would otherwise be required to be “adequately capitalized” for
regulatory purposes. Moreover, if, in the opinion of the Comptroller, the Bank
is engaged in an unsound practice (which could include the payment of
dividends), the Comptroller may require, generally after notice and hearing,
that the Bank cease such practice. The Comptroller has indicated that paying
dividends that deplete a depository institution’s capital base to an inadequate
level would be an unsafe banking practice. Moreover, the Comptroller has also
issued policy statements providing that insured depository institutions
generally should pay dividends only out of current operating
earnings.




Capital
adequacy . The
Federal Reserve monitors the capital adequacy of bank holding companies, such as
the Company, and the Comptroller monitors the capital adequacy of the Bank. The
federal bank regulators use a combination of risk-based guidelines and leverage
ratios to evaluate capital adequacy and consider these capital levels when
taking action on various types of applications and when conducting supervisory
activities related to the safety and soundness of the Company and the Bank. The
risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $150 million or more and, generally, on a bank-only
basis for bank holding companies with less than $150 million in consolidated
assets. Each insured depository subsidiary of a bank holding company with less
than $150 million in consolidated assets is expected to be “well-capitalized.”




The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.




12





The
minimum guideline for the ratio of total capital to risk-weighted assets is 8%.
Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
Tier 1 Capital generally consists of common stock, minority interests in the
equity accounts of consolidated subsidiaries, non-cumulative perpetual preferred
stock, and a limited amount of qualifying cumulative perpetual preferred stock,
less goodwill and other specified intangible assets. Tier 1 Capital must equal
at least 4% of risk-weighted assets. Tier 2 Capital generally consists of
subordinated debt, preferred stock (other than that which is included in Tier 1
Capital), and a limited amount of loan loss reserves. The total amount of Tier 2
Capital is limited to 100% of Tier 1 Capital.




In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies with assets of $150 million or more. These guidelines
provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill
and other specified intangible assets, of 3% for bank holding companies that
meet specified criteria, including having the highest regulatory rating and
implementing the Federal Reserve’s risk-based capital measure for market risk.
All other bank holding companies with assets of $150 million or more generally
are required to maintain a leverage ratio of at least 4%. The guidelines also
provide that holding companies of such size experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without reliance on
intangible assets. The Federal Reserve considers the leverage ratio and other
indicators of capital strength in evaluating proposals for expansion or new
activities. The Federal Reserve and the FDIC recently adopted amendments to
their risk-based capital regulations to provide for the consideration of
interest rate risk in the agencies’ determination of a banking institution’s
capital adequacy.




Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. As described above,
significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements.




Restrictions
on transactions with affiliates and loans to insiders . The
Company and the Bank are subject to the provisions of Section 23A of the Federal
Reserve Act. Section 23A places limits on the amount of:




·
    a
      bank’s loans or extensions of credit to
affiliates;




·
    a
      bank’s investment in affiliates;




·
    assets
      a bank may purchase from affiliates, except for real and personal property
      exempted by the Federal Reserve;




·
    the
      amount of loans or extensions of credit to third parties collateralized by
      the securities or obligations of affiliates;
and




·
    a
      bank’s guarantee, acceptance or letter of credit issued on behalf of an
      affiliate.




The total
amount of the above transactions is limited in amount, as to any one affiliate,
to 10% of a bank’s capital and surplus and, as to all affiliates combined, to
20% of a bank’s capital and surplus. In addition to the limitation on the amount
of these transactions, each of the above transactions must also meet specified
collateral requirements. The Bank must also comply with other provisions
designed to avoid the taking of low-quality assets.




The
Company and the Bank are also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in the transactions with affiliates unless the transactions are on
terms substantially the same, or at least as favorable to the institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies.




The Bank
is also subject to restrictions on extensions of credit to its executive
officers, directors, principal shareholders and their related interests. These
extensions of credit (1) must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties and (2) must not involve more than the normal
risk of repayment or present other unfavorable features.




13





Privacy .
Financial institutions are required to disclose their policies for collecting
and protecting confidential information. Customers generally may prevent
financial institutions from sharing personal financial information with
nonaffiliated third parties except for third parties that market the
institutions’ own products and services. Additionally, financial institutions
generally may not disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing or other marketing through
electronic mail to consumers.




Anti-terrorism
legislation . In the
wake of the tragic events of September 11 th , on
October 26, 2001, the President signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001. Also known as the “Patriot Act,” the law enhances the
powers of the federal government and law enforcement organizations to combat
terrorism, organized crime and money laundering. The Patriot Act significantly
amends and expands the application of the Bank Secrecy Act, including enhanced
measures regarding customer identity, new suspicious activity reporting rules
and enhanced anti-money laundering programs.




Under the
Patriot Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and “know your customer” standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures and controls generally require financial
institutions to take reasonable steps:




·
    to
      conduct enhanced scrutiny of account relationships to guard against money
      laundering and report any suspicious transaction;




·
    to
      ascertain the identity of the nominal and beneficial owners of, and the
      source of funds deposited into, each account as needed to guard against
      money laundering and report any suspicious
transactions;




·
    to
      ascertain for any foreign bank, the shares of which are not publicly
      traded, the identity of the owners of the foreign bank and the nature and
      extent of the ownership interest of each such owner; and




·
    to
      ascertain whether any foreign bank provides correspondent accounts to
      other foreign banks and, if so, the identity of those foreign banks and
      related due diligence information.




Under the
Patriot Act, financial institutions must also establish anti-money laundering
programs. The Patriot Act sets forth minimum standards for these programs,
including: (i) the development of internal policies, procedures and controls;
(ii) the designation of a compliance officer; (iii) an ongoing employee training
program; and (iv) an independent audit function to test the programs.




In
addition, the Patriot Act requires the bank regulatory agencies to consider the
record of a bank or bank holding company in combating money laundering
activities in their evaluation of bank and bank holding company merger or
acquisition transactions. Regulations proposed by the U.S. Department of the
Treasury to effectuate certain provisions of the Patriot Act provide that all
transaction or other correspondent accounts held by a U.S. financial institution
on behalf of any foreign bank must be closed within 90 days after the final
regulations are issued, unless the foreign bank has provided the U.S. financial
institution with a means of verification that the institution is not a “shell
bank.” Proposed regulations interpreting other provisions of the Patriot Act are
continuing to be issued.




Under the
authority of the Patriot Act, the Secretary of the Treasury adopted rules on
September 26, 2002 increasing the cooperation and information sharing among
financial institutions, regulators and law enforcement authorities regarding
individuals, entities and organizations engaged in, or reasonably suspected
based on credible evidence of engaging in, terrorist acts or money laundering
activities. Under these rules, a financial institution is required to:




·
    expeditiously
      search its records to determine whether it maintains or has maintained
      accounts, or engaged in transactions with individuals or entities, listed
      in a request submitted by the Financial Crimes Enforcement Network
      (“FinCEN”);




·
    notify
      FinCEN if an account or transaction is identified;




14




·
    designate
      a contact person to receive information requests;




·
    limit
      use of information provided by FinCEN to: (1) reporting to FinCEN, (2)
      determining whether to establish or maintain an account or engage in a
      transaction and (3) assisting the financial institution in complying with
      the Bank Secrecy Act; and




·
    maintain
      adequate procedures to protect the security and confidentiality of FinCEN
      requests.




Under the
new rules, a financial institution may also share information regarding
individuals, entities, organizations and countries for purposes of identifying
and, where appropriate, reporting activities that it suspects may involve
possible terrorist activity or money laundering. Such information-sharing is
protected under a safe harbor if the financial institution: (i) notifies FinCEN
of its intention to share information, even when sharing with an affiliated
financial institution; (ii) takes reasonable steps to verify that, prior to
sharing, the financial institution or association of financial institutions with
which it intends to share information has submitted a notice to FinCEN; (iii)
limits the use of shared information to identifying and reporting on money
laundering or terrorist activities, determining whether to establish or maintain
an account or engage in a transaction, or assisting it in complying with the
Bank Secrecy Act; and (iv) maintains adequate procedures to protect the security
and confidentiality of the information. Any financial institution complying with
these rules will not be deemed to have violated the privacy requirements
discussed above.




The
Secretary of the Treasury also adopted a rule on September 26, 2002 intended to
prevent money laundering and terrorist financing through correspondent accounts
maintained by U.S. financial institutions on behalf of foreign banks. Under the
rule, financial institutions: (i) are prohibited from providing correspondent
accounts to foreign shell banks; (ii) are required to obtain a certification
from foreign banks for which they maintain a correspondent account stating the
foreign bank is not a shell bank and that it will not permit a foreign shell
bank to have access to the U.S. account; (iii) must maintain records identifying
the owner of the foreign bank for which they may maintain a correspondent
account and its agent in the United States designated to accept services of
legal process; (iv) must terminate correspondent accounts of foreign banks that
fail to comply with or fail to contest a lawful request of the Secretary of the
Treasury or the Attorney General of the United States, after being notified by
the Secretary or Attorney General.




Proposed
legislation and regulatory action . New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation’s financial institutions. The Company cannot predict whether or in
what form any proposed regulation or statute will be adopted or the extent to
which the business of the Company or the Bank may be affected by any new
regulation or statute.




Effect
of governmental monetary policies . The
commercial banking business is affected not only by general economic conditions
but also by the fiscal and monetary policies of the Federal Reserve. Some of the
instruments of fiscal and monetary policy available to the Federal Reserve
include changes in the discount rate on member bank borrowings, the fluctuating
availability of borrowings at the “discount window,” open market operations, the
imposition of and changes in reserve requirements against member banks’ deposits
and assets of foreign branches, the imposition of and changes in reserve
requirements against certain borrowings by banks and their affiliates, and the
placing of limits on interest rates that member banks may pay on time and
savings deposits. Such policies influence to a significant extent the overall
growth of bank loans, investments, and deposits and the interest rates charged
on loans or paid on time and savings deposits. The Company cannot predict the
nature of future fiscal and monetary policies and the effect of such policies on
the future business and its earnings.




**All
of the above laws and regulations add significantly to the cost of operating the
Company and the Bank and thus have a negative impact on profitability. It should
also be noted that there has been a tremendous expansion experienced in recent
years by certain financial service providers that are not subject to the same
rules and regulations as the Company or the Bank. These institutions, because
they are not so highly regulated, have a competitive advantage over us and may
continue to draw large amounts of funds away from traditional banking
institutions, with a continuing adverse effect on the banking industry in
general.**




15


****


**ITEM
2.** **Description
of Property** **.**




The Bank
intends to open for business from two locations. Its main office, which will
also be the principal executive office of the Company, will be located at 905
Calle Amanecer, Suite 100, San Clemente, California 92673. The Bank will occupy
7,285 square feet of the main lobby-accessed ground floor of a 45,000 square
foot, freestanding, three-story office building. In addition, the Bank will have
a right of first refusal on the remaining 2,845 square feet on the ground floor
and will have outside signage that is clearly visible from the intersection of
Calle Amanecer and Calle Negocio. The Bank will also operate from a branch
office to be located at the intersection of North El Camino Real and Garden View
in Encinitas, California, which is approximately 37 miles south of the main
office. The branch office will occupy 4,284 square feet in a commercial building
in a developed commercial center. The Bank has entered into lease agreements
with respect to each of the proposed banking locations. The aggregate
commitments under the leases are set forth in the notes to the audited financial
statements included in this Form 10-KSB. At this time, the Bank does not intend
to own any of the properties from which it will conduct banking operations.
Management believes that these facilities will be adequate to meet the initial
needs of the Company and Bank.




**ITEM
3.** **Legal
Proceedings.**




There are
no material pending legal proceedings to which the Company or the Bank is a
party or to which any of its properties are subject; nor are there material
proceedings known to the Company, in which any director, officer or affiliate or
any principal stockholder is a party or has an interest adverse to the Company
or the Bank.




**ITEM
4.** **Submission
of Matters to a Vote of Security Holders.**




None.




**PART
II**


**ITEM
5.** **Market
for Common Equity** **and Related Stockholder Matters.**




**Market
Information**




The
Company is conducting its initial public offering of securities. All sales of
securities by the Company will be registered under the Securities Act. There is
currently no established market for the common stock of the Company, and an
active trading market is not likely to develop. The Company has no plans to list
its common stock on any stock exchange although the Company expects to have at
least one company making a market in its shares.




**Holders**




As of
March 15, 2005, no shares of common stock of the Company are issued and
outstanding.




**Dividends**




Because,
as a holding company, the Company will initially conduct no material activities
other than holding the common stock of the Bank, its ability to pay dividends
will depend on the receipt of dividends from the Bank. Initially, the Company
expects that the Bank will retain all of its earnings to support its operations
and to expand its business. Additionally, the Company and the Bank are subject
to significant regulatory restrictions on the payment of cash dividends. In
light of these restrictions and the need to retain and build capital, neither
the Company nor the Bank plans to pay dividends until the Bank becomes
profitable and recovers any losses incurred during its initial operations. The
payment of future dividends and the dividend policies of the Company and the
Bank will depend on the earnings, capital requirements and financial condition
of the Company and the Bank, as well as other factors that its respective boards
of directors consider relevant. For additional discussion of legal and
regulatory restrictions on the payment of dividends, see “Part I - Item 1.
Description of Business - Supervision and Regulation.”




16


****


**Securities
Authorized For Issuance Under Equity Compensation Plans**




The
Company does not currently have any equity compensation plans, but is in the
process of preparing a stock incentive plan and will seek shareholder approval
of such plan at the Company’s first annual meeting of shareholders.




**Recent
Sales of Unregistered Securities**




None.




**ITEM
6.** **Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.**




The
purpose of the following discussion is to address information relating to the
financial condition and results of operations of the Company that may not be
readily apparent from the financial statements and notes included in this
Report. This discussion should be read in conjunction with the information
provided in the Company’s financial statements and the notes thereto.





**General**





Pacific
Coast National Bancorp is a California corporation that was incorporated on July
2, 2003 to organize and serve as the holding company for Pacific Coast National
Bank, a national bank in organization. The Bank will be a full-service
commercial bank headquartered in San Clemente, California, with a full-service
banking office in Encinitas, California. The Bank will initially serve San
Clemente, Encinitas and its neighboring communities with a broad range of
commercial and consumer banking services to small and medium-sized businesses,
professionals and individuals who it believes will be particularly responsive to
the style of service which the Bank intends to provide. It is assumed that local
ownership and control will allow the Bank to serve customers more efficiently
and effectively and will aid in the Bank’s growth and success. The Bank intends
to compete on the basis of providing a unique and personalized banking
experience combined with a full range of services, customized and tailored to
fit the needs of the client.





On June
2, 2004, an application was filed with the Comptroller to organize a new
national bank in San Clemente, California and with the FDIC for federal deposit
insurance. Conditional approvals of each of these applications have been
received.





During
the period between regulatory approval and the commencement of banking
operations, the Company is engaged in raising the capital necessary to open the
Bank. In addition, the holding company is engaged in such activities as the
build-out of the banking offices, the recruitment and training of staff,
preliminary marketing, and the installation of the computer system and operating
system. Final approval is not expected before the completion of the offering and
a satisfactory pre-opening examination.





The
Company was incorporated to serve as a holding company for the Bank. From the
date of inception, the main activities have been:





·
    Seeking,
      interviewing and selecting organizers, directors and
    officers;


·
    Preparing
      the business plan;


·
    Applying
      for a national bank charter;


·
    Applying
      for FDIC deposit insurance;


·
    Applying
      with the Federal Reserve to become a bank holding company;
    and


·
    Raising
      equity capital through a public offering.





From the
date of incorporation, July 2, 2003 through December 31, 2004, the Company’s
operations have been funded, and will continue to funded, from advances made to
us by its organizers and from draws under a line of credit extended by TIB - The
Independent BankersBank. These advances will be repaid from the proceeds of the
offering unless the Company is unable to sell at least 1,700,000 shares of
common stock, in which case the organizers will bear the risk of loss with
respect to the direct cash advances and may be pursued by TIB with respect to
any funds advanced under the per-opening line of credit.





17


****


**Financial
Condition at December 31, 2004**




Total
assets at December 31, 2004, were $200,742, composed of $57,270 in cash, $63,112
in prepaid rent and contracts, and $80,360 in property and equipment. These
assets were funded by $825,000 in notes payable to TIB - The Independent
BankersBank and guaranteed by the organizers, $735,000 in direct advances from
the organizers, and $236,623 in accounts payable and accrued expenses.




**Results
of Operations**




From July
2, 2003, the date the Company began its organizational activities, through
December 31, 2004, its accumulated net losses amounted to $1,595,881. The
Company’s financial statements and related notes, which are included in this
Report, provide additional information relating to the discussion of its
financial condition. See Item 7 of this Report.





Legal and
professional fees amounted to $850,000. Of this amount, $421,000 was paid to
Bankmark in conjunction with the capital raising, $63,000 was paid in marketing
expenses, $27,000 was paid in printing costs, $111,000 was paid in legal fees,
with the remainder paid for accounting services, systems design, and expenses
related to the stock sale.





Consulting
fees in the amount of $323,000 were paid as part of consulting agreements with
Michael Hahn, Colin Forkner, Terry Stalk, and GRCAC, LLC, each of whom is
actively involved in directing the organizational and preopening activities of
the bank. Messrs. Hahn, Forkner, and Stalk are each organizers or executive
officers of the Company and the Bank, and GRCAC, LLC, is owned and operated by
Richard Grinyer, who is an organizer of the Company and the Bank. The amounts
paid to Messrs. Hahn, Forkner, and Stalk was $86,000, $110,000, and $32,000
respectively. GRCAC, LLC, received payment of $96,000. In addition, the
consulting agreements provided for deferred compensation of $54,000, $56,000,
and $19,000 for Messrs. Hahn, Forkner, and Stalk, and $56,000 for GRCAC, LLC.
The remaining consulting expenses were paid in conjunction with administrative
support for the organizational office and personnel consultants.





Occupancy
expense amounted to $77,000. Rent expense began in September for the Encinitas
office in the amount of $11,600 per month. $21,000 was paid in rent for the
organizational office. Utility expense and telephone expense accounted for the
remaining expenses.





Other
expenses of $92,000 were made up of $27,000 in insurance costs, of which $18,000
was for placement of D&O insurance and the remainder was for workers
compensation insurance; $8,500 in loan fees for the line of credit at TIB;
$11,000 in office supply costs; $10,000 in travel-related costs for professional
development and the stock sale; $8,000 in accrued interest on the note from TIB;
$7,000 in accrued expenses related to software costs; and the remainder
attributable to expense relating to recruiting and other personnel
costs.





As of
March 2005, the Company has not yet completed its organizational activities and
expects the Bank to begin banking operations in May 2005. The Company has
incurred substantial expenses in establishing the Bank as a going concern and
can give you no assurance that it will be profitable or that future earnings, if
any, will meet the levels prevailing in the banking industry. Typically new
banks are not profitable in their first year of banking operations and, in some
cases are not profitable for several years. The Bank’s future results will be
determined primarily by its ability to manage effectively interest income and
expense, to minimize loan and investment losses, to generate non-interest
income, and to control non-interest expenses. Since interest rates will be
determined by market forces and economic conditions beyond the control of the
Company or the Bank, the Bank’s ability to generate net interest income will be
dependent upon its ability to maintain an adequate spread between the rate
earned on earning assets, such as loans and investment securities, and the rate
paid on interest-bearing liabilities, such as deposits and
borrowing.





**Liquidity
and interest rate sensitivity**




Organizational
period . During
the Company’s organizational period, its cash requirements consist principally
of funding its pre-opening expenses, described above, as well as capital
expenditures for the acquisition, renovation, furnishing and equipping of the
initial main office facility.





During
the organizational stage, the primary sources of liquidity to meet current
obligations have been direct cash advances from the organizers and draws under a
line of credit extended to the Company by TIB - The Independent BankersBank,
which is guaranteed by the organizers. In addition, specific vendors have agreed
to delay payment of certain invoices pending the opening of the Bank. As of
December 31, 2004, the Company had borrowing capacity of approximately $475,000
remaining under the pre-opening line of credit. Based on the projected opening
of May, 2005, the Company has requested and been approved for an additional
$300,000 from TIB - The Independent BankersBank. The Company will repay the
outstanding balance on the line of credit by using a portion of the proceeds of
its initial public offering. Management believes that the liquidity sources are
adequate to meet the obligations that have been incurred, or are expected to be
incurred, prior to the time that the Bank opens for business.





18





Commencement
of banking operations . Since
the Company has been in the organizational stage, there are no results of
operations to present at this time. When the Bank begins operations, net
interest income, the Bank’s expected primary source of earnings, will fluctuate
with significant interest rate movements. The Company’s profitability will
depend substantially on the Bank’s net interest income, which is the difference
between the interest income earned on its loans and other assets and the
interest expense paid on its deposits and other liabilities. A large change in
interest rates may significantly decrease the Bank’s net interest income and
eliminate the Company’s profitability. Most of the factors that cause changes in
market interest rates, including economic conditions, are beyond the Company’s
control. While the Bank intends to take measures to minimize the effect that
changes in interest rates will have on its net interest income and
profitability, these measures may not be effective. To lessen the impact of
these fluctuations, the Bank intends to structure the balance sheet so that
repricing opportunities exist for both assets and liabilities in roughly equal
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any point in time constitute interest rate sensitivity.




Interest
rate sensitivity refers to the responsiveness of interest-bearing assets and
liabilities to change in market interest rates. The rate sensitive position, or
“gap,” is the difference in the volume of rate sensitive assets and liabilities
at a given time interval. The general objective of gap management is to actively
manage rate sensitive assets and liabilities in order to reduce the impact of
interest rate fluctuations on the net interest margin. The Bank will generally
attempt to maintain a balance between rate sensitive assets and liabilities as
the exposure period is lengthened to minimize the Bank’s overall interest rate
risk. The Bank will regularly evaluate the balance sheet’s asset mix in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity.




To
effectively manage the balance sheet’s liability mix, the Bank plans to focus on
expanding its deposit base and converting assets to cash as necessary. As the
Bank continues to grow, it will continuously structure its rate sensitivity
position in an effort to hedge against rapidly rising or falling interest rates.
The Bank’s investment/asset and liability committee will meet regularly to
develop a strategy for the upcoming period.




Liquidity
represents the ability to provide steady sources of funds for loan commitments
and investment activities, as well as to maintain sufficient funds to cover
deposit withdrawals and payment of debt and operating obligations. The Bank can
obtain these funds by converting assets to cash or by attracting new deposits.
Its ability to maintain and increase deposits will serve as its primary source
of liquidity.




Other
than the offering, management knows of no trends, demands, commitments, events
or uncertainties that should result in or are reasonably likely to result in the
Company’s liquidity increasing or decreasing in any material way in the
foreseeable future.





**Capital
adequacy**




There are
now two primary measures of capital adequacy for banks and bank holding
companies: (i) risk-based capital guidelines and (ii) the leverage ratio. The
risk-based capital guidelines measure the amount of a bank's required capital in
relation to the degree of risk perceived in its assets and its off-balance sheet
items. Under the risk-based capital guidelines, capital is divided into two
"tiers." Tier 1 capital consists of common shareholders' equity, noncumulative
and cumulative perpetual preferred stock, and minority interests. Goodwill, if
any, is subtracted from the total. Tier 2 capital consists of the allowance for
loan losses, hybrid capital instruments, term subordinated debt and intermediate
term preferred stock. Banks are required to maintain a minimum risk-based
capital ratio of 8%, with at least 4% consisting of tier 1 capital.




The
second measure of capital adequacy relates to the leverage ratio. The OCC has
established a 3% minimum leverage ratio requirement. The leverage ratio is
computed by dividing tier 1 capital into total assets. In the case of the Bank
and other banks that are experiencing growth or have not received the highest
regulatory rating from their primary regulator, the minimum leverage ratio
should be 3% plus an additional cushion of at least 1% to 2%, depending upon
risk profiles and other factors.




19





The
Company believes that the net proceeds of this offering will enable the Bank to
satisfy its capital requirements for at least the next 12 months following the
opening of the Bank. The Company believes all anticipated material expenditures
for this period have been identified and provided for out of the proceeds of the
initial public offering. For additional information about the plan of operations
of the Company and the Bank, see "Item 1. Description of Business."




**ITEM
7.** **Financial
Statements** **.**




The
financial statements of the Company, including the notes thereto, and the report
of independent certified public accountants are included in this
Report.




**ITEM
8.  C** **hanges
in and Disagreements With Accountants on Accounting and Financial
Disclosure.**




Not
applicable.




**ITEM** **8A.
Controls and Procedures.**




As of the
end of the period covered by this Annual Report on Form 10-KSB for the year
ended December 31, 2004, the Company carried out an evaluation, under the
supervision and with the participation of its management, including its chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of its “disclosure controls and procedures,” as such term
is defined under Exchange Act Rule 13a-15(e).




Based on
this evaluation, the Company’s chief executive officer and chief financial
officer concluded that, as of the end of the fiscal quarter covered by this
report, such disclosure controls and procedures were reasonably designed to
ensure that information required to be disclosed by us in the reports the
Company files or submit under the Exchange Act is: (a) recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and (b) accumulated and communicated
to management, including its chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.




In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance management of the
Company necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.




There
were no changes in the Company’s internal controls over financial reporting
during the year ended December 31, 2004 that materially affected, or were
reasonably likely to materially affect, its internal controls over financial
reporting.




**ITEM** **8B.
Other Information**




Not
applicable.





PART III




**ITEM
9.**  **Directors
and Executive Officers of the Registrant.**




(a)  Set forth
below is information regarding the directors and executive officers of the
Company. Each of the directors of the Company serves as directors of the Bank.
The Company, as the sole shareholder of the Bank, will nominate each of the
following individuals to serve as a director of the Bank at the Bank's first
shareholders meeting. Directors of the Bank will serve for a term of one year
and will be elected by the Company each year at the Bank's annual meeting of
shareholders. The Bank's officers will be appointed by and hold office at the
will of its board of directors.





The
following table sets forth for each director and executive officer of the
Company (1) the person's name, (2) his or her age at December 31, 2004, (3) the
year he or she was first elected as a director of the Company, and (4) his or
her positions with the Company other than as a director and his or her other
business experience for the past five years.





20




Name
      (Age)
    
    Director
      Since
    
    Position(s)
      with the Company and Business experienceColin
      Forkner (60)
    
    2004
    
    Director;
      Chief Executive OfficerMichael
      Hahn (45)
    
    2004
    
    Director;
      PresidentRichard
      W. Grinyer (56)
    
    2004
    
    Director;
      Executive Vice PresidentMichael
      V. Cummings (63)
    
    2004
    
    Director;
      Bank ConsultantDavid
      E. Davies (69)
    
    2004
    
    Director;
      Instructor of Managerial Finance at the University of
    PhoenixFred
      A. deBoom (68)
    
    2004
    
    Director;
      managing partner in Sonfad Associates, a merger and acquisition consulting
      firmDavid
      Johnson (58)
    
    2004
    
    Director;Vice
      President-Finance of Affinity Medical Technologies, LLCDennis
      C. Lindeman (57)
    
    2004
    
    Chairman;
      Certified Financial PlannerDonald
      R. Mealing (44)
    
    2004
    
    Director;
      BusinessmanDenis
      H. Morgan (51)
    
    2004
    
    Director;
      Civil engineerJames
      W. Shute (38)
    
    2004
    
    Director;
      President of J.W. Shute International, a real estate development and
      consulting firmJohn
      Vuona (47)
    
    2004
    
    Director;
      Partner, Bentson & Vuona, LLP, accounting firmTerry
      Stalk (50)
    
    N/A
    
    Chief
      Financial Officer





The
Company is filing this Annual Report on Form 10-KSB pursuant to Section 15(d) of
the Securities Exchange Act and is not subject to filings required by Section 16
of the Securities Exchange Act.





(b)  None.





(c)  None.





(d)  None.





(e)  The board
of directors of the Company has determined that the Company has at least one
audit committee financial expert serving on its audit committee and has
determined that John
Vuona satisfies the definition of audit
committee financial expert. Mr. Vuona satisfies
the standards for independence established by the NASDAQ Stock Market,
Inc.





(f)  The
Company has a separately-designated standing audit committee. Its members are
John Vuona, Dennis Lindeman, David Davies, and David Johnson.







(g)  Under the
bylaws of the Company, shareholders entitled to vote for the election of
directors may nominate persons for election to the board of directors upon
delivery of timely written notice to the corporate secretary. To be considered
timely, the notice must be delivered or mailed and received at our principal
offices not less than 60 days nor more than 270 days prior to the meeting;
provided, however, that in the event less than 30 days’ notice or prior
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be received no later than the close of
business on the 10 th day
following the day on which such notice of the date of the meeting was mailed or
such disclosure was made.




To be in
proper written form, the shareholder’s notice to the Secretary must set forth in
writing (a) the name and address of the shareholder who intends to make the
nomination and of the person or persons intended to be nominated; (b) the class
and number of shares of stock of the corporation which are beneficially owned by
such shareholder intending to make the nomination; (c) a representation that the
shareholder is a holder of record of shares of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (d) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (e) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated
by the board of directors; and (f) the consent of each nominee to serve as
director of the corporation if so elected.




21


****


**Compliance
with Section 16(a) of the Exchange Act** . The
directors, officers and 10% of more shareholders of the Company are not
presently subject to Section 16(a) of the Exchange Act because the Company does
not have a class of securities registered under Section 12 of that
Act.





**Code
of ethics** . The
Company has not adopted a Code of Ethics applicable to all directors, officers
and employees, but intends to do so prior to the time that the Bank opens for
business.





**ITEM
10.** **Executive
Compensation.**




General . The
Company does not expect its officers or employees to receive any direct
remuneration for serving as officers or employees of the Company after the Bank
opens for business. However, at this time, the Company has entered into
consulting agreements with Mr. Forkner, Mr. Hahn, GRCAC, LLC, and Ms. Stalk
providing for the payment of $94,200, $94,200, $82,200 and $76,200 annually,
respectively, in connection with their activities in organizing the Company and
the Bank. In addition, the consulting agreements provide for deferred
compensation of $5,083, $3,834, $4,000 and $3,250 per month to be accrued for
the benefit of Mr. Forkner, Mr. Hahn, GRCAC, LLC, and Ms. Stalk, respectively.
However, the deferred compensation will be paid only in the event that the Bank
opens for business by June 30, 2005, at which time the consulting agreements
will terminate unless they are extended by the organizers. Although the Company
does not expect its officers to receive any direct remuneration for serving as
officers of the Company after the Bank opens for business, certain of these
persons will receive compensation for serving as officers of the Bank. The
Company may compensate its officers in the future, but have no current plans to
do so at this time.




GRCAC,
LLC is a California limited liability company organized by Richard Grinyer, an
organizer and the proposed Chief Credit Officer of the Bank, for the purpose of
providing consulting services to the Company and the Bank in connection with the
organization and pre-opening activities of each entity. Richard Grinyer is the
managing member of GRCAC, LLC.




Each of
the consultants is providing independent advisory and consulting services for
the Company in connection with its organizational activities and those of its
proposed banking subsidiary, the Bank. These services have included assistance
in preparing regulatory applications and obtaining regulatory approvals;
directing site development activities, personnel matters and capital raising
activities; negotiating contractual arrangements; and performing other tasks
necessary or appropriate in connection with the organization of a de novo
national bank, at such times and in such a manner as reasonable requested by the
Company.




It is
expected that prior to commencement of banking operations, the Bank will engage
the services of four senior executive officers: a chief executive officer, a
president and chief operating officer, a chief credit officer and a chief
financial officer. In addition, the Bank expects to engage the services of
several additional lending officers. Mr. Forkner is expected to be Chief
Executive Officer and has entered into an employment agreement with the Bank
(described below) providing, among other things, for an initial annual salary of
$160,000 and an annual bonus at the discretion of the board of directors of the
Bank. Mr. Hahn is expected to be the Bank’s President and Chief Operating
Officer and has entered into an employment agreement providing for a base salary
of $135,000. Mr. Grinyer is expected to be the Bank’s Executive Vice President
and Chief Credit Officer and has entered into an employment agreement providing
for a base salary of $125,000. The Bank also expects that Terry Stalk will be
appointed Chief Financial Officer and has entered into an employment agreement
providing for a base salary of $110,000. The Bank estimates that compensation
payable to its executive officers during its first 12 months of operations will
total $530,000. The Bank does not currently intend to enter into employment
agreements with any of its employees other than Messrs. Forkner, Hahn, Grinyer
and Ms. Stalk; all of the Bank’s other employees will be employees-at-will
serving at the pleasure of the board of directors.




Employment
agreements .




*Colin
M. Forkner* . The
Bank has entered into an employment agreement with Colin M. Forkner regarding
his employment as Vice Chairman and Chief Executive Officer. The agreement will
commence when the Bank opens for business and continue in effect through
December 31, 2007 (with certain exceptions), and will automatically renew
thereafter for successive one-year terms unless the Bank provides notice that it
will not seek to renew the agreement.




22





Under the
terms of the agreement, Mr. Forkner will receive a base salary of $160,000 per
year. Following the first year of the agreement, the base salary will be
reviewed by the board of directors of the Bank and may be increased as a result
of that review. Mr. Forkner will be eligible to participate in any
executive incentive bonus plan and all other benefit programs adopted by the
Bank. Mr. Forkner will also receive other customary benefits such as health,
dental and life insurance, membership fees to banking and professional
organizations and an automobile allowance. In addition, the Bank will purchase
and maintain a split dollar life insurance policy in the amount of $1,000,000,
for the benefit of Mr. Forkner.




Mr.
Forkner’s employment agreement also provides that the Company will grant him
options to acquire shares of common stock at an exercise price of $10.00 per
share, exercisable within ten (10) years from the date of grant of the options,
the exact number of options to be equal to 4% of the number of shares sold in
the offering. It is expected that these options will be incentive stock options
and would vest ratably over a period of three years beginning on the first
anniversary of the date that the Bank opens for business.




In the
event of a “change in control,” Mr. Forkner would be entitled to receive a cash
lump-sum payment equal to 199% of his “base amount” as defined in section 280G
of the Internal Revenue Code and, in general, means the executive’s annualized
compensation over the prior five-year period. If Mr. Forkner’s employment is
terminated for any reason other than for cause, the Bank will be obligated to
pay as severance, an amount equal to his base salary, along with a relocation
allowance.




The
agreement also generally provides non-competition and non-solicitation
provisions that would apply for a period of one year following the termination
of Mr. Forkner’s employment. The non-competition provision would be limited in
scope to twenty miles from the main office of the Bank.




*Michael
Hahn* . The
Bank has entered into an employment agreement with Michael Hahn regarding his
employment as President and Chief Operating Officer of the Bank. The agreement
will commence when the Bank opens for business and continue in effect through
December 31, 2009 (with certain exceptions), and will automatically renew
thereafter for successive one-year terms unless the Bank provides notice that it
will not seek to renew the agreement.




Under the
terms of the agreement, Mr. Hahn will receive a base salary of $135,000 per
year. Following the first year of the agreement, the base salary will be
reviewed by the board of directors of the Bank and may be increased as a result
of that review. Mr. Hahn will be eligible to participate in any executive
incentive bonus plan and all other benefit programs adopted by the Bank. Mr.
Hahn will also receive other customary benefits such as health, dental and life
insurance, membership fees to banking and professional organizations and an
automobile allowance. In addition, the Bank will purchase and maintain a split
dollar life insurance policy in the amount of $1,000,000, for the benefit of Mr.
Hahn.




Mr.
Hahn’s employment agreement also provides that the Company will grant him
options to acquire shares of common stock at an exercise price of $10.00 per
share, exercisable within ten (10) years from the date of grant of the options,
the exact number of options to be equal to 4% of the number of shares sold in
the offering. It is expected that these options will be incentive stock options
and would vest ratably over a period of three years beginning on the first
anniversary of the date that the Bank opens for business.




In the
event of a “change in control,” Mr. Hahn would be entitled to receive a cash
lump-sum payment equal to 199% of his “base amount” as defined in section 280G
of the Internal Revenue Code and, in general, means the executive’s annualized
compensation over the prior five-year period. If Mr. Hahn’s employment is
terminated for any reason other than for cause, the Bank will be obligated to
pay as severance, an amount equal to his base salary, along with a relocation
allowance.




The
agreement also generally provides non-competition and non-solicitation
provisions that would apply for a period of one year following the termination
of Mr. Hahn’s employment. The non-competition provision would be limited in
scope to fifty miles from the main office of the Bank.




*Richard
Grinyer* . The
Bank has also entered into an employment agreement with Richard Grinyer
regarding his employment as Executive Vice President and Chief Credit Officer of
the Bank. The agreement will commence when the Bank opens for business and
continue in effect through December 31, 2009 (with certain exceptions), and will
automatically renew thereafter for successive one-year terms unless the Bank
provides notice that it will not seek to renew the agreement.




23





Under the
terms of the agreement, Mr. Grinyer will receive a base salary of $125,000 per
year. Following the first year of the agreement, the base salary will be
reviewed by the board of directors of the Bank and may be increased as a result
of that review. Mr. Grinyer will be eligible to participate in any
executive incentive bonus plan and all other benefit programs adopted by the
Bank. Mr. Grinyer will also receive other customary benefits such as health,
dental and life insurance, membership fees to banking and professional
organizations and an automobile allowance. In addition, the Bank will purchase
and maintain a split dollar life insurance policy in the amount of $1,000,000,
for the benefit of Mr. Grinyer.




Mr.
Grinyer’s employment agreement also provides that the Company will grant him
options to acquire shares of common stock at an exercise price of $10.00 per
share, exercisable within ten (10) years from the date of grant of the options,
the exact number of options to be equal to 4% of the number of shares sold in
the offering. It is expected that these options will be incentive stock options
and would vest ratably over a period of three years beginning on the first
anniversary of the date that the Bank opens for business.




In the
event of a “change in control,” Mr. Grinyer would be entitled to receive a cash
lump-sum payment equal to 199% of his “base amount” as defined in section 280G
of the Internal Revenue Code and, in general, means the executive’s annualized
compensation over the prior five-year period. If Mr. Grinyer’s employment is
terminated for any reason other than for cause, the Bank will be obligated to
pay as severance, an amount equal to his base salary, along with a relocation
allowance.




The
agreement also generally provides non-competition and non-solicitation
provisions that would apply for a period of one year following the termination
of Mr. Grinyer’s employment. The non-competition provision would be limited in
scope to fifty miles from the main office of the Bank.




*Terry
A. Stalk* . The
Bank has entered into an employment agreement with Terry A. Stalk regarding her
employment as Executive Vice President and Chief Financial Officer of the Bank.
The agreement will commence when the Bank opens for business and continue in
effect through December 31, 2009 (with certain exceptions), and will
automatically renew thereafter for successive one-year terms unless the Bank
provides notice that it will not seek to renew the agreement.




Under the
terms of the agreement, Ms. Stalk will receive a base salary of $110,000 per
year. Following the first year of the agreement, the base salary will be
reviewed by the board of directors of the Bank and may be increased as a result
of that review. Ms. Stalk will be eligible to participate in any executive
incentive bonus plan and all other benefit programs adopted by the Bank. Ms.
Stalk will also receive other customary benefits such as health, dental and life
insurance, membership fees to banking and professional organizations and an
automobile allowance. In addition, the Bank will purchase and maintain a split
dollar life insurance policy in the amount of $1,000,000, for the benefit of Ms.
Stalk.




Ms.
Stalk’s employment agreement also provides that the Company will grant her
options to acquire shares of common stock at an exercise price of $10.00 per
share, exercisable within ten (10) years from the date of grant of the options,
the exact number of options to be equal to 2.5% of the number of shares sold in
the offering. It is expected that these options will be incentive stock options
and would vest ratably over a period of three years beginning on the first
anniversary of the date that the Bank opens for business.




In the
event of a “change in control,” Ms. Stalk would be entitled to receive a cash
lump-sum payment equal to 199% of her “base amount” as defined in section 280G
of the Internal Revenue Code and, in general, means the executive’s annualized
compensation over the prior five-year period. If Ms. Stalk’s employment is
terminated for any reason other than for cause, the Bank will be obligated to
pay as severance, an amount equal to her base salary, along with a relocation
allowance.




The
agreement also generally provides non-competition and non-solicitation
provisions that would apply for a period of one year following the termination
of Ms. Stalk’s employment. The non-competition provision would be limited in
scope to fifty miles from the main office of the Bank.




24





Option
grants during fiscal year 2004 .




None.




Options
exercised in fiscal year 2004 .




None.




**ITEM
11.** **Security
Ownership of Certain Beneficial Owners and Management.**




As of
March 1, 2005, no shares of the common stock of the Company were issued and
outstanding, and the Company does not currently have any equity compensation
plans.




**ITEM
12. C** **ertain
Relationships and Related Transactions.**




The
Company and Bank expect to enter into banking and other business transactions in
the ordinary course of business with its directors and officers, including
members of their families and corporations, partnerships or other organizations
in which they have a controlling interest. If these transactions occur, each
transaction will be on the following terms:




·
    In
      the case of banking transactions, each transaction will be on
      substantially the same terms, including price or interest rate and
      collateral, as those prevailing at the time for comparable transactions
      with unrelated parties, and any banking transactions will not be expected
      to involve more than the normal risk of collectibility or present other
      unfavorable features to the Bank;




·
    In
      the case of business transactions, each transaction will be on terms no
      less favorable than could be obtained from an unrelated third party; and




·
    In
      the case of all related party transactions, each transaction will be
      approved by a majority of the directors, including a majority of the
      directors who do not have an interest in the
  transaction.




**ITEM
13.** **Exhibits**





**(a) Exhibits**





**Number**
    **Description**3.1
    Articles
      of incorporation*3.2
    Bylaws*4.1
    Specimen
      common stock certificate*4.2
    See
      Exhibits 3.1 and 3.2 for provisions of the articles of incorporation and
      bylaws defining rights of holders of the common stock10.1
    Form
      of engagement letter for consulting services by and between Bankmark &
      Financial Marketing Services and Pacific Coast National Bancorp regarding
      marketing*10.2
    Form
      of engagement letter for consulting services by and between Bankmark &
      Financial Marketing Services and Pacific Coast National Bancorp regarding
      regulatory application*10.4
    Form
      of Pacific Coast National Bancorp Organizers’ Warrant
      Agreement*10.5
    Form
      of Pacific Coast National Bancorp Shareholders’ Warrant
      Agreement*10.6
    Pacific
      Coast National Bancorp, Inc. 2004 Stock Incentive Plan+*10.7
    Form
      of Employment Agreement by and between Pacific Coast National Bancorp and
      Michael Hahn+*10.8
    Form
      of Employment Agreement by and between Pacific Coast National Bancorp and
      Richard Grinyer+*10.9
    Form
      of Employment Agreement by and between Pacific Coast National Bancorp and
      Colin Forkner+*10.10
    Form
      of Employment Agreement by and between Pacific Coast National Bancorp and
      Terry Stalk+*10.11
    Consulting
      Agreement by and between Pacific Coast National Bancorp and Michael
      Hahn+*
  10.12
    Consulting
      Agreement by and between Pacific Coast National Bancorp and GRCAC,
      LLC+*10.13
    Consulting
      Agreement by and between Pacific Coast National Bancorp and Colin
      Forkner+*10.14
    Consulting
      Agreement by and between Pacific Coast National Bancorp and Terry
      Stalk+*10.15
    First
      Amendment to Consulting Agreement by and between Pacific Coast National
      Bancorp and Michael Hahn+*10.16
    First
      Amendment to Consulting Agreement by and between Pacific Coast National
      Bancorp and GRCAC, LLC +*10.17
    First
      Amendment to Consulting Agreement by and between Pacific Coast National
      Bancorp and Colin Forkner+*10.18
    First
      Amendment to Consulting Agreement by and between Pacific Coast National
      Bancorp and Terry Stalk+*31.1
    Certification
      of Chief Executive Officer Pursuant to Rule 15d-15(e) of the Securities
      Exchange Act31.2
    Certification
      of Chief Financial Officer Pursuant to Rule 15d-15(e) of the Securities
      Exchange Act32
    Certification
      Pursuant to Rule 14d-14(b) of the Securities Exchange Act and 18 U.S.C.
      §1350.
 (b)  None


**ITEM
14.**  **Principal
Accounting Fees and Services.**




The
following table shows the amounts paid by the Company to its independent
auditors for the last two fiscal years.


2004
    
    2003Audit
      fees
    
    $
    3,000
    
    
    -Audit
      related fees
    
    
    -
    
    
    -Tax
      fees
    
    
    -
    
    
    -All
      other fees
    
    
    -
    
    
    -Total
    
    $
    3,000
    
    
    -


As
defined by the SEC, (i) “audit fees” are fees for professional services rendered
by the company’s principal accountant for the audit of the company’s annual
financial statements and review of financial statements included in the
company’s Form 10-Q, or for services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years; (ii) “audit-related fees” are fees for assurance and
related services by the company’s principal accountant that are reasonably
related to the performance of the audit or review of the company’s financial
statements and are not reported under “audit fees;” (iii) “tax fees” are fees
for professional services rendered by the company’s principal accountant for tax
compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for
products and services provided by the company’s principal accountant, other than
the services reported under “audit fees,” “audit-related fees,” and “tax
fees.”




Under
applicable SEC rules, the Audit Committee is required to pre-approve the audit
and non-audit services performed by the independent auditors in order to ensure
that they do not impair the auditors’ independence. The SEC’s rules specify the
types of non-audit services that an independent auditor may not provide to its
audit client and establish the Audit Committee’s responsibility for
administration of the engagement of the independent auditors.




Consistent
with the SEC’s rules, the Audit Committee Charter requires that the Audit
Committee review and pre-approve all audit services and permitted non-audit
services provided by the independent auditors to us or any of our subsidiaries.
The Audit Committee may delegate pre-approval authority to a member of the Audit
Committee and if it does, the decisions of that member must be presented to the
full Audit Committee at its next scheduled meeting.




25







SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.




PACIFIC COAST NATIONAL
      BANCORP, INC.By:
    /s/ Michael HahnMichael HahnPresident and Chief Operating
      Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




SIGNATURE
    
    TITLE
    
    DATE/s/
      Michael Hahn
    
    Director
    
    April
      15, 2005Michael
      Hahn/s/
      Michael Cummings
    
    Director
    
    April
      15, 2005Michael
      Cummings/s/
      David E. Davies
    
    Director
    
    April
      15, 2005David
      E. Davies/s/
      Fred A. de Boom
    
    Director
    
    April
      15, 2005Fred
      A. de Boom/s/
      Colin Forkner
    
    Director
    
    April
      15, 2005Colin
      Forkner/s/
      Richard Grinyer
    
    Director
    
    April
      15, 2005Richard
      Grinyer/s/
      Dennis Lindeman
    
    Director
    
    April
      15, 2005Dennis
      Lindeman/s/
      David Johnson
    
    Director
    
    April
      15, 2005David
      Johnson/s/
      Donald R. Mealing
    
    Director
    
    April
      15, 2005Donlad
      R. Mealing/s/
      Denis H. Morgan
    
    Director
    
    April
      15, 2005Denis
      H. Morgan/s/
      James W. Shute
    
    Director
    
    April
      15, 2005James
      W. Shute/s/
      Jack Vuona
    
    Director
    
    April
      15, 2005Jack
      Vuona/s/
      Terry Stalk
    
    Principal
      Financial Officer
    
    April
      15, 2005Terry Stalk
  26





**PACIFIC
COAST NATIONAL BANCORP**


**(IN
ORGANIZATION)**





**FINANCIAL
STATEMENTS**


**WITH**


**INDEPENDENT
AUDITORS’ REPORT**





**December
31, 2004**





25231
Paseo De Alicia, Suite 100 Laguna Hills, CA 92653 Tel: 949.768.0833 Fax:
949.768.8408 www.vtdcpa.com
FRESNO·LAGUNA
HILLS·PALO
ALTO·PLEASANTON·RANCHO
CUCAMONGA·SAN JOSE


27
 28


****
**ITEM
      1.**Vavrinek,
      Trine, Day & Co., LLP
      **ITEM
      2.**Vavrinek,
      Trine, Day & Co., LLP
      Certified
      Public Accountants & Consultants
    **PART II**VALUE
      THE DIFFERENCE
      **PART III**VALUE
      THE DIFFERENCE


**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To the
Organizers of


Pacific
Coast National Bancorp (In Organization)




We have
audited the accompanying balance sheet of Pacific Coast National Bancorp (In
Organization) as of December 31, 2004, and the related statements of operations,
changes in shareholders' deficit, and cash flows for the period from July 2,
2003 (Inception) to December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.





We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Pacific Coast National Bancorp (In
Organization) as of December 31, 2004, and the results of its operations and its
cash flows for the period from July 2, 2003 (Inception) to December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.








Laguna
Hills, California


March 28,
2005




25231 Paseo De Alicia, Suite 100 Laguna Hills, CA
92653 Tel: 949.768.0833 Fax: 949.768.8408 www.vtdcpa.com 
 FRESNO · LAGUNA
HILLS · PALO
ALTO · PLEASANTON · RANCHO
CUCAMONGA · SAN JOSE


29





**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**BALANCE
SHEET**


**December
31, 2004**


**ASSETS**Cash
      and Cash Equivalents
    
    $
    57,270Furniture,
      Fixtures, Equipment and Leasehold Improvements
    
    
    80,360Rent
      Deposits
    
    
    63,112$
    200,742**LIABILITIES
      AND SHAREHOLDERS' DEFICIT****LIABILITIES**Accounts
      Payable and Accrued Expenses
    
    $
    236,623Note
      Payable
    
    
    825,000Due
      to Organizers
    
    
    735,000**TOTAL
      LIABILITIES**
    
    
    1,796,623**COMMITMENTS**
    
    
    -**SHAREHOLDERS'
      DEFICIT**Common
      Stock, $0.01 par value; 10,000,000 sharesAuthorized;
      None Issued and Outstanding
    
    
    -Deficit
      Accumulated During the Organizational Period
    
    
    (
      1,595,881
    )**TOTAL
      SHAREHOLDERS' DEFICIT**
    
    
    (
      1,595,881
    )$
    200,742


The accompanying notes are an integral part of these
financial statements.




30




**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**STATEMENT
OF OPERATIONS**


**For
the Period from July 2, 2003 (Inception) to December 31,
2004**





**EXPENSES**Consulting
      Fees
    
    $
    551,645Rent
      and Other Occupancy Expense
    
    
    77,133Legal
      and Professional
    
    
    850,131OCC
      Application Fee
    
    
    25,000Other
      Expenses
    
    
    91,9721,595,881**NET
      LOSS**
    
    $
    (
      1,595,881
    )


The accompanying notes are an integral part of
these financial statements.




31


****


**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**STATEMENT
OF SHAREHOLDERS' DEFICIT**


**For
the Period from July 2, 2003 (Inception) to December 31,
2004**


DeficitAccumulated
    
    
    
    AccumulatedCommon
      Stock
    
    During
    
    
    
    OtherNumber
      of
    
    
    
    Organizational
    
    
    
    ComprehensiveShares
    
    Amount
    
    Period
    
    Total
    
    Income**BALANCE
      AT JULY 2, 2003**
    
    
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -Net
      Loss
    
    
    
    
    
    
    
    
    (
      1,595,881
    )
    
    (
      1,595,881
    )**BALANCE
      AT DECEMBER 31, 2004**
    
    
    -
    
    $
    -
    
    $
    (
      1,595,881
    )
    $
    (
      1,595,881
    )
    $
    -


The accompanying notes are an integral part of these
financial statements.




32


****


**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**STATEMENT
OF CASH FLOWS**


**For
the Period from July 2, 2003 (Inception) to December 31,
2004**





**OPERATING
      ACTIVITIES**Net
      Loss
    
    $
    (
      1,595,881
    )Increase
      in Rent Deposits
    
    
    (63,112
    )Increase
      in Accounts Payable and Accrued Expenses
    
    
    236,623**CASH
      USED BY OPERATIONS**
    
    
    (
      1,422,370
    )**INVESTING
      ACTIVITIES**Purchases
      of Furniture, Equipment, Fixtures and Leaseholds
    
    
    (
      80,360
    )**CASH
      USED BY INVESTING ACTIVITIES**
    
    
    (
      80,360
    )**FINANCING
      ACTIVITIES**Advances
      from Organizers
    
    
    765,000Repayments
      to Organizers
    
    
    (
      30,000
    )Advances
      from Note Payable
    
    
    825,000**CASH
      PROVIDED BY FINANCING ACTIVITIES**
    
    
    1,560,000**NET
      INCREASE IN CASH AND CASH EQUIVALENTS**
    
    
    57,270**CASH
      AND CASH EQUIVALENTS AT JULY 2, 2003**
    
    
    -**CASH
      AND CASH EQUIVALENTS AT DECEMBER 31, 2004**
    
    $
    57,270


The accompanying notes are an integral part of these
financial statements.




33


**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**NOTES
TO FINANCIAL STATEMENTS**


**December
31, 2004**








**NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Organizational
Period Operations





Pacific
Coast National Bancorp (In Organization) (the "Company") was incorporated on
July 2, 2003. Pacific Coast National Bancorp is being organized as the parent
company of Pacific Coast National Bank (in organization). As part of its
organizational activities, the Company has filed an application with the Federal
Reserve to become a bank holding company under the “Bank Holding Company Act of
1956, as amended”. Operations since incorporating consisted of securing a
management team, developing a strategic plan, filing applications with the
Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance
Corporation (“FDIC”), and preparing the necessary forms and documents to raise
capital. It is the Company’s intention to sell a minimum of 1,700,000 shares of
common stock at $10 per share in order to capitalize its proposed subsidiary,
Pacific Coast National Bank (proposed). The Company commenced its initial public
offering on November 22, 2004 and as of December 31, 2004 the escrow agent for
the Company held $2,724,750.





On June
2, 2004, the Company filed its Application for Authority to organize a national
banking association with the Comptroller of the Currency and the Federal Deposit
Insurance Corporation. The costs incurred by the Company for the organization of
Pacific Coast National Bank (proposed) will be reimbursed, subject to regulatory
approval, by Pacific Coast National Bank (proposed) upon opening of the Bank.




Organizational
Costs





Organizational
costs incurred from the inception of the Company’s organization through the
commencement of operations will be charged directly to shareholders’
equity.




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, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.





Cash
and Cash Equivalents





For
purposes of reporting cash flows, cash and cash equivalents include cash and due
from banks. The Company maintains amounts in banks, which may exceed federally
insured limits. The Company has not experienced any losses in such
accounts.


****


34


****


**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**NOTES
TO FINANCIAL STATEMENTS**


**December
31, 2004**





**NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





Furniture,
Fixtures and Equipment





Furniture,
fixtures and equipment are carried at cost. Expenditures for betterments or
major repairs are capitalized and those for ordinary repairs and maintenance are
charged to operations as incurred. Leasehold improvements will be amortize using
the straight-line method over the estimated useful lives of the improvements or
remaining lease term, whichever is shorter.




Income
Taxes





Deferred
income taxes are computed using the asset and liability method, which recognizes
a liability or asset representing the tax effects, based on current tax law, of
future deductible or taxable amounts attributable to events that have been
recognized in the consolidated financial statements. A valuation allowance is
established to reduce the deferred tax asset to the level at which it is “more
likely than not” that the tax asset or benefits will be realized. Realization of
tax benefits of deductible temporary differences and operating loss
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryforward periods.





Disclosure
About Fair Value of Financial Instruments





In
December 1996, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
126, *“Exemption
from Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities,”* an
amendment of SFAS No. 107. SFAS No. 126 is effective for fiscal years ending
after December 15, 1996. In accordance with SFAS No. 126, the Company is exempt
from the disclosure requirements of SFAS No. 107 and has therefore elected not
to disclose fair value information for financial instruments.





Stock-Based
Compensation





SFAS No.
123 *,
“Accounting for Stock-Based Compensation,”* encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company plans to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board (“APB”) Opinion No. 25, *“Accounting
for Stock Issued to Employees,”* and
related Interpretations. Accordingly, compensation cost for stock options issued
to directors and employees will be measured as the excess, if any, of the quoted
market price of the Company’s stock at the date of the grant over the amount an
employee or director must pay to acquire the stock. The Company also intends to
issue warrants to some of its organizers. Accordingly, compensation cost for
warrants and stock options issued to organizers will be measured and the fair
value of the options and warrants and will be treated as part of the
organizational costs.


****


35


****


**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**NOTES
TO FINANCIAL STATEMENTS**


**December
31, 2004**








**NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**





Recent
Accounting Developments





In
November 2003, the Emerging Issues Task Force of the FASB reached consensus on
Issue 03-1, “The Meaning of Other-Than -Temporary Impairment and Its Application
to Certain Investments.” Issue 03-1 provides guidance in the recognition and
measurement of other-than-temporary impairment for debt and equity securities
that are within the scope of SFAS 115, “Accounting for Certain Investments in
Debt and Equity Securities” and equity securities that are accounted for under
the cost method of accounting, or cost method investments. The guidance for
evaluating whether an investment is other-than-temporarily impaired should be
applied in other-then-temporary impairment evaluations made in reporting periods
beginning after June 15, 2004. Issue 03-1 also provides guidance on disclosure
requirements for other-than-temporary impairments. Those disclosure requirements
were effective for fiscal years ending after December 15, 2003.





In
December 2004, Financial Accounting Standards Board (“FASB”) revised SFAS 123
and issued it under its new name, *“Share-Based
Payment”.* This
statement eliminates the alternative to use Opinion 25’s intrinsic value method
of accounting discussed in the previous paragraph. Instead, this Statement
generally requires entities to recognize the cost of employee services received
in exchange for awards of stock options, or other equity instruments, based on
the grant-date fair value of those awards. This cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award, generally the vesting period.





The
Company must adopt this Statement in 2006 for all new stock option awards as
well as any existing awards that are modified, repurchased or cancelled. In
addition, the unvested portion of previously awarded options will also be
recognized as expense. The Company is unable to estimate the impact of this
Statement on its financial condition and results of operations as the decision
to grant option awards is made annually on a case-by-case basis, and,
accordingly, the Company cannot estimate the amount of stock awards that will be
made in 2006.




**ITEM
15.** **NOTE
B - DUE TO ORGANIZERS**




The
Company has received advances from its organizers. These amounts will be
reimbursed, subject to OCC approval, out of the proceeds from the proposed stock
offering and do not accrue interest while outstanding.




36




**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**NOTES
TO FINANCIAL STATEMENTS**


**December
31, 2004**








**NOTE
C - COMMITMENTS**





Lease
Commitments





The
Company has entered into a ten-year lease for its main office in San Clemente,
California and a five-year lease for the facility that will be a banking office
in Encinitas, California. The leases are contingent upon the Company obtaining
approval to organize as a national banking association. In the event that
approval is not received the leases call for a termination payment of
approximately $335,000 that is guaranteed by the organizers of the Company. The
leases are scheduled to start September 1, 2004 and June 1, 2005. The leases
call for annual increases and the Company will also be responsible for it’s pro
rata share of common area expenses and property taxes. A director of the Company
served as the leasing agent in connection with the lease for its main office in
San Clemente. The director is expected to receive a commission from the lessor
in the amount of $55,949, when the Bank opens for Business. The Company has
entered into a month-to-month lease agreement with an organizer of the Company
for temporary office space. The lease calls for monthly payments of $3,000. Rent
expense amounted to $67,268 for the period ended December 31, 2004.


****


**ITEM
16.**




The
approximate future minimum annual payments for these leases are as
follows:




2005
    
    
    $
    242,1822006
    
    
    
    321,7862007
    
    
    
    330,1892008
    
    
    
    339,8322009
    
    
    
    295,663Thereafter
    
    
    
    893,440$
    2,423,092


**ITEM
17.**




**ITEM
18.**  Management
Agreements




The
Company has entered into employment agreements with certain executive officers
which state that in the event the Company terminates employment without cause,
and or upon a change in control of the Company, the Company may be liable for
salaries ranging from 100% to 199% of a base amount as defined in the agreement.
The agreements will commence when the Bank opens for business and will
automatically renew for one-term after the initial period. The agreements also
state that the executive officers will be eligible to participate in any
executive incentive bonus plan and all other benefit programs adopted by the
Bank.




37




**PACIFIC
COAST NATIONAL BANCORP (IN ORGANIZATION)**





**NOTES
TO FINANCIAL STATEMENTS**


**December
31, 2004**




**NOTE
C - COMMITMENTS - Continued**





Bankmark
Consulting Agreement





The
Company has engaged Bankmark & Financial Marketing Services to assist the
Company during the organizational process, including providing the Company with
guidance with respect to capitalization strategy, public relations, event
planning, director/senior management training, proposed shareholder database,
management and marketing consulting. The agreement will expire 150 calendar days
from the date of the final prospectus. The agreement calls for a total of
$450,000 and $35,000 for each 30 day extension. As of December 31, 2004 the
company had paid $404,700 towards the consulting agreement in accordance with
the terms of the agreement. In addition, the agreement calls for certain
expenses incurred in connection with the Bankmark Agreement, such as payment for
the use of computer network systems, part-time support staff, printing costs,
event costs, and graphic program development to be paid by the
Company.


****


**NOTE
D - NOTE PAYABLE**





The
Company has a $1.4 million line of credit from The Independent BankersBank
(TIB). The line is unsecured and is being guaranteed by the organizers on a pro
rata basis. The line of credit bears interest at prime rate as set forth in the
Wall Street Journal, plus 50 basis points. Principal and interest is due April
30, 2005. As of December 31, 2004 the Company had advanced $825,000 on this
line.




**ITEM
19.**  **NOTE
E - INCOME TAXES**




No tax
benefit related to the loss incurred during the organizational process was
recognized, as realization of the benefit is dependent upon future income.





Deferred
taxes are a result of differences between income tax accounting and generally
accepted accounting principles with respect to income and expense recognition.
The loss incurred during the period ended December 31, 2004 will be capitalized
as startup and organizational expenses for tax purposes and amortized over
fifteen years once operations begin. As of December 31, 2004 the amount of
deferred taxes related to organizational and startup expenses was approximately
$654,000. The Company has also recorded a valuation allowance of $654,000 as of
December 31, 2004.




**NOTE
F - RELATED PARTY TRANSACTIONS**





The
Company has entered into business transactions with a director and an organizer.
A director, who is actively engaged in the business of real estate investment
and consulting, has served as the Company’s leasing agent in connection with the
lease on the proposed San Clemente location. The director is expected to receive
a commission from the lessor in the amount of $55,949. The Company has entered
into a month-to-month lease agreement with an organizer for temporary offices
during the organizational period. The lease arrangement provides for payments of
$1,750 per month starting April 1, 2004 and $3,000 per month starting September
1, 2004. Total rent expense per the month-to-month lease for the period ended
December 31, 2004 was $21,000.




38




**PACIFIC
COAST NATIONAL BANCORP**


**(IN
ORGANIZATION)**





**FINANCIAL
STATEMENTS**


**WITH**


**INDEPENDENT
AUDITORS’ REPORT**





**December
31, 2004**





39