**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, 2005**
  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
  Registrant’s
        revenues for the fiscal year ended December 31, 2005, were
        $809,436.
  The
        aggregate market value of the voting stock held by non-affiliates computed
        by
        reference to the average bid and asked prices of such stock, as of March
        10,
        2005: $31,920,000.
  The
        number of shares of common stock, par value $0.01 share, of the Registrant
        outstanding as of March 1, 2006, was 2,280,000.
  
  **PACIFIC
        COAST NATIONAL BANCORP**
  **ANNUAL
        REPORT ON FORM 10-KSB**
 INDEXPAGEPART
                    I
                
                2ITEM
                    1. BUSINESS
                
                3ITEM
                    2. DESCRIPTION OF PROPERTY
                
                35ITEM
                    3. LEGAL PROCEEDINGS
                
                36ITEM
                    4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                
                36PART
                    II
                
                36ITEM
                    5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                    MATTERS
                
                36ITEM
                    6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS
                    OF OPERATION
                
                37ITEM
                    7. FINANCIAL STATEMENTS
                
                46ITEM
                    8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                    AND
                    FINANCIAL DISCLOSURE
                
                46ITEM
                    8A. CONTROLS AND PROCEDURES
                
                47PART
                    III
                
                47ITEM
                    9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
                
                47ITEM
                    10. EXECUTIVE COMPENSATION
                
                49ITEM
                    11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                    MANAGEMENT
                
                58ITEM
                    12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                
                60ITEM
                    13. EXHIBITS
                
                62ITEM
                    14. PRINCIPAL ACCOUNTING FEES AND SERVICES
                
                63
  i
  **PART
        I**
  **Cautionary
        Statement Regarding Forward-Looking Information**
  This
        report contains certain statements that are forward-looking within the meaning
        of section 21E of the Securities Exchange Act of 1934, as amended. These
        statements are not guarantees of future performance and involve certain risks,
        uncertainties and assumptions that are difficult to predict. Actual outcomes
        and
        results may differ materially from those expressed in, or implied by, the
        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 other similar
        expressions or future or conditional verbs. Readers of this annual report
        should
        not rely solely on the forward-looking statements and should consider all
        uncertainties and risks throughout this report. The statements are
        representative only as of the date they are made, and Pacific Coast National
        Bancorp (“Company”) undertakes no obligation to update any forward-looking
        statement.
  These
        forward-looking statements, implicitly and explicitly, include the assumptions
        underlying the statements and other information with respect to the Company’s
        beliefs, plans, objectives, goals, expectations, anticipations, estimates,
        financial condition, results of operations, future performance and business,
        including management’s expectations and estimates with respect to revenues,
        expenses, return on equity, return on assets, efficiency ratio, asset quality
        and other financial data and capital and performance ratios.
  Although
        the Company believes that the expectations reflected in the forward-looking
        statements are reasonable, these statements involve risks and uncertainties
        that
        are subject to change based on various important factors, some of which are
        beyond the control of the Company and Pacific Coast National Bank (“Bank”). The
        following factors, among others, could cause the Company’s results or financial
        performance to differ materially from its goals, plans, objectives, intentions,
        expectations and other forward-looking statements:
  ●
              the
                  loss of senior management or operating personnel and the potential
                  inability to hire qualified personnel at reasonable compensation
                  levels;
  ●
              the
                  failure of assumptions underlying the establishment of and provisions
                  made
                  to the allowance for credit losses;
  ●
              changes
                  in various monetary and fiscal policies and regulations, including
                  those
                  determined by the Board of Governors of the Federal Reserve System
                  (FRB),
                  the Office of the Comptroller of the Currency (OCC) and the Federal
                  Deposit Insurance Corporation
                  (FDIC);
  ●
              changes
                  in general economic conditions and economic conditions in the geographic
                  regions and industries in which the Bank operates which may affect,
                  among
                  other things, the level of nonperforming assets, charge-offs and
                  provision
                  expense;
  ●
              adverse
                  changes in the local real estate market, which is where most of
                  the Bank’s
                  loans are concentrated, the substantial majority of which have
                  real estate
                  as collateral;
  ●
              changes
                  in the availability of funds resulting in increased costs or reduced
                  liquidity;
  ●
              geopolitical
                  conditions, including acts or threats of terrorism, actions taken
                  by the
                  United States or other governments in response to acts or threats
                  of
                  terrorism and/or military conflicts which could impact business
                  and
                  economic in the United States and
                  abroad;
  2
  ●
              changes
                  in market rates and prices which may adversely impact the value
                  of
                  financial products including securities, loans, deposits, debt
                  and
                  derivative financial instruments and other similar financial
                  instruments;
  ●
              changes
                  in the interest rate environment, which may reduce interest margins
                  and
                  impact funding sources;
  ●
              increased
                  asset levels and changes in the composition of assets and the resulting
                  impact on the capital levels and regulatory capital ratios of the
                  Company
                  or the Bank;
  ●
              competition
                  with other banks, thrifts, credit unions and other nonbank financial
                  institutions and the willingness of users to substitute competitors’
                  products and services for the products and services offered by
                  the
                  Bank;
  ●
              the
                  ability to develop and introduce new banking-related products,
                  services
                  and enhancements and gain market acceptance of such
                  products;
  ●
              the
                  ability to grow the Bank’s core
                  businesses;
  ●
              decisions
                  to change or adopt new business
                  strategies;
  ●
              changes
                  in tax laws, rules and regulations as well as Internal Revenue
                  Service
                  (IRS) and other governmental agencies’ interpretations
                  thereof;
  ●
              technological
                  changes;
  ●
              changes
                  in consumer spending and savings habits;
                  and
  ●
              management’s
                  ability to manage these and other
                  risks.
  In
        addition, new factors emerge from time to time, and it is not possible for
        the
        Company or Bank to predict which will arise. In addition, management cannot
        assess the impact of each factor on the Bank’s business 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.
  **Item
        1. Business**
  **Overview**
  Pacific
        Coast National Bancorp - The
        Company, headquartered in San Clemente, California, was organized as a
        California corporation on July 2, 2003 to serve as a bank holding company
        for Pacific Coast National Bank. The Company became a bank holding company
        on
        May 16, 2005, following its initial public offering, upon the acquisition
        of all
        of the issued and outstanding shares of stock of the Bank. The Company raised
        a
        total of $22.8 million in its initial public offering and used $19.5 million
        of
        the proceeds of the offering to capitalize the Bank.
  The
        Company chose a holding company structure because it believed it would provide
        flexibility in accommodating the Company’s and Bank’s business objectives. For
        example, with a holding company structure, the Company may assist the Bank
        in
        maintaining its required capital ratios by borrowing money and contributing
        the
        proceeds of that debt to the Bank as primary capital. Additionally, under
        provisions of the Gramm-Leach-Bliley Act, if the Company elected to be a
        financial holding company, it could engage in activities that are financial
        in
        nature or incidental or complementary to a financial activity, including
        merchant banking activities, in which the Bank would be prohibited from
        engaging. Although the Company does not presently intend to engage in these
        financial activities, it would be able to do so without notice to or a filing
        with the Federal Reserve if it believes that there is a need for these services
        in its market area, that it can be successful in these activities, and that
        these activities would be profitable.
  3
  At
        this
        time, the Company engages in no material business operations other than owning
        and managing the Bank.
  Pacific
        Coast National Bank - On May
        16, 2005, the Bank began banking operations as a federally-chartered national
        bank, having received all necessary regulatory approvals. The FDIC insures
        the
        Bank’s deposit accounts up to the $100,000 maximum amount currently allowable
        under federal law. The Bank is subject to examination and regulation by the
        OCC
        and the FDIC. The Bank is further subject to regulations by the Federal Reserve
        Board concerning reserves to be maintained against deposits and certain other
        matters and is a member of the Federal Reserve Bank.
  The
        Bank
        is headquartered in San Clemente, California, and currently operates full
        service retail banking offices in San Clemente and Encinitas, California.
        The
        Bank offers a broad range of commercial and consumer banking services to
        small-
        to medium-sized businesses, independent single-family residential and commercial
        contractors and consumers. Lending services include consumer loans and
        commercial loans to small- to medium-sized
        businesses and professional concerns. The Bank offers a broad array of deposit
        services including demand deposits, regular savings accounts, money market
        accounts, certificates of deposit and individual retirement accounts. For
        the
        convenience of its customers, the Bank also offers credit and debit cards,
        automatic transfers, travelers’ checks, domestic and foreign wire transfers,
        cashier’s checks and personalized checks. These services are provided through a
        variety of delivery systems including automated teller machines, private
        banking, telephone banking and Internet banking. The Bank concentrates on
        providing superior customer service as it continues to enhance the products
        and
        services offered to its customers. The Bank’s website is
        www.pacificcoastnationalbank.com.
  **Philosophy
        and strategy**
  Pacific
        Coast National Bank operates 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, distinguishes the Bank from its
        competitors.
  To
        carry
        out its philosophy, the Bank’s business strategy involves 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;
  4
  ·
              Encouraging
                  the shareholders of the Company to become customers;
                  and
  ·
              Implementing
                  a strong marketing program.
  **Market
        opportunities**
  Primary
        service areas - The
        Bank’s primary service areas are the coastal regions of south Orange County and
        north San Diego County, which it serves from two locations. The main office
        is
        located at 905 Calle Amanecer, Suite 100, San Clemente, California, with
        a
        second 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. The 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.
  Local
        economy - The
        Bank believes that its 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 growth. As a community
        bank,
        the Bank is designed to serve the needs of the residents and small- to
        medium-sized businesses within this growing economy.
  Lending- The
        Bank faces significant competition in Southern California for new loans with
        other commercial banks, savings and loan associations, credit unions, credit
        companies, Wall Street lending conduits, mortgage bankers, life insurance
        companies and pension funds. Some of the largest financial institutions in
        the
        United States operate in California, and have extensive branch systems and
        advertising programs, which the Bank does not have. Large banks and savings
        and
        loan institutions frequently enjoy a lower cost of funds than the Bank and
        can
        therefore charge less than the Bank for loans. The Bank attempts to compensate
        for competitive pricing disadvantages that may exist by providing a higher
        level
        of personal service to borrowers and “hands on” involvement of senior officers
        to meet the borrowers’ needs.
  Deposits - The
        Bank competes for deposit funds with other financial companies, including
        banks,
        savings associations, credit unions and thrifts. These companies generally
        compete with one another based upon price, convenience and service. Although
        many of the Bank’s competitors offer customers a larger spectrum of products
        than the Bank, the Bank, as part of its strategic plan, continues to enhance
        the
        line of products and services offered to its customers.
  **Business
        strategy**
  Management
        philosophy - The
        Bank is a full-service commercial bank dedicated to providing superior customer
        service to the individuals and businesses in the communities it serves. The
        Bank
        offers a sophisticated array of financial products while emphasizing prompt,
        personalized customer service. Management believes that this philosophy,
        encompassing the service aspects of community banking, distinguishes the
        Bank
        from its competitors. The Bank endeavors to hire the most qualified and
        experienced people in the market who share its commitment to customer service
        and believes that this marketplace will provide 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 is implementing the following operating
        and
        growth strategies.
  Operating
        strategy - In
        order to achieve the level of prompt, responsive service that the Bank believes
        is necessary to attract customers and to develop its image as a local bank
        with
        a community focus, the Bank has employed the following operating strategies:
  5
  ·
              *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. Its Chief Executive Officer, Colin Forkner,
                  has 40
                  years of banking experience. Michael Hahn, its President and Chief
                  Operating Officer, has more than 20 years of banking experience.
                  Combined,
                  the four senior-most members of the Bank’s management team have more than
                  120 years of banking experience.
  ·
              *Quality
                  employees*.
                  The Bank has hired, and will continue to hire, highly trained and
                  seasoned
                  staff. Ongoing training has provided the staff with extensive knowledge
                  of
                  the Bank’s products and services allowing the first employee a customer
                  encounters to resolve most questions the customer may have.
  ·
              *Community-oriented
                  board of directors*.
                  The Bank’s 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.
  ·
              *Highly
                  visible sites*.
                  The Bank’s main office is highly visible and located in close proximity
                  to
                  major traffic arteries. The main office location is located at
                  905 Calle
                  Amanecer, Suite 100, San Clemente, California in an area that provides
                  easy access to potential banking customers living and working in
                  the San
                  Clemente area. The Bank also operates a second 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
                  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 believes that the distinctive name, “Pacific Coast National Bank”
                  enables the Bank to stand out from the pack and is memorable to
                  its
                  Southern California coastal customer
                  base.
  ·
              *Individual
                  customer focus*.
                  The Bank focuses on providing individual service and attention
                  to its
                  target customers, which include individuals and small- to medium-sized
                  businesses. The employees, officers and directors are familiar
                  with the
                  Bank’s customers on an individual basis, allowing the Bank to 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 has implemented an active officer and director call program
                  to
                  promote the Bank’s philosophy. The purpose of this call program is 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
                  implementing a targeted marketing program through local newspaper
                  advertising and direct-mail campaigns. They have assisted management
                  in
                  developing the Bank’s image as a locally owned and operated bank with an
                  emphasis on quality service and personal relationships.
  6
  Growth
        strategies -
        Because the Bank believes that the growth and expansion of its operations
        will
        be significant factors in its success, the Bank has implemented, or plans
        to
        implement, the following growth strategies:
  ·
              *Capitalize
                  on its community orientation*.
                  The Bank actively markets itself 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 emphasizes local decision-making by experienced bankers.
                  This
                  enhances the Bank’s ability to attract local businesses and service-minded
                  customers.
  ·
              *Employ
                  experienced lending officers*.
                  The Bank has hired, and will continue to hire, experienced, well-trained
                  lending officers knowledgeable in the local real estate and commercial
                  markets. By hiring experienced lending officers, the Bank has been
                  able to
                  attract local businesses who appreciate dealing with bankers who
                  know
                  their business.
  ·
              *Offer
                  fee-generating products and services*.
                  The Bank’s range of services, pricing strategies, interest rates paid and
                  charged and hours of operation are structured to attract the Bank’s target
                  customers and increase its market share. The Bank strives 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**
  The
        Bank
        offers a full range of lending products, including commercial loans to small
        to
        medium-sized businesses and professionals, and consumer loans to
        individuals. Management understands that the Bank is competing for these
        loans
        with competitors who are well established in its primary market area and
        have
        greater resources and lending limits.
  Lending
        policy - The
        Bank’s current loan origination activities are governed by established policies
        and procedures intended to mitigate the risks inherent to the types of
        collateral and borrowers financed by the Bank. The Bank’s strategic focus
        includes an effective, efficient and responsive transaction execution, which
        is
        consistent with the Bank’s relatively flat organizational structure and its
        reliance upon relatively few, highly-skilled lending professionals. This
        results
        in a rapid response to credit requests provided through local decision making
        and provides the Bank with a competitive advantage.
  The
        Bank’s loan approval policies 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 credit committee determines whether to approve the loan request.
        The Bank does not make loans to any of its directors unless the loan receives
        prior approval by the board of directors, excluding the interested party,
        and
        the terms of the loan are no more favorable than would be available to any
        comparable borrower. Although permitted by law to do so, the Bank has chosen
        not
        to lend to its executive officers.
  Lending
        limits - The
        Bank’s lending activities are 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 is able
        to loan to 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.
  7
  Credit
        risks - The
        principal economic risk associated with each category of loans that the Bank
        makes 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 make
        proportionately more loans to medium- to large-sized businesses than the
        Bank
        makes. Many of the Bank’s commercial loans are and/or 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 makes, or plans to make, commercial real estate loans, construction
        and
        development loans, small business loans and residential real estate loans.
        These
        may 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. At December 31, 2005, the Bank held $7.8 million in loans secured
        by
        real estate, representing 75.3% of gross loans receivable, and undisbursed
        commitments of $1.2 million. These classes of real estate loans are described
        below.
  ·
              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 monthly. 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 an experienced construction lender or third-party inspector
                  has
                  inspected the project. Risks associated with construction loans
                  include
                  fluctuations in the value of real estate and new job creation trends.
                  At
                  December 31, 2005, the Bank had no construction and development
                  loans.
  ·
              Commercial
                  real estate-
                  Commercial real estate loan terms generally are limited to fifteen
                  years
                  or less, although payments may be structured on a longer amortization
                  basis. Interest rates may be fixed for three to five years, or
                  adjustable.
                  The Bank generally charges an origination fee for its services.
                  The Bank
                  generally requires 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 limits its risk by analyzing borrowers’
                  cash flow and collateral value on an ongoing basis. At December
                  31, 2005,
                  the Bank held $6.6 million in commercial real estate loans outstanding,
                  representing 64.3% of gross loans receivable, and undisbursed commercial
                  real estate loan commitments of $27 thousand.
  ·
              Residential
                  real estate-
                  The Bank’s residential real estate loans consist of residential second
                  mortgage loans and residential construction loans. All loans are
                  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. At December 31, 2005, the Bank held $541 thousand
                  in
                  residential real estate loans outstanding, representing 5.2% of
                  gross
                  loans receivable, and undisbursed commitments of $1.2 million.
  8
  Commercial
        loans - The
        Bank expects that loans for commercial purposes in various lines of businesses
        will be one of the major components of its loan portfolio. The target commercial
        loan market is retail establishments and small- to medium-sized businesses.
        The
        terms of these loans vary by purpose and by type of underlying collateral,
        if
        any. The commercial loans are primarily underwritten on the basis of the
        borrower’s ability to service the loan from income. The Bank typically makes
        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
        typically have terms not exceeding one year and are usually secured by accounts
        receivable, inventory or personal guarantees of the principals of the business.
        For loans secured by accounts receivable or inventory, principal is typically
        repaid as the assets securing the loan are converted into cash, and for loans
        secured with other types of collateral, principal is 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. At December 31, 2005, the Bank held $2.5 million in commercial
        loans outstanding, representing 24.0% of gross loans receivable, and undisbursed
        commitments of $3.9 million.
  Small
        Business Administration (SBA) loans - SBA
        loans continue to increase in popularity as an attractive means for businesses
        to fund purchases of real estate and business expansion. The Bank’s SBA lending
        department has the expertise to offer two types of SBA-guaranteed loans to
        business clients, depending on the business needs and underlying
        collateral.
  ·
              SBA
                  504-
                  SBA 504 second trust deed loan terms are generally limited to six
                  months
                  or less, and interest rates are adjustable. The Bank generally
                  charges an
                  origination fee for its services. The Bank generally requires 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
                  limits its risk by analyzing borrowers’ cash flow and collateral value on
                  an ongoing basis. At December 31, 2005, the Bank held $602 thousand
                  in
                  commercial real estate SBA 504 loans outstanding, representing
                  5.8% of
                  gross loans receivable. There were no undisbursed commitments for
                  SBA 504
                  loans.
  ·
              SBA
                  7A-**The
                  Bank expects that SBA 7A loans for commercial purposes in various
                  lines of
                  businesses will be an important part its commercial loan portfolio.
                  The
                  target market for SBA 7A loans is retail establishments and small-
                  to
                  medium-sized businesses. The terms of these loans vary by purpose
                  and by
                  type of underlying collateral. The loans are primarily underwritten
                  on the
                  basis of the borrower’s ability to service the loan from income. Under the
                  SBA 7A loan program the loans carry a Small Business Administration
                  guaranty up to 75% of the loan. Typical maturities for this type
                  of loan
                  vary up to ten years. 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
                  an SBA 7A
                  borrower’s creditworthiness. At December 31, 2005, the Bank had no SBA 7A
                  loans.
  9
  Consumer
        and other lending - The
        Bank makes 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 overdrafts, which are done on a case-by-case
        basis as an accommodation for the Bank’s clients. The amortization of second
        mortgages generally does not exceed 15 years and the rates are generally
        fixed
        for 12 months or longer. 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 officers 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.
        The
        principal competitors for consumer loans are the established banks and finance
        companies in the Bank’s market areas. At December 31, 2005, the Bank held $72
        thousand in consumer loans outstanding, representing 0.7% of gross loans
        receivable, and undisbursed commitments of $25 thousand.
  Composition
        of portfolio - The
        following table sets forth the composition of the Bank’s loan portfolio as of
        December 31, 2005.
 2005Real
                    estate
                
                $
                7,791,112Commercial
                
                
                2,483,127Consumer
                
                
                72,25910,346,498Deferred
                    loan fees
                
                
                (29,168
                )Allowance
                    for loan losses
                
                
                (87,208
                )$
                10,230,122
  Average
        loan size of portfolio - The
        following table sets forth the Bank’s average loan size by loan portfolio
        composition for 2005.
 Number
                    of
                
                AverageLoans
                
                Loan
                    SizeReal
                    estate - California
                
                
                20
                
                $
                389,556Commercial
                
                
                9
                
                
                275,903Consumer
                
                
                11
                
                
                6,56940
                
                
                258,662
  Loan
        originations - The
        following table sets forth the Bank’s loan originations for 2005, including
        loans participations that were sold without recourse to other
        banks.
  10
 2005Real
                    estate
                
                $
                12,329,250Commercial
                
                
                6,463,911Consumer
                
                
                98,160$
                18,891,321
  Repricing
        of portfolio - The
        following table summarizes the maturities for fixed rate loans and the repricing
        intervals for adjustable rate loans as of December 31, 2005.
 Principal
                    BalanceInterval
                
                Fixed
                    Rate
                
                Adjustable
                    Rate
                
                Total<3 months
                
                $
                26,026
                
                $
                3,377,331
                
                $
                3,403,357>3 to 12
                    months
                
                
                -
                
                
                3,087,569
                
                
                3,087,569>1 to 3
                    Years
                
                
                -
                
                
                -
                
                
                ->3 to 5
                    years
                
                
                675,854
                
                
                2,653,518
                
                
                3,329,372>5 to 10
                    years
                
                
                -
                
                
                526,200
                
                
                526,200Gross
                    Loans Receivable
                
                $
                701,880
                
                $
                9,644,618
                
                $
                10,346,498
  Contractual
        maturity of portfolio - The
        following table sets forth information at December 31, 2005, regarding the
        dollar amount of loans maturing in the Bank’s portfolio based on the contractual
        terms to maturity or scheduled amortization. The table does not give effect
        to
        potential prepayments. Loans that have no stated schedule of repayments or
        maturity are reported as due in one year or less.
 <1
                    Year
                
                1
                    -
                    5 years
                
                5
                    -
                    10 years
                
                Over
                    10 years
                
                Total
                    loansReal
                    estate
                
                $
                1,523,824
                
                $
                3,087,568
                
                $
                2,039,720
                
                $
                1,140,000
                
                $
                7,791,112Commercial
                
                
                1,848,949
                
                
                634,178
                
                
                -
                
                
                -
                
                
                2,483,127Consumer
                
                
                30,583
                
                
                41,676
                
                
                -
                
                
                -
                
                
                72,259Gross
                    Loans Receivable
                
                $
                3,403,356
                
                $
                3,763,422
                
                $
                2,039,720
                
                $
                1,140,000
                
                $
                10,346,498
  **Asset
        quality**
  General - The
        Bank’s Directors’ Credit Committee, consisting of the Bank’s Chief Executive
        Officer, President, Chief Credit Officer, and four outside board members,
        monitors the credit quality of the Bank’s assets, reviews classified and other
        identified loans and determines the proper level of allowances to allocate
        against the Bank’s loan portfolio, in each case subject to guidelines approved
        by the Bank’s board of directors.
  Loan
        delinquencies - When a
        borrower fails to make a required payment on a loan, the Bank attempts to
        cure
        the deficiency by contacting the borrower and seeking payment. Contact is
        generally made following the fifteenth day after a payment is due, at which
        time
        a late payment fee is assessed. In most cases, deficiencies are cured promptly.
        If a delinquency extends beyond 15 days, the loan and payment history are
        reviewed and efforts are made to collect the loan. While the Bank generally
        prefers to work with borrowers to resolve such problems, if a payment becomes
        45
        days delinquent, the Bank may institute foreclosure or other proceedings,
        as
        necessary, to minimize any potential loss. As of December 31, 2005, there
        were
        no delinquent loan payments.
  11
  Non-performing
        assets - At
        December 31, 2005, the Bank had no nonperforming assets. Nonperforming assets
        are defined as non-accrual loans and real estate acquired by foreclosure
        or
        deed-in-lieu thereof. Nonperforming loans are defined as non-accrual loans
        and
        loans 90 days or more past due but still accruing interest, to the extent
        applicable. A loan is considered to be impaired if management determines
        the
        recovery of the Bank’s gross investment in the loan is not probable. Troubled
        debt restructurings (“TDRs”) are defined as loans which the Bank has agreed to
        modify by accepting below market terms either by granting interest rate
        concessions or by deferring principal and/or interest payments. Loans are
        placed
        on non-accrual status when, in the judgment of management, the probability
        of
        collection of interest is deemed to be insufficient to warrant further accrual.
        When any such loan is placed on non-accrual status, previously accrued but
        unpaid interest will be deducted from interest income. As a matter of policy,
        the Bank does not accrue interest on loans past due 90 days or more. There
        were
        no loans placed on non-accrual during 2005.
  Classified
        assets -
        Federal regulations require that each insured financial institution classify
        its
        assets on a regular basis. In addition, in connection with examinations of
        insured institutions, federal examiners have authority to identify problem
        assets and, if appropriate, classify them. The Bank has established three
        classifications for potential problem assets: “substandard,” “doubtful” and
“loss.” Substandard assets have one or more defined weaknesses and are
        characterized by the distinct possibility that the insured institution will
        sustain some loss if the deficiencies are not corrected. Doubtful assets
        have
        the weakness of substandard assets with the additional characteristic that
        the
        weaknesses make collection or liquidation in full on the basis of currently
        existing facts, conditions and values questionable, and there is a high
        possibility of loss. An asset classified as loss is considered uncollectible,
        and of such little value that continuance as an asset of the institution
        is not
        warranted. The Bank has established another category, designated “Other Assets
        Especially Mentioned” (OAEM), for assets which do not currently expose the Bank
        to a sufficient degree of risk to warrant classification as substandard,
        doubtful or loss. Assets classified as OAEM, substandard or doubtful result
        in
        the Bank establishing higher levels of general allowances for loan losses.
        If an
        asset or portion thereof is classified loss, the Bank must either establish
        specific allowances for loan losses in the amount of 100% of the portion
        of the
        asset classified as loss, or charge off such an amount. At December 31, 2005,
        the Bank had no classified assets.
  Allowance
        for loan losses - The
        Bank maintains an allowance for estimated loan losses based on a number of
        quantitative and qualitative factors. Quantitative factors used to assess
        the
        adequacy of the allowance for loan losses are established based upon
        management’s assessment of the credit risk in the portfolio, historical loan
        loss experience and the Bank’s loan underwriting policies as well as
        management’s judgment and experience. Provisions for loan losses may be provided
        both on a specific and general basis. Specific and general valuation allowances
        are increased by provisions charged to expense and decreased by charge-offs
        of
        loans, net of recoveries. Specific allowances are provided for impaired loans
        for which the expected loss is measurable. General valuation allowances are
        provided based on a formula that incorporates the factors discussed above.
        The
        Bank periodically reviews the assumptions and formula by which additions
        are
        made to the specific and general valuation allowances for losses in an effort
        to
        refine such allowances in light of the current status of the factors described
        above. The Bank did not have any loan losses in 2005.
  The
        following table sets forth the activity for 2005 in the Bank’s allowance for
        loan losses account.
  12
 2005Balance
                    at beginning of year
                
                $
                -Provision
                    charged to expense
                
                
                87,208Loans
                    charged off
                
                
                -Recoveries
                    on loans previously charged off
                
                
                -Balance
                    at end of year
                
                $
                87,208
  The
        following table sets forth information concerning the allocation of the
        allowance for loan losses, which is maintained on the Bank’s loan portfolio, by
        loan category at December 31, 2005.
 Percentageof
                    loans in
                
                
                
                Percentageeach
                
                Percentage
                
                of
                    reservescategory
                    to
                
                of
                    year-end
                
                to
                    net loansAmount
                
                total
                    loans
                
                allowance
                
                by
                    categoryReal
                    estate
                
                $
                44,251
                
                
                75.3
                %
                
                50.7
                %
                
                0.6
                %Commercial
                
                
                12,605
                
                
                24.0
                %
                
                14.5
                %
                
                0.5
                %Consumer
                
                
                75
                
                
                0.7
                %
                
                0.1
                %
                
                0.1
                %Unallocated
                
                
                30,277
                
                
                
                
                
                34.7
                %Total
                    Allowance for Loan Losses
                
                $
                87,208
                
                
                100.0
                %
                
                100.0
                %
                
                0.8
                %
  The
        allowance for loan losses reflects management’s judgment of the level of
        allowance adequate to absorb estimated credit losses in the Bank’s loan
        portfolio. The board of directors of the Bank approved a policy formulated
        by
        management for a systematic analysis of the adequacy of the allowance. The
        major
        elements of the policy require: (1) a quarterly analysis of allowance amounts
        performed by management; (2) approval by the Bank’s board of directors of the
        quarterly analysis; and (3) allocation of the allowance into general and
        specific valuation allowance categories. The general valuation allowance
        includes an unallocated amount, based upon management’s evaluation of various
        conditions, such as general economic and business conditions affecting the
        Bank’s key lending areas, the effects of which may not be directly measured in
        the determination of the general valuation allowance formula and specific
        allowances. The evaluation of the inherent loss with respect to these conditions
        is subject to a high degree of uncertainty because they are not identified
        with
        specific problem credits or portfolio components. Management currently intends
        to maintain an unallocated allowance, in the range of 5% to 7.5% of the total
        general valuation allowance, for the inherent risk associated with imprecision
        in estimating the allowance, and an additional 25% to 30% of the total general
        valuation allowance to account for the lack of historical trends within the
        Bank’s target market segment and the loan portfolio.
  The
        Bank’s external asset review system and loss allowance methodology are designed
        to provide for timely identification of problem assets and recognition of
        losses. The overall adequacy of the allowance for loan losses is reviewed
        by the
        Directors’ Credit Committee on a monthly basis and submitted to the board of
        directors for approval, on a quarterly basis. The committee’s responsibilities
        consist of risk management, as well as problem loan management, which include
        ensuring proper risk grading of all loans and analysis of specific valuation
        allowances for all classified loans. The current monitoring process includes
        a
        process of segmenting the loan portfolio into pools of loans that share similar
        credit characteristics. The loan portfolio is currently segmented into seven
        different risk grades. These specific pools of loans are analyzed for purposes
        of calculating the general valuation allowance in accordance with Statement
        of
        Financial Accounting Standards (“SFAS”) No. 5.
  13
  The
        general valuation allowance is derived by analyzing the historical loss
        experience and asset quality within each homogeneous loans portfolio segment,
        along with assessing qualitative environmental factors, and correlating it
        with
        the delinquency and classification status for each portfolio segment. A grading
        system with seven classification categories is used, including assets classified
        as Pass, which is divided into seven risk grade levels, based upon credit
        risk
        characteristics. Each loan asset is categorized by risk grade allowing for
        a
        more consistent review of similar loan assets. A loss factor is applied to
        each
        risk graded loan segment.
  Loss
        factors for each risk graded loan segment are based on experience of peer
        institutions, national and regional averages published the OCC and FDIC.
        Given
        that the Bank has extremely limited historical trends, peer group statistics
        are
        used to validate the loss factors applied to the Bank’s various loan segments.
        In addition, the following qualitative environmental elements are considered
        in
        determining the loss factors used in calculating the general valuation
        allowance: the levels of and trends in past due, non-accrual and impaired
        loans;
        the trend in volume and terms of loans; the effects of changes in credit
        concentrations; the effects of changes in risk selection and underwriting
        standards, and other changes in lending policies, procedures and practices;
        the
        experience, ability and depth of management and other relevant staff; national
        and local economic trends and conditions; and industry conditions.
  At
        December 31, 2005, the Bank had no classified credits, and insufficient data
        for
        historical trends. In the future, as loans move into the classified categories,
        they will be reviewed individually for purposes of determining specific
        valuation allowances and impairment as defined in SFAS No. 114. Loans are
        reviewed individually on an annual basis. In addition, classified assets
        are
        reviewed at the time the loan is classified and on a regular basis (at least
        every 90 days) thereafter. This evaluation of individual loans is documented
        in
        the internal asset review report relating to the specific loan. An impairment
        analysis is completed with each internal asset review report, typically on
        a
        quarterly basis, for all classified loans secured by real estate. Any
        deficiencies outlined by the impairment analysis are accounted for in the
        specific valuation allowance for the loan. A loan is determined to be impaired
        if management determines the recovery of the Bank’s gross investment is not
        probable. A specific valuation allowance is applied if the amount of loss
        can be
        reasonably determined. To determine impairment under SFAS No. 114, management
        assesses the current operating statement requested from the borrower (although
        they may not always be received from the borrower), the property’s current and
        past performance, borrower’s ability (defined as capacity, willingness and
        rationale) to repay and the overall condition and estimated value of the
        collateral. If a loan is deemed impaired, a specific valuation allowance
        is
        applied equal to the amount the Bank’s total investment in the varying value of
        the loan that exceeds the fair value of the collateral. The fair value of
        impaired loans is measured based on present value of expected future cash
        flows
        discounted at the loan’s effective interest rate or, as a practical expedient,
        at the loan’s observable market price or the fair value of the collateral if the
        loan is collateral dependent.
  The
        allowance requirements for any loan segment could be different in the future
        as
        the quantitative and qualitative factors change. Consequently, provision
        levels
        may also be influenced by changes in the quantitative and qualitative factors
        quarter over quarter. In addition, various regulatory agencies, as an integral
        part of their examination process, periodically review the Bank’s valuation
        allowance. These agencies may require increases to the allowance based on
        their
        judgments of the information available to them at the time of their
        examination.
  14
  Management
        believes that the Bank’s overall asset quality is sound, as supported by the
        Bank’s internal risk rating process. The Bank had no classified assets as of
        December 31, 2005.
  **Investments**
  In
        addition to loans, the Bank makes 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 exceeds any applicable limitation imposed by law or regulation.
        The
        asset-liability management committee reviews 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.
  Investment
        securities that management has the positive intent and ability to hold to
        maturity are classified as “held-to-maturity” and recorded at amortized cost.
        Securities not classified as held-to-maturity or trading, with readily
        determinable fair values, are classified as “available-for-sale” and recorded at
        date value, with unrealized gains and losses excluded from earnings and reported
        in other comprehensive income, as part of stockholders’ equity. Currently, all
        investment securities of the Bank are classified as
        held-to-maturity.
  Declines
        in fair value of held-to-maturity and available-for-sale securities below
        their
        cost that are deemed to be other than temporary are reflected in earnings
        as
        realized losses. Gains and losses on the sale of securities are recorded
        on the
        trade date and are determined using the specific identification method. Purchase
        premiums and discounts are recognized in interest income using the interest
        method over the estimated lives of the securities.
  The
        table
        below sets forth the amounts and distribution of the investment securities
        and
        the weighted average yields as of December 31, 2005.
 WeightedMarket
                
                AverageBook
                    Value
                
                Value
                
                Yield**Securities
                    held to maturity****U.S.
                    Government and Agency Securities:**Within
                    One Year
                
                $
                6,001,108
                
                $
                5,984,120
                
                
                4.17
                %One
                    to Five Years
                
                
                1,996,835
                
                
                1,983,760
                
                
                4.35
                %**Total
                    Securities held to maturity**
                
                $
                7,997,943
                
                $
                7,967,880
                
                
                4.22
                %
  The
        table
        below sets forth the net balance at cost, and fair value of held-to-maturity
        investment securities, with gross unrealized gains and losses as of December
        31,
        2005.
  15
 Amortized
                
                Unrealized
                
                Unrealized
                
                EstimatedCost
                
                Gains
                
                Losses
                
                Fair
                    Value**Securities
                    held to maturity:**U.S.
                    Government andAgency
                    Securities
                
                $
                7,997,943
                
                $
                -
                
                $
                (
                    30,063
                )
                $
                7,967,880
  **Deposit
        services**
  The
        Bank
        offers a variety of deposit products and services at competitive interest
        rates.
        The Bank utilizes traditional and innovative marketing methods to attract
        new
        clients and deposits, including various forms of advertising and significant
        involvement in the local communities. The Bank also intends to leverage its
        broad shareholder base as a source for local banking relationships. The primary
        sources of deposits are residents of, and businesses and their employees
        located
        in, the Bank’s primary service areas. The Bank attracts these deposits through
        personal solicitation by its officers and directors, direct mail solicitations
        and advertisements published in the local media. The Bank does not operate
        a
        money desk or otherwise solicit brokered deposits.
  The
        following table sets forth the amount and maturities of the time deposits
        as of
        December 31, 2005.
  Time
                    Deposits of $100,00
                    or more
                
                Other
                    Time Deposits
                
                Total
                    Time Deposits(Dollars
                    in thousands)Three
                    months or less
                
                $
                -
                
                
                10
                
                $
                10Over
                    three months through six months
                
                
                602
                
                
                251
                
                
                853Over
                    six months through 12 months
                
                
                1,810
                
                
                1,206
                
                
                3,016Over
                    12 months
                
                
                -
                
                
                -
                
                
                -Total
                    Time Deposits
                
                $
                2,412
                
                $
                1,467
                
                $
                3,879
  **SUPERVISION
        AND REGULATION**
  **General** **-** 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 OCC, 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.
  16
  **Pacific
        Coast National Bancorp** - The
        Company is a bank holding company subject to regulatory oversight by the
        Federal
        Reserve. As such, the Company is required to register and file reports with
        the
        Federal Reserve and is subject to regulation and examination by the Federal
        Reserve. In addition, the Federal Reserve has enforcement authority over
        the
        Company and its subsidiaries, which also permits the Federal Reserve to restrict
        or prohibit activities that are determined to be a serious risk to the
        subsidiary bank.
  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.
  17
  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;
  ·
                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;
  18
  ·
                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.
  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 Business Corporation Act of 1957” from paying
        dividends under certain conditions.
  19
  **Pacific
        Coast National Bank** **** -
        As a
        national bank, the Bank is subject to extensive regulation by the OCC and
        the
        FDIC. Lending activities and other investments of the Bank must comply with
        various statutory and regulatory requirements. The Bank is also subject to
        certain reserve requirements promulgated by the FRB.
  The
        OCC,
        in conjunction with the FDIC, regularly examines the Bank and prepares reports
        for the consideration of the Bank’s board of directors on any deficiencies found
        in the operations of the Bank. The relationship between the Bank and the
        depositors and borrowers is also regulated by federal and state laws, especially
        in such matters as the ownership of deposit accounts and the form and content
        of
        consumer loan documents utilized by the Bank.
  The
        Bank
        must file reports with the OCC and the FDIC concerning its activities and
        financial condition, in addition to obtaining regulatory approvals prior
        to
        entering into certain transactions such as mergers with or acquisitions of
        other
        financial institutions. This regulation and supervision establishes a
        comprehensive framework of activities in which an institution can engage
        and is
        intended primarily for the protection of the FDIC and depositors. The regulatory
        structure also gives the regulatory authorities extensive discretion in
        connection with their supervisory and enforcement activities and examination
        policies, including policies with respect to the classification of assets
        and
        the establishment of adequate loan loss allowance for regulatory purposes.
        Any
        change in such regulations, whether by the OCC, the FDIC, or Congress could
        have
        a material adverse impact on the Company, the Bank, and their operations.
  Federal
        Financial Institutions Examination Council (FFIEC): *Authentication
        in an Internet Banking Environment* - On
        October 12, 2005, the Federal Financial Institutions Examination Council
        (FFIEC)
        issued guidance, “Authentication in an Internet Banking Environment.” This
        updated interagency guidance, which replaces the FFIEC’s *Authentication
        in an Electronic Banking Environment,* issued
        in
        2001, specifically addresses the need for risk-based assessment, customer
        awareness, and security measures to authenticate customers using a financial
        institution’s Internet-based services.
  This
        guidance applies to both retail and commercial customers and does not endorse
        any particular technology. National banks should use this guidance when
        evaluating and implementing authentication systems and practices whether
        they
        are provided internally or by a technology service provider. Although this
        guidance is focused on the risks and risk management techniques associated
        with
        the Internet delivery channel, the principles are applicable to all forms
        of
        electronic banking activities.
  Consistent
        with the *FFIEC
        Information Technology Examination Handbook* ,
        Information Security Booklet December 2002, financial institutions should
        periodically:
 ●
                Ensure
                    that their information security
                    program:
  -
                Identifies
                    and assesses the risks associated with Internet-based products
                    and
                    services;
 -
                Identifies
                    risk mitigation actions, including appropriate authentication
                    strength;
                    and
 -
                Measures
                    and evaluates customer awareness
                    efforts;
 
 ●
                Adjust,
                    as appropriate, their information security program in light of
                    any
                    relevant changes in technology, the sensitivity of their customer
                    information, and internal or external threats to information;
                    and
  20
  ●
                Implement
                    appropriate risk mitigation
                    strategies.
  The
        Bank
        will be working with its Electronic Banking vendors to implement a dual
        authentication product for its online banking products, fully assess the
        risks
        associated with all internet based products and implementing effective controls
        and procedures to mitigate these risks. The implementation of the new
        authentication system will entail detailed customer awareness and education
        program as well as an increase in the Bank’s expenses associated with these
        products. The Bank anticipates implementation of this program during the
        third
        and fourth quarters of 2006.
  Fair
        and Accurate Credit Transactions Act - The
        Fair and Accurate Credit Transactions Act (FACT Act) establishes new obligations
        for financial firms to help deter identity theft and give consumers more
        control
        of their credit data. It also reauthorizes a federal ban on state laws that
        interfere with corporate credit granting and marketing practices. The provisions
        of this law include:
  ·
              Marketing
                  solicitations based on information from
                  affiliates;
  ·
              Preventing
                  the re-pollution of consumer
                  reports;
  ·
              Identity
                  theft provisions; and
  ·
              Other
                  miscellaneous provisions including most recently the use of medical
                  information for credit eligibility and requirements for data
                  disposal.
  These
        provisions are provided to ensure the protection of a consumer’s rights and
        information and to standardize procedures in processing and handling certain
        customer information.
  Check
        Clearing for the 21 st Century Act .
        The
“Check Clearing for the 21 st Century
        Act” (Check 21), which became effective on October 28, 2004, gives “substitute
        checks,” such as a digital image of a check and copies made from that image, the
        same legal standing as the original paper check. Some of the major provisions
        include:
  ●
                allowing
                    check truncation without making it
                    mandatory;
  ●
                demanding
                    that every financial institution communicate to accountholders
                    in writing
                    a description of its substitute check processing program and
                    their rights
                    under the law;
  ●
                legalizing
                    substitutions for and replacements of paper checks without agreement
                    from
                    consumers;
  ●
                retaining
                    in place the previously mandated electronic collection and return
                    of
                    checks between financial institutions only when individual agreements
                    are
                    in place;
  ●
                requiring
                    that when accountholders request verification, financial institutions
                    produce the original check (or a copy that accurately represents
                    the
                    original) and demonstrate that the account debit was accurate
                    and valid;
                    and
  ●
                requiring
                    recrediting of funds to an individual’s account on the next business day
                    after a consumer proves that the financial institution has
                    erred.
  The
        Company expects that this legislation will likely affect bank capital spending
        as many financial institutions assess whether technological or operational
        changes are necessary to stay competitive and take advantage of the new
        opportunities presented by Check 21.
  21
  Privacy -
        Federal banking rules limit the ability of banks and other financial
        institutions to disclose non-public information about consumers to nonaffiliated
        third parties. Under these rules, financial institutions must
        provide:
  ·
              Initial
                  notices to customers about their privacy policies, describing the
                  conditions under which they may disclose nonpublic personal information
                  to
                  nonaffiliated third parties and
                  affiliates;
  ·
              Annual
                  notices of their privacy policies to current customers;
                  and
  ·
              A
                  reasonable method for customers to “opt out” of disclosures to
                  nonaffiliated third parties.
  In
        recent
        years, a number of states have implemented their own versions of privacy
        laws.
        For example, in 2003, California adopted standards that are tougher than
        federal
        law, allowing banks customers the opportunity to bar financial institutions
        from
        sharing information with their affiliates.
  These
        privacy provisions affect how consumer information is transmitted through
        diversified financial companies and conveyed to outside vendors. The Bank
        has
        implemented privacy policies designed to comply with these laws.
  USA
        Patriot Act of 2001  **-** 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.
  22
  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. Under
        the
        authority of the Patriot Act, the Secretary of the Treasury has also adopted
        rules 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;
  ●
                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 Security 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 has also adopted a rule 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.
  Di vidends .
        The
        Bank is required by federal law to obtain prior approval of the OCC for payments
        of dividends if the total of all dividends declared by its board of directors
        in
        any year would 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 Bank commenced
        operations with an accumulated deficit as a result of organizational expenses,
        and the Company expects the Bank to generate losses during its early periods
        of
        operations. Accordingly, the Bank will be unable to pay dividends until the
        accumulated deficit is eliminated.
  23
  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 OCC 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 OCC, the Bank is
        engaged in an unsound practice (which could include the payment of dividends),
        the OCC may require, generally after notice and hearing, that the Bank cease
        such practice. The OCC 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 OCC has also issued policy statements providing
        that insured depository institutions generally should pay dividends only
        out of
        current operating earnings.
  Loans-to-one-borrower
        limitations - With
        certain limited exceptions, the maximum amount that a national bank may lend
        to
        any borrower (including certain related entities of the borrower) at one
        time
        may not exceed 15% of the unimpaired capital and surplus of the institution,
        plus an additional 10% of unimpaired capital and surplus for loans fully
        secured
        by readily marketable collateral.
  At
        December 31, 2005, the Bank’s loans-to-one-borrower limit was $2,673,000 based
        upon the 15% of unimpaired capital and surplus measurement. At December 31,
        2005, the Bank’s two largest lending relationships had outstanding balances of
        $2,489,700, which consisted of eight loans secured by commercial real estate,
        and $1,354,000, which consisted of two loans, secured by commercial real
        estate
        and included an SBA guarantee on a portion of the second trust deed. These
        loans
        were performing in accordance with their terms.
  Restrictions
        on transactions with affiliates and loans to insiders. The Bank
        is 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.
  24
  The
        Bank
        is also subject to the provisions of section 23B of the Federal Reserve Act
        which, among other things, prohibits it 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.
  Capital standards - The
        federal banking agencies have adopted risk-based minimum capital guidelines
        intended to provide a measure of capital that reflects the degree of risk
        associated with a banking organization’s operations for both transactions
        reported on the balance sheet as assets and transactions which are recorded
        as
        off balance sheet items. Under these guidelines, nominal dollar amounts of
        assets and credit equivalent amounts of off balance sheet items are multiplied
        by one of several risk adjustment percentages, which range from 0% for assets
        with low credit risk federal banking agencies, to 100% for assets with
        relatively high credit risk.
  The
        risk-based capital ratio is determined by classifying assets and certain
        off-balance sheet financial instruments into weighted categories, with higher
        levels of capital being required for those categories perceived as representing
        greater risk. Under the capital guidelines, a banking organization’s total
        capital is divided into tiers. “Tier I capital” consists of 1) common equity, 2)
        qualifying noncumulative perpetual preferred stock, 3) a limited amount of
        qualifying cumulative perpetual preferred stock, and 4) minority interest
        in the
        equity accounts of consolidated subsidiaries (including trust-preferred
        securities), less goodwill and certain other intangible assets. Not more
        than
        25% of qualifying Tier I capital may consist of trust-preferred securities.
        “Tier II capital” consists of hybrid capital instruments, perpetual debt,
        mandatory convertible debt securities, a limited amount of subordinated debt,
        preferred stock that does not qualify as Tier I capital, a limited amount
        of the
        allowance for loan and lease losses and a limited amount of unrealized holding
        gains on equity securities. “Tier III capital” consists of qualifying unsecured
        subordinated debt. The sum of Tier II and Tier III capital may not exceed
        the
        amount of Tier I capital.
  The
        guidelines require a minimum ratio of qualifying total capital to risk-adjusted
        assets of 8% and a minimum ratio of Tier I capital to risk-adjusted assets
        of
        4%. In addition to the risk-based guidelines, federal banking regulators
        require
        banking organizations to maintain a minimum of Tier I capital to average
        total
        assets, referred to as the leverage ratio. For a banking organization rated
        in
        the highest of the 5 categories used by the regulators to rate banking
        organizations, the minimum leverage ratio of Tier I capital to total assets
        must
        be 3%. In addition to these uniform risk-based capital guidelines and leverage
        ratios that apply across the industry, the regulators have the discretion
        to set
        individual minimum capital requirements for specific institutions at rates
        significantly above the minimum guidelines and ratios. During the first three
        years of the Bank’s operations, it is required to maintain a leverage ratio of
        at least 8%.
  In
        addition, federal banking regulators may set capital requirements higher
        than
        the minimums described above for financial institutions whose circumstances
        warrant it. For example, a financial institution experiencing or anticipating
        significant growth may be expected to maintain capital positions substantially
        above the minimum supervisory levels without significant 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.
  25
  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.
  Prompt
        corrective action and other enforcement mechanisms - 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.
  In
        addition to measures taken under the prompt corrective action provisions,
        commercial banking organizations may be subject to potential enforcement
        actions
        of federal regulators for unsafe or unsound practices in conducting their
        business or for violations of any law, rule, regulation, or any condition
        imposed in writing by the agency or any written agreement with the agency.
        Finally, pursuant to an interagency agreement, the FDIC can examine any
        institution that has a substandard regulatory examination score or is considered
        undercapitalized - without the express permission of the institution’s primary
        regulator.
  Safety
        and soundness standards - The
        federal banking agencies have adopted guidelines designed to assist the federal
        banking agencies in identifying and addressing potential safety and soundness
        concerns before capital becomes impaired. The guidelines set forth operational
        and managerial standards relating to: (i) internal controls, information
        systems
        and internal audit systems, (ii) loan documentation, (iii) credit underwriting,
        (iv) asset growth, (v) earnings, and (vi) compensation, fees, and benefits.
        In
        addition, the federal banking agencies have also adopted safety and soundness
        guidelines with respect to asset quality and earnings standards. These
        guidelines provide 6 standards for establishing and maintaining a system
        to
        identify problem assets and prevent those assets from deteriorating. Under
        these
        standards, an insured depository institution should: (i) conduct periodic
        asset
        quality reviews to identify problem assets, (ii) estimate the inherent losses
        in
        problem assets and establish reserves that are sufficient to absorb estimated
        losses, (iii) compare problem asset totals to capital, (iv) take appropriate
        action to resolve problem assets, (v) consider the size and potential risks
        of
        material asset concentrations, and (vi) provide periodic asset quality reports
        with adequate information for management and the board of directors to assess
        the level of asset risk. These guidelines also set forth standards for
        evaluating and monitoring earnings and for ensuring that earnings are sufficient
        for the maintenance of adequate capital and reserves.
  26
  Premiums
        for deposit insurance -
        Through the Bank Insurance Fund (“BIF”), the FDIC insures deposits of the Bank’s
        customers up to prescribed limits for each depositor. The amount of FDIC
        assessments paid by each BIF member is based on its relative risk of default
        as
        measured by regulatory capital ratios and other factors. Specifically, the
        assessment rate is based on the institution’s capitalization risk category and
        supervisory subgroup category. An institution’s capitalization risk category is
        based on the FDIC’s determination of whether the institution is well
        capitalized, adequately capitalized or less than adequately capitalized.
        An
        institution’s supervisory subgroup category is based on the FDIC’s assessment of
        the financial condition of the institution and the probability that FDIC
        intervention or other corrective action will be required.
  The
        assessment rate currently ranges from zero to 27 cents per $100 of domestic
        deposits. The FDIC may increase or decrease the assessment rate schedule
        on a
        semi-annual basis. The BIF has a minimum ratio of 1.25% of insured deposits
        mandated by law. If the ratio drops below 1.25%, it is likely that the FDIC
        will
        be required to assess premiums on all banks. Any increase in assessments
        or the
        assessment rate could have a material adverse effect on the company’s earnings,
        depending on the amount of the increase. Furthermore, the FDIC is authorized
        to
        raise insurance premiums under certain circumstances.
  The
        FDIC
        is authorized to terminate a depository institution’s deposit insurance upon a
        finding by the FDIC that the institution’s financial institution’s condition is
        unsafe or unsound or that the institution has engaged in unsafe or unsound
        practices or has violated any applicable rule, regulation, order or condition
        enacted or imposed by the institution’s regulatory agency. The termination of
        deposit insurance for the Bank could have a material adverse effect on the
        company’s earnings.
  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.
  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.
  27
  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
        are currently less than $250 million, 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;
  ·
                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 are also 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
  28
  ·
                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.
  Federal
        Reserve System - The
        FRB requires all depository institutions to maintain non-interest bearing
        reserves at specified levels against their transaction accounts (primarily
        interest bearing and non-interest bearing checking accounts) and non-personal
        time deposits. At December 31, 2005, the Bank was in compliance with these
        requirements.
  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. Management cannot predict
        the
        nature of future fiscal and monetary policies and the effect of such policies
        on
        the future business and the Company’s 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 the Company’s
        profitability. The Company would also note 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 and
        the
        Bank. These institutions, because they are not so highly regulated, have
        a
        competitive advantage over the Company and Bank 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.**
  **BUSINESS
        RISKS**
  *You
        should carefully consider the following risk factors and all other information
        contained in this Report* *before investing in the Company’s securities. These risks and uncertainties are
        not the only ones faced by the Company or the Bank. Additional risks and
        uncertainties not presently known to the Company or that the Company currently
        believes are immaterial also may impair the business of the Company or the
        Bank.
        If any of the events described in the following risk factors occur, the
        Company’s and Bank’s business, results of operations and financial condition
        could be materially adversely affected. In addition, the trading price of
        the
        Company’s stock could decline due to any of the events described in these
        risks.*
  29
  ***The
        Company has a limited operating history upon which to base an estimate of
        its
        future financial performance.***
  The
        Company commenced active operations when it acquired the Bank on May 16,
        2005.
        At this time, the Company’s assets consist primarily of cash, intangible assets
        related to its organizational efforts, and its ownership of the Bank, and
        the
        Company’s growth is primarily dependent upon the operations of the Bank.
        Consequently, the Company has little to no historical operating or financial
        information from which to base an estimate of its future financial
        performance.
  ***The
        liquidity of the Company’s common stock is affected by its limited trading
        market.***
  The
        Company’s shares do not at this time qualify for listing on any national
        securities exchange, and it cannot assure you that the shares will ever be
        listed on a national securities exchange. However, the shares are traded
        on the
        OTC Bulletin Board or “pink sheets,” and at least one company makes a market in
        the Company’s common stock. Because the shares are not listed on a national
        securities exchange, the Company cannot assure you that a broadly followed,
        established trading market for its common stock will ever develop or be
        maintained. Furthermore, the Company cannot assure you that at least one
        company
        will continue to make a market in its shares for as long as it is quoted
        on the
        OTC Bulletin Board. Active trading markets generally result in lower price
        volatility and more efficient execution of buy and sell orders. In addition,
        active trading markets tend to reduce the bid-ask spreads for sales
        transactions. On the other hand, the absence of an active trading market
        would
        reduce the liquidity, and have an adverse effect on the market value of the
        Company’s shares. In addition, if the Company would cease to be quoted on the
        OTC Bulletin Board, shareholders would find it more difficult to dispose
        of, or
        to obtain accurate quotations as to the market value of, the Company’s common
        stock, and the market value of the common stock likely would
        decline.
  **The
        Company****expects
        to incur losses during its initial years of
        operations.**
  The
        Company incurred substantial start-up expenses associated with its organization
        and recent public offering and expects to sustain losses or achieve minimal
        profitability during its initial years of operations. At December 31, 2005,
        the
        Company had an accumulated deficit account of approximately $4.6 million,
        principally resulting from the organizational and pre-opening expenses that
        were
        incurred in connection with the opening of the Bank and operating losses
        from
        its first year of operations. In addition, due to the extensive regulatory
        oversight to which will be subject, the Bank expects to incur significant
        administrative costs. The Bank’s success will depend, in large part, on its
        ability to address the problems, expenses and delays frequently associated
        with
        new financial institutions and the ability to attract and retain deposits
        and
        customers for its services. In addition, to gain market share as a
        newly-organized bank, the Bank may be required to pay higher interest rates
        to
        attract deposits or extend credit at lower rates to attract borrowers, which
        may
        decrease its profitability or prevent the Bank from becoming profitable.
        Management cannot assure you that the Company will ever become profitable.
        If
        the Company is ultimately unsuccessful, you may lose part or all of the value
        of
        your investment.
  ***Failure
        to implement*** ***the
        Bank’s business strategies may adversely affect its financial
        performance.***
  The
        Bank
        has developed a business plan that details the strategies it is working to
        implement in its efforts to achieve profitable operations. If these business
        strategies cannot be implemented, the Bank will be hampered in its ability
        to
        develop business and serve its customers, which, in turn, could have an adverse
        effect on the Company’s financial performance. Even if the business strategies
        are successfully implemented, the Company cannot assure you that the strategies
        will have the favorable impact that it anticipates. Furthermore, while
        management believes that the Bank’s business plan is reasonable and that the
        strategies will enable the Bank to execute the business plan, the Bank has
        no
        control over the future occurrence of certain events upon which the business
        plan and strategies are based, particularly
        general and local economic conditions that may affect the Bank’s loan-to-deposit
        ratio, total deposits, the rate of deposit growth, cost of funding, the level
        of
        earning assets and interest-related revenues and expenses.
  30
  ***The
        Bank’s emphasis on commercial business and commercial real estate lending may
        result in greater credit risk.***
  Management
        expects that commercial business and commercial real estate lending will
        ultimately comprise more than 60% of the Bank’s loan portfolio, which may result
        in greater credit risk to the Bank. Generally, commercial loans are considered
        to be riskier than residential mortgage or construction loans or consumer
        loans
        because they have larger balances to a single borrower or group of related
        borrowers. In addition, the borrower’s ability to repay a commercial loan
        depends, in many cases, on the successful operation of the business or the
        property securing the loan. Because these types of loans are considered to
        be
        riskier than residential mortgage or construction loans or consumer loans,
        the
        Bank will be required to reserve greater amounts in its loan loss allowance
        in
        anticipation of the higher credit losses. If management underestimates the
        credit risk associated with these lending activities, the Bank’s actual loan
        losses may exceed the amounts reserved against the loans, in which case its
        profits and financial condition would be adversely affected.
  ***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.***
  As
        a
        material part of its business plan, the Bank makes commercial, consumer,
        commercial and residential real estate and construction loans. The principal
        economic risk associated with each class of loans is the creditworthiness
        of the
        borrower, which is affected by the strength of the relevant business market
        segment, local market conditions and general economic conditions.
  Additional
        factors related to the credit quality of commercial loans include the quality
        of
        the management of the business and the borrower’s ability both to properly
        evaluate changes in the supply and demand characteristics affecting its market
        for products and services and to effectively respond to those changes.
        Additional factors related to the credit quality of commercial real estate
        loans
        include tenant vacancy rates and the quality of management of the property.
        Additional factors related to the credit quality of construction loans include
        fluctuations in the value of real estate and new job creation trends.
  Many
        of
        the Bank’s loans are made to small and medium sized businesses that are less
        able to withstand competitive, economic and financial pressures that larger
        borrowers. If the Bank is unable to effectively measure and limit the risk
        of
        default associated with its loan portfolio, the Company’s profitability will be
        adversely impacted.
  ***Departures
        of key personnel or directors may**impair*** ***the
        Bank’s operations.***
  The
        Bank’s success depends in large part on the services and efforts of its key
        personnel and on its ability to attract, motivate and retain highly qualified
        employees. Competition for employees is intense, and the process of locating
        key
        personnel with the combination of skills and attributes required to execute
        the
        Bank’s business plan may be lengthy.
  In
        particular, the Company believes that retaining Colin Forkner, Michael Hahn,
        Richard Grinyer and Terry Stalk are important to the Bank’s success. If any of
        these persons leaves his or her position with the Bank for any reason, its
        financial condition and results of operations may suffer.
  31
  If
        the
        services of any of the Bank’s key personnel should become unavailable for any
        reason or if the regulatory agencies should require the employment of additional
        persons to fill positions at the Bank, it would be required to employ other
        persons to manage and operate the Bank, and the Company cannot assure you
        that
        the Bank would be able to employ qualified persons on terms acceptable to
        the
        Bank.
  Additionally,
        the directors’ involvement, diverse backgrounds and extensive local business
        relationships are important to the Bank’s success. If the composition of the
        Bank’s board of directors changes materially, its banking business may
        suffer.
  **The
        Bank****faces
        intense competition from a variety of competitors.**
  The
        banking business in the Bank’s target banking market and the surrounding areas
        has become increasingly competitive over the past several years, and management
        expects the level of competition to continue to increase. If this competition
        forces the Bank to offer aggressive loan and deposit rates or otherwise incur
        higher funding costs, its profitability will be diminished.
  Many
        of
        the Bank’s competitors are larger than it is and have greater financial and
        personnel resources. Many of its competitors have established customer bases
        and
        offer services, such as extensive and established branch networks and trust
        services, that the Bank does not currently provide. Also, some competitors
        are
        not subject to the same degree of regulation as the Bank is and thus may
        have a
        competitive advantage over the Bank.
  The
        Company believes that the Bank will be a successful competitor in the area’s
        financial services market. However, the Company cannot assure you that the
        Bank
        will be able to compete successfully with other financial institutions serving
        its target banking market. An inability to compete effectively could be expected
        to have a material adverse effect on the Bank’s growth and profitability.
  ***The
        Bank competes in an industry that continually experiences technological change,
        and it may not be able to compete effectively with other banking institution,
        with greater resources.***
  In
        order
        to compete effectively with competitors that have significantly more resources,
        the Bank will need to maintain an infrastructure capable of implementing
        its
        business objectives as a community bank to provide a superior level and quality
        of services. The Bank’s infrastructure needs to be flexible and adapt to
        technological changes; however, the Bank does not have the same level of
        resources as some of its competitors. The Bank has a limited number of software
        and hardware suppliers. Furthermore, because the Bank has been in operation
        for
        a short time, it has very little experience with local software and hardware
        suppliers or other vendors that might provide it with technology infrastructure
        support. In addition, the Bank will need to update its infrastructure
        continually and hire additional personnel to accommodate increases in the
        number
        of customers. Any inability to develop and maintain the appropriate
        infrastructure may cause unanticipated service disruptions, slower response
        times, reduced levels of customer service, impaired quality, or delays in
        reporting accurate financial information. The Company cannot assure you that
        the
        Bank will be able to project accurately the rate or timing of increases,
        if any,
        in the subscriptions to services or upgrade and expand its systems in a timely
        manner or to integrate any newly developed systems smoothly. The Bank’s
        inability to do so could have a material adverse effect on its ability to
        compete effectively in its market and also on its business, financial condition,
        and results of operations.
  ***The
        Bank’s*** ***legal
        lending limits may impair its ability to attract
        borrowers.***
  The
        Bank’s current legally mandated lending limits are lower than those of many of
        its competitors because it has less capital than many of its competitors.
        The
        lower lending limits may discourage potential borrowers who have lending
        needs
        that exceed these limits, which may restrict the Bank’s ability to establish
        relationships with larger businesses in its market area.
  32
  **An
        economic downturn, especially one affecting****the
        Bank’s primary service area, may have an adverse effect on its financial
        performance.**
  The
        Bank’s success depends on the general economic condition of the region in which
        it operates, which management cannot forecast with certainty. Unlike many
        of the
        Bank’s larger competitors, the majority of the Bank’s borrowers and depositors
        are individuals and businesses located or doing business in its local banking
        market. As a result, the Bank’s operations and profitability may be more
        adversely affected by a local economic downturn than those of its larger,
        more
        geographically diverse competitors. Factors that adversely affect the economy
        in
        the Bank’s local banking market could reduce its deposit base and the demand for
        its products and services, which may decrease the Bank’s (and, thus, the
        Company’s) earnings. For example, an adverse change in the local economy could
        make it more difficult for borrowers to repay their loans, which could lead
        to
        loan losses for the Bank.
  ***Monetary
        policy and other economic factors could
        adversely**affect*** ***the Bank’s profitability.***
  Changes
        in governmental economic and monetary policies, the Internal Revenue Code
        and
        banking and credit regulations, as well as such other factors as national,
        state
        and local economic growth rates, employment rates and population trends,
        will
        affect the demand for loans and the ability of the Bank and other banks to
        attract deposits. The foregoing monetary and economic factors, and the need
        to
        pay rates sufficient to attract deposits, may adversely affect the ability
        of
        the Bank to maintain an interest margin sufficient to result in operating
        profits.
  ***The
        Bank*** ***could
        be negatively affected by changes in interest rates.***
  The
        Bank’s profitability (and, therefore, the Company’s profitability) depends,
        among other things, on its net interest income, which is the difference between
        the income that the Bank earns on its interest-earning assets, such as loans,
        and the expenses that the Bank incurs in connection with its interest-bearing
        liabilities, such as checking or savings deposits or certificates of deposit.
        Changes in the general level of interest rates and other economic factors
        can
        affect the Bank’s net interest income by affecting the spread between
        interest-earning assets and interest-bearing liabilities.
  Over
        the
        past year, as the Federal Reserve Board has increased interest rates, the
        yield
        curve has flattened, in that long-term interest rates have not moved in tandem
        with short-term rates. Under ordinary conditions the yield curve has a positive
        slope, indicating that long-term instruments pay higher yields than do
        short-term instruments, and that borrowers are willing to pay a premium for
        long-term funds. A flat yield curve, on the other hand, generally indicates
        uncertainty about the direction in which interest rates are moving. If this
        trend continues, the Bank’s future net interest income, and therefore its
        profitability, may decline.
  Changes
        in the general level of interest rates also affect, among other things, the
        Bank’s ability to originate loans, the value of interest-earning assets and its
        ability to realize gains from the sale of such assets, the average life of
        interest-earning assets, and the Bank’s ability to obtain deposits in
        competition with other available investment alternatives. Interest rates
        are
        highly sensitive to many factors, including government monetary policies,
        domestic and international economic and political conditions and other factors
        beyond the Bank’s control. Because fluctuations in interest rates are not
        predictable or controllable, management cannot assure you that the Bank will
        continue to achieve positive net interest income.
  33
  **The
        Company’s****ability
        to pay dividends is limited.**
  The
        Company currently have no material source of income other than dividends
        that it
        receives from the Bank. Therefore, the Company’s ability to pay dividends to its
        shareholders depends on the Bank’s ability to pay dividends to the Company. The
        board of directors of the Bank intends to retain earnings to promote growth
        and
        build capital and recover any losses incurred in prior periods. Accordingly,
        the
        Company does not expect to receive dividends from the Bank in the foreseeable
        future. In addition, banks and bank holding companies are both subject to
        certain regulatory restrictions on the payment of cash dividends.
  **The
        Company and the Bank****are
        subject to extensive regulatory oversight, which could restrain growth and
        profitability.**
  Banking
        organizations such as the Company and the Bank are subject to extensive federal
        and state regulation and supervision. Laws and regulations affecting financial
        institutions are undergoing continuous change, and management cannot predict
        the
        ultimate effect of these changes. The Company cannot assure you that any
        change
        in the regulatory structure or the applicable statutes and regulations will
        not
        materially and adversely affect the business, condition or operations of
        the
        Company or the Bank or benefit competing entities that are not subject to
        the
        same regulations and supervision.
  **The
        Company****may
        not be able to raise additional capital on favorable terms.**
  In
        the
        future, should the Company need additional capital to support business of
        the
        Company or the Bank, expand operations or maintain minimum capital requirements,
        the Company may not be able to raise additional funds through the issuance
        of
        additional shares of common stock or other securities. Even if the Company
        is
        able to obtain capital through the issuance of additional shares of common
        stock
        or other securities, the sale of these additional shares could significantly
        dilute your ownership interest.
  **The
        Company’s****directors
        and executive officers could have the ability to influence shareholder actions
        in a manner that may be adverse to your personal investment
        objectives.**
  As
        of
        December 31, 2005, directors and executive officers of the Company owned
        124,550
        shares of the Company’s common stock, which represents approximately 5.5% of its
        issued and outstanding common stock. Additionally, the Company has issued
        warrants to the Company’s directors and has issued stock options to the Bank’s
        executive officers pursuant to certain employment agreements. If the directors
        exercised all of their warrants, they would own shares upon exercise
        representing as much as 9.4% of the Company’s then outstanding common stock.
        Moreover, although all of the employee stock options are not immediately
        exercisable, upon exercise of the employee stock options issued to the Bank’s
        executive officers, together with the exercise of warrants held by the
        directors, the Company’s directors and executive officers would own shares
        representing as much as 20.5% of the Company’s then outstanding common stock.
  Due
        to
        their significant ownership interests, the Company’s directors and executive
        officers are able to exercise significant control over the management and
        affairs of the Company and the Bank. For example, the directors and executive
        officers may be able to influence the outcome of director elections or block
        significant transactions, such as a merger or acquisition, or any other matter
        that might otherwise be approved by the shareholders.
  34
  ***The
        Company’s articles of incorporation and bylaws and the laws of the State of
        California contain provisions that could make a takeover more
        difficult.***
  The
        Company’s articles of incorporation and bylaws, and the corporate laws of the
        State of California, include provisions designed to provide the board of
        directors with time to consider whether a hostile takeover offer is in the
        Company’s and shareholders’ best interests, but could be utilized by the board
        of directors to deter a transaction that would provide shareholders with
        a
        premium over the market price of the Company’s shares.
  These
        provisions include the availability of authorized, but unissued shares, for
        issuance from time to time at the discretion of the Company’s board of
        directors; bylaws provisions enabling the board of directors to increase
        the
        size of the board and to fill the vacancies created by the increase; bylaw
        provisions establishing advance notice procedures with regard to business
        to be
        presented at a shareholder meeting or to director nominations (other than
        those
        by or at the direction of the board); and “change in control” provisions in the
        employment agreements of each of the Bank’s four senior executive officers
        providing for lump sum cash payments of 199% of each officer’s base
        compensation. The California Corporations Code also contains provisions intended
        to protect shareholders and prohibit or discourage various types of hostile
        takeover activities.
  These
        provisions may discourage potential acquisition proposals and could delay
        or
        prevent a change in control, including under circumstances where the
        shareholders might otherwise receive a premium over the market price of the
        Company’s shares. These provisions may also have the effect of making it more
        difficult for third parties to cause the replacement of current management
        and
        may limit the ability of shareholders to approve transactions that they may
        deem
        to be in their best interests.
  ***The
        Company’s stock price may fluctuate.***
  The
        stock
        market has, from time to time, experienced extreme price and volume
        fluctuations, which often have been unrelated to the operating performance
        of
        particular companies. Any announcement with respect to the banking industry,
        market conditions or any variance in the Company’s revenues or earnings from
        levels generally expected by securities analysts for a given period could
        have
        an immediate and significant effect on the trading price of the Company’s common
        stock.
  **Item
        2. Description of Property**
  The
        Bank
        maintains two locations. Its main office, which is also the principal executive
        office of the Company, is located at 905 Calle Amanecer, Suite 100, San
        Clemente, California 92673. The Bank occupies 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 has a right of first refusal on the
        remaining 2,845 square feet on the ground floor. The Bank also operates a
        branch
        office 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 occupies 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 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 are adequate to meet the present needs of the Company
        and
        Bank.
  35
  **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**
  No
        matters were submitted to a vote of the stockholders during the fourth quarter
        of 2005.
  **PART
        II**
  **Item
        5. Market for Common Equity and Related Stockholder
        Matters**
  **Market** **Price
        of Common Stock**
  The
        Company’s common stock is traded over the counter on the OTC Bulletin Board
        under the symbol “PCST.OB”. Continental Stock Transfer & Trust Company is
        the Company’s transfer agent and registrar, and is able to respond to inquiries
        from shareholders on its website: www.continentalstock.com or at its mailing
        address: 17 Battery Place, 8th Floor, New York, New York, 10004. The following
        table sets forth the high and low sales prices for the periods indicated
        below.
 **Year
                    Ended December 31, 2005:**
                
                High
                
                LowFirst
                    Quarter
                
                $
                -
                
                $
                -Second
                    Quarter
                
                
                10.50
                
                
                10.50Third
                    Quarter
                
                
                13.00
                
                
                10.50Fourth
                    Quarter
                
                
                12.25
                
                
                10.75
  **Holders**
  As
        of
        February 24, 2006, there were approximately 646 holders of record.
  **Dividends**
  The
        Company has never declared or paid dividends on its common stock. In addition,
        the Company expects to retain future earnings, if any, for use in the operation
        and expansion of the Bank’s business and does not anticipate paying any cash
        dividends in the foreseeable future. Any determination to pay dividends in
        the
        future will be at the discretion of the board of directors and will, among
        other
        factors, depend upon regulatory requirements and restrictions, the Company’s
        results of operations, its financial condition and capital requirements.
        Because, as a holding company, the Company conducts no material activities
        at
        this time other than holding the common stock of the Bank, its ability to
        pay
        dividends depends on the receipt of dividends from the Bank. The board of
        directors of the Bank intends to retain earnings to promote growth and build
        capital and to recover any losses incurred in prior periods. Accordingly,
        the
        Company does not expect to receive dividends from the Bank in the foreseeable
        future. In addition, banks and bank holding companies are both subject to
        certain regulatory restrictions on the payment of cash dividends. For additional
        discussion of legal and regulatory restrictions on the payment of dividends,
        see *“Part
        I - Item 1. Description of Business - Supervision and
        Regulation.”*
  36
  **Securities
        Authorized For Issuance Under Equity Compensation Plans**
  The
        board
        of directors of the Company has adopted the Pacific Coast National Bancorp
        2005
        Stock Incentive Plan and submitted the plan for the consideration of the
        shareholders of the Company at the 2006 annual meeting. Information regarding
        the 2005 Stock Incentive Plan, which in the only equity compensation plan
        that
        the Company has adopted, is included in Item 10.
  **Recent
        Sales of Unregistered Securities**
  None
  **Use
        of Proceeds from Sales of Registered Securities**
  On
        May
        11, 2005, the Company registered a total of 2,970,000 shares of its common
        stock, of which 690,000 shares are issuable under registered common stock
        warrants (warrants to purchase an aggregate of 456,000 shares of common stock
        at
        an exercise price of $12.50 per share issued to the Company’s initial
        shareholders in connection with the offering, and warrants to purchase an
        aggregate of 234,000 shares of common stock at an exercise price of $10.00
        per
        share issued to the Company’s organizers). The Company completed its initial
        public offering having sold 2,280,000 shares at $10.00 per share, for an
        aggregate of $22.8 million.
  The
        Company incurred approximately $665 thousand in offering expenses, none of
        which
        was paid to directors, officers, ten percent or greater shareholders, any
        of
        their associates, or affiliates of the Company. None of those expenses were
        paid
        to underwriters or for underwriting discounts and commissions or finders’ fees.
  The
        following is a reasonable estimate of the use of the offering proceeds through
        December 31, 2005:
 Gross
                    proceeds from sale of shares
                
                $
                22,800,000Offering
                    expenses
                
                
                (665,000
                )Organizational
                    expenses
                
                
                (1,655,000
                )Contribution
                    to the capital of the Bank
                
                
                (19,500,000
                )Remaining
                    proceeds
                
                $
                980,000
  **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. The
        financial information provided below has been rounded in order to simplify
        its
        presentation. However, the ratios and percentages provided below are calculated
        using the detailed financial information contained in the financial statements,
        the notes thereto and the other financial data included elsewhere in this
        Annual
        Report.
  37
  **General**
  The
        Company is a bank holding company headquartered in San Clemente, California,
        offering a board range of commercial and consumer banking services through
        its
        wholly-owned subsidiary, Pacific Coast National Bank. As of December 31,
        2005,
        on a consolidated basis, the Company had total assets of $31.2 million, net
        loans of $10.2 million, total deposits of $12.4 million and shareholders’ equity
        of $18.7 million.
  From
        the
        date of inception until the Bank opened for business on May 16, 2005, the
        Company’s main activities consisted of:
  ●  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 May 16, 2005, the
        Company ’s
        operations were funded by advances made by its organizers and from draws
        under a
        line of credit extended by TIB - The Independent BankersBank. The Company
        completed an initial public offering of its common stock in which it sold
        a
        total of 2,280,000 shares at $10.00 per share. Proceeds of the offering were
        used to pay organizational costs and provide the initial capital for the
        Bank.
 
 The
        following discussion focuses on the Company’s financial condition and results of
        operations during the year ended December 31, 2005, presented on a consolidated
        basis. Since the Company did not commence active banking operations until
        May
        16, 2005, comparison of 2005 to prior periods would not be
        meaningful.
  **Critical** **accounting
        policies**
  This
        discussion and analysis of the Company’s financial condition and results of
        operations is based upon the Company’s financial statements, which have been
        prepared in accordance with United States generally accepted accounting
        principles. The preparation of these consolidated financial statements requires
        management to make estimates and judgments that effect the reported amounts
        of
        assets and liabilities, revenues and expenses, and related disclosures of
        contingent assets and liabilities at the date of the financial statements.
        Actual results may differ from these estimates under different assumptions
        or
        conditions. The following is a description of the Company’s significant
        accounting policies used in the preparation of the accompanying consolidated
        financial statements.
  ***Allowance**for*** ***credit
        losses***
  Management
        considers the policies related to the allowance for loan losses as the most
        critical to the financial statement presentation. The total allowance for
        loan
        losses includes activity related to allowances calculated in accordance with
        Statement of Financial Accounting Standards (SFAS) No. 114, *Accounting
        by Creditors for Impairment of a Loan,* and
        SFAS No. 5, *Accounting
        for Contingencies.*
  38
  The
        allowance for losses on loans represents management’s best estimate of probable
        losses inherent in the existing loan portfolio. The allowance for losses
        on
        loans is increased by the provision for losses on loans charged to expense
        and
        reduced by loans charged-off, net of recoveries. The provision for losses
        on
        loans is determined based on management’s assessment of several factors: reviews
        and evaluations of specific loans, changes in the nature and volume of the
        loan
        portfolio, current and anticipated economic conditions and the related impact
        on
        specific borrowers and industry groups, historical loan loss experience,
        the
        level of classified and nonperforming loans and the results of regulatory
        examinations.
  The
        allowance for loan losses is comprised of specific reserves assigned to certain
        classified loans and general reserves. Factors contributing to the determination
        of specific reserves include the credit-worthiness of the borrower, and more
        specifically, changes in the expected future receipt of principal and interest
        payments and/or in the value of pledged collateral. A reserve is recorded
        when
        the carrying amount of the loan exceeds the discounted estimated cash flows
        using the loan’s initial effective interest rate or the fair value of the
        collateral for certain collateral dependent loans. For purposes of determining
        the general reserve, the portfolio is segregated by product types in order
        to
        recognize differing risk profiles among categories, and then further segregated
        by credit grades. Until management has adequate historical data upon which
        to
        base the estimate of the allowance for credit losses, a balance of approximately
        0.6% of the outstanding principal is used unless additional information
        regarding the ability of the borrower to repay the loan, current economic
        conditions or other pertinent factors indicate a different allowance is needed.
  The
        loan
        loss allowance is based on the most current review of the loan portfolio
        at that
        time. The servicing officer has the primary responsibility for updating
        significant changes in a customer’s financial position. Each officer prepares
        status updates on any credit deemed to be experiencing repayment difficulties
        which, in the officer’s opinion, would place the collection of principal or
        interest in doubt. The internal loan review department for the Bank is
        responsible for an ongoing review of its entire loan portfolio with specific
        goals set for the volume of loans to be reviewed on an annual basis.
  At
        each
        review of a credit, a subjective analysis methodology is used to grade the
        respective loan. Categories of grading vary in severity to include loans
        which
        do not appear to have a significant probability of loss at the time of review
        to
        grades which indicate a probability that the entire balance of the loan will
        be
        uncollectible. If full collection of the loan balance appears unlikely at
        the
        time of review, estimates or appraisals of the collateral securing the debt
        are
        used to allocate the necessary allowances. A list of loans or loan relationships
        of $150 thousand or more, which are graded as having more than the normal
        degree
        of risk associated with them, is maintained by the internal loan review officer.
        This list is updated on a periodic basis, but no less than quarterly in order
        to
        properly allocate necessary allowance and keep management informed on the
        status
        of attempts to correct the deficiencies noted in the credit.
  Loans
        are
        considered impaired if, based on current information and events, it is probable
        that the Bank will be unable to collect the scheduled payments of principal
        or
        interest when due according to the contractual terms of the loan agreement.
        The
        measurement of impaired loans is generally based on the present value of
        expected future cash flows discounted at the historical effective interest
        rate
        stipulated in the loan agreement, except that all collateral-dependent loans
        are
        measured for impairment based on fair value of the collateral. In measuring
        the
        fair value of the collateral, management uses assumptions (e.g., discount
        rates)
        and methodologies (e.g., comparison to the recent selling price of similar
        assets) consistent with those that would be utilized by unrelated third parties.
  Changes
        in the financial condition of individual borrowers, in economic conditions,
        in
        historical loss experience and in the conditions of the various markets in
        which
        collateral may be sold may all affect the required level of the allowance
        for
        losses on loans and the associated provision for loan losses.
  39
  As
        of
        December 31, 2005, a review of the loan portfolio indicated that a loan
        loss allowance of $87 thousand was adequate to cover probable losses in the
        portfolio.  Refer
        to
        Notes to Financial Statements Note A. Summary of Significant Accounting and
        Reporting Policies for a detailed description of management’s estimation process
        and methodology related to the allowance for loan losses.
  ***Estimation
        of fair value***
  The
        estimation of fair value is significant to a number of the Company’s assets,
        including available for sale investment securities and other real estate
        owned.
        These are all recorded at either fair value or at the lower of cost or fair
        value. Furthermore, accounting principles generally accepted in the United
        States require disclosure of the fair value of financial instruments as a
        part
        of the notes to the consolidated financial statements. Fair values are volatile
        and may be influenced by a number of factors, including market interest rates,
        prepayment speeds, discount rates and the shape of yield curves.
  ***New
        Accounting Pronouncements***
  FASB
        Statement 123R - On December 16, 2004, the Financial Accounting Standards
        Board
        (FASB) issued FASB Statement No. 123, Share-Based Payments which is a revision
        of FASB No. 123, Accounting for Stock-Based Compensation, Statement 123 (R)
        supersedes APB opinion No. 25, Accounting for Stock Issued to Employees,
        and
        amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach
        in Statement 123 (R) is similar to the approach described in Statement 123.
        However, Statement 123 (R) requires all share-based payments to employees,
        including grants of employee stock options, to be recognized in the income
        statement based on their fair values. Pro forma disclosure is no longer an
        alternative. Management has not yet determined the impact that this statement
        will have on the Company’s consolidated financial statements.
  **Results
        of operations for the year ended December 31, 2005**
  The
        Company’s net loss for the year ended December 31, 2005 was $2,988,000. $1.8
        million of the loss is related to banking operations, with the remainder
        of $1.2
        million related to pre-opening expenses. The operating loss during 2005 was
        due
        primarily to level of overhead costs, compared to the Company’s asset size. The
        Company’s overhead costs, or noninterest expense, which totaled approximately
        $3.6 million, were only partially offset by its net interest income of
        approximately $695 thousand. Noninterest income earned during 2005 was
        immaterial to the Company’s operating results, but the Company expects
        noninterest income to play a more meaningful part in the Company’s earnings
        performance in 2006.
  The
        2005
        loss resulted in a return on average assets of (17.9%) and a return on average
        equity of (25.7%). These ratios are distorted by the impact of the pre-opening
        period on earnings as well as the average outstanding assets and equity.
  **Net** **interest
        income**
  Net
        interest income is the difference between the income earned on assets and
        interest paid on deposits and borrowings used to support such assets. Net
        interest income is determined by the yields earned on the Company’s
        interest-earning assets and the rates paid on its interest-bearing liabilities,
        the relative amounts of interest-earning assets and interest-bearing
        liabilities, and the degree of mismatch and the maturity and repricing
        characteristics of its interest-earning assets and interest-bearing liabilities.
        Net interest income divided by average interest-earning assets represents
        the
        Company’s net interest margin.
  40
  The
        following tables set forth, for the period indicated, information related
        to the
        Company’s average balance sheet and its average yields on assets and average
        costs of liabilities. These yields are derived by dividing income or expense
        by
        the average balance of the corresponding assets or liabilities and are then
        annualized. Average balances have been derived from the daily balances for
        the
        year ended December 31, 2005.
 2005AverageAverage
                
                
                
                Yield
                    /Balance
                
                Interest
                
                CostAssets:Interest-earning
                    Assets:Loans
                    Receivable
                
                $
                2,894,090
                
                $
                230,166
                
                
                7.95
                %Investment
                    Securities
                
                
                2,558,130
                
                
                106,536
                
                
                4.16
                %Investment
                    in capital stock of FederalReserve
                    Bank
                
                
                361,797
                
                
                21,670
                
                
                5.99
                %Time
                    Deposits in other financialinstitutions
                
                
                734,318
                
                
                20,985
                
                
                2.86
                %Cash,
                    fed funds and other
                
                
                8,457,655
                
                
                422,284
                
                
                4.99
                %Total
                    interest-earning assets
                
                
                15,005,990
                
                
                801,641
                
                
                5.34
                %Noninterest-earning
                    assets
                
                
                1,643,067Total
                    Assets
                
                $
                16,649,057Liabilities
                    and Stockholders' EquityTime
                    Deposits of $100,000 or more
                
                $
                698,962
                
                $
                25,748
                
                
                3.68
                %Other
                    Deposits
                
                
                2,290,654
                
                
                51,084
                
                
                2.23
                %Other
                
                
                709,583
                
                
                30,022
                
                
                4.23
                %Total
                    Interest-bearing liabilities
                
                
                3,699,199
                
                
                106,854
                
                
                2.89
                %Non-interest
                    bearing checking accounts
                
                
                1,179,917Non-interest
                    bearing liabilities
                
                
                147,901Stockholders'
                    Equity
                
                
                11,622,040Total
                    Liabilities andStockholders'
                    Equity
                
                $
                16,649,057Net
                    Interest Income
                
                
                
                
                $
                694,787Net
                    Interest Spread
                
                
                
                
                
                2.45
                %Net
                    Interest Margin
                
                
                
                
                
                4.63
                %
  Net
        interest income for the year ended December 31, 2005 was $695 thousand. Total
        interest income for the year was $802 thousand and was partially offset by
        interest expense of $107 thousand. Interest income is composed of interest
        and
        fees on loans of $230 thousand, federal funds sold of $308 thousand, interest
        income on escrow deposits of $136 thousand, and investment income of $128
        thousand. Interest expense is composed of interest paid on deposits of $77
        thousand and interest paid on the line of credit of $30 thousand.
  41
  The
        Company’s net interest spread and net interest margin were 2.45% and 4.63%,
        respectively, in 2005. The total yield on earning assets was 5.34%. The largest
        component of earning assets was loans which had a yield of 7.95%. Total interest
        bearing liabilities had a yield of 2.89%.
  **Provision
        for credit losses and allowance for credit losses**
  The
        provision for credit losses is the annual cost of providing an allowance
        or
        reserve for estimated probable losses on loans. The provision for loan losses
        was $87 thousand in 2005. The allowance for loan losses reflects management’s
        judgment of the level of allowance adequate to absorb estimated credit losses
        in
        the Bank’s loan portfolio.
  Information
        regarding the calculation of the loan loss provision for 2005, the factors
        considered by the Company in establishing the reserves and the quality of
        the
        Bank’s loan portfolio is included in the section of this Report titled *“Part
        I - Item 1. Business - Asset quality.”*
  **Noninterest
        income**
  Noninterest
        income for the year ended December 31, 2005 totaled $8 thousand. In order
        to
        attract depositors, the Bank has taken a competitive posture in regards to
        service charges. Many business accounts will not incur normal service charges
        for activity for the first 90 days of business. This has held noninterest
        income
        to a minimum.
  **Noninterest
        expense**
  Noninterest
        expenses totaled $3.6 million for the year ended December 31, 2005. Of this
        total, $1.3 million is attributable to pre-opening expenses and $2.3 million
        is
        attributable to banking operations.
  Salaries
        and employee benefits, the largest component of noninterest expense, totaled
        $1.3 million for the year, with $1.1 million attributable to banking operations
        with the remainder incurred during the pre-opening phase. As of December
        31,
        2005, the Bank had 24 employees, with a full-time-equivalent of 23
        employees.
  Occupancy
        totaled $448 thousand, with $392 thousand related to banking operations and
        $56
        thousand related to pre-opening expenses. Of this, $255 thousand was paid
        in
        rent and common area maintenance, $99 thousand was depreciation of equipment
        and
        amortization of leasehold improvements, $53 thousand was related to telephone
        and utilities expense, and the remainder was related to maintenance and
        repairs.
  Professional
        services totaled $624 thousand, with $70 thousand related to banking operations
        and $554 thousand related to pre-opening expenses. Of the $554 thousand,
        $190
        thousand was paid in consulting fees as detailed in the following paragraph,
        $120 thousand was paid to Bankmark in conjunction with the capital raising,
        $48
        thousand was paid in legal fees, $30 thousand was paid for marketing related
        expenses, with the remainder paid for accounting services, systems design,
        and
        expenses related to the stock sale. The $70 thousand incurred since the Bank
        opened consisted of $23 thousand in legal fees, $16 thousand related to auditor
        expense, $12 thousand in compliance-related expenses, with the remainder
        related
        to internal audits and reviews.
  42
  Consulting
        fees in the amount of $191 thousand were paid as part of consulting agreements
        with Michael Hahn, Colin Forkner, Terry Stalk, and GRCAC, LLC, each of whom
        was
        actively involved in directing the organizational and preopening activities
        of
        the bank. Messrs. Hahn, Forkner, and Ms. 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 and an executive officer of the Company
        and
        the Bank. The amount paid to Messrs. Hahn, Forkner, and Ms. Stalk was $41
        thousand, $58 thousand, and $43 thousand respectively. GRCAC, LLC, received
        payment of $49 thousand.
  Data
        processing expenses totaled $224 thousand, all related to banking operations.
        Office expenses totaled $85 thousand, with $83 thousand related to banking
        operations and $2 thousand related to pre-opening expenses. Marketing expenses
        totaled $164 thousand and were incurred after the Bank opened for business.
        The
        expense related to the stock warrants granted to organizers of $495 thousand
        was
        incurred during the pre-opening phase.
  Other
        operating expenses totaled $222 thousand for the year. $172 thousand was
        related
        to banking operations and $50 thousand was related to pre-opening expenses.
        The
        $50 thousand was comprised of $26 thousand in insurance premiums, $13 thousand
        in mileage reimbursement and travel costs, and $11 thousand in training-related
        expenses. The $172 thousand was comprised of $22 thousand in insurance premiums,
        $48 thousand in mileage reimbursement and travel costs, $20 thousand in armored
        carrier costs, $16 thousand in reserves for off-balance sheet contingencies,
        $12
        thousand in waived check printing costs, $12 thousand in holding company
        and
        director-related costs, $9 thousand in recruiting costs, $9 thousand in
        regulatory assessments, with the remainder related to subscriptions, dues,
        memberships, and loan-related expenses.
  **Financial
        condition as of December 31, 2005**
  **Loans**
  The
        Bank’s loan portfolio represents the highest yielding component of the Company’s
        earning asset base. Information regarding the Company’s loan portfolio as of
        December 31, 2005 is included in the section of this Report titled *“Part
        I - Item 1. Business - Lending services”* and *“Part
        I - Item 1. Business - Asset quality.”*
  **Securities
        and other earning assets**
  The
        securities portfolio is used to make various term investments, to provide
        a
        source of liquidity and to serve as collateral for certain types of deposits
        and
        borrowings. Information regarding the Company’s securities portfolio as of
        December 31, 2005 is included in the section of this Report titled *“Part
        I - Item 1. Business - Investments.”*
  **Nonearning
        assets**
  Premises,
        leasehold improvements and equipment totaled $1.15 million at December 31,
        2005,
        net of accumulated depreciation of $120 thousand. There are no definitive
        agreements regarding acquisition or disposition of owned or leased facilities
        and, for the near-term future, there are no significant changes anticipated
        in
        the total occupancy expense.
  **Deposits**
  Deposits
        are the Company’s primary source of funds to support its earning assets. The
        Company has been able to effectively compete for deposits in its primary
        market
        areas. Information regarding the Company’s deposit mix as of December 31, 2005
        is included in the section above titled *“Net
        interest income.”*
  43
  **Liquidity**
  On
        May
        16, 2005, the Company completed its initial public offering of common stock
        and
        issued 2,280,000 shares of its common stock at $10 per share for a total
        of
        $22,800,000. As of December 31, 2005, the Company maintained cash and cash
        equivalents of $967 thousand. The Company is a holding company with no
        significant business operations outside of the Bank. Accordingly, the primary
        source of liquidity for the Company will be dividends paid by the Bank. The
        Bank
        is currently restricted from paying dividends without regulatory approval
        until
        the accumulated deficit has been eliminated.
  For
        the
        Bank, 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’s primary funding sources are deposits, principal payments
        on loans, and cash flows from operations. Other possible sources of liquidity
        available to the Bank include the sale of loans and investment securities,
        commercial bank lines of credit, and direct access, under certain conditions,
        to
        borrowings from the Federal Reserve System. The cash needs of the Bank are
        principally for the payment of interest on, and withdrawals of deposit accounts,
        the funding of loans, investments and operating costs and expenses. The Company
        believes that, with the capital injection from the proceeds of the offering,
        the
        Bank should have more than adequate liquidity to meet anticipated future
        funding
        needs.
  During
        the Company’s organizational period, its cash requirements consisted 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 were direct cash advances
        from
        the organizers and draws under a line of credit extended to the Company by
        TIB -
        The Independent BankersBank, which was guaranteed by the organizers. The
        Company
        repaid the outstanding balance on the line of credit by using a portion of
        the
        proceeds of its initial public offering.
  **Interest
        rate sensitivity**
  Net
        interest income, the Bank’s expected primary source of earnings, can fluctuate
        with significant interest rate movements. The Company’s profitability depends
        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 takes measures to minimize the effect that changes in interest
        rates has 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 attempts
        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
        regularly evaluates the balance sheet’s asset mix in terms of several variables:
        yield, credit quality, appropriate funding sources and liquidity.
  44
  The
        following table sets forth information concerning the sensitivity of the
        Company’s interest-earning assets and interest-bearing liabilities as of
        December 31, 2005. The amount of assets and liabilities shown within a
        particular period were determined in accordance with their contractual
        maturities, except that the adjustable rate products are reflected in the
        earlier period of when they are first scheduled to adjust or
        mature.
 Three
                        Months or Less
                
                Over
                    Three Through Twelve Months
                
                Over
                    One Year Through Five Years
                
                Over
                    Five Years
                
                Total(Dollars
                    in Thousands)Interest-earning
                    assets:Cash,
                    fed funds and other (1)
                
                $
                6,580
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                6,580Time
                    Deposits held at other financial institutions
                
                
                750
                
                
                2,000
                
                
                -
                
                
                -
                
                
                2,750Investments
                    and FRB Stock (2)
                
                
                6,001
                
                
                1,997
                
                
                -
                
                
                554
                
                
                8,552Loans
                    (3)
                
                
                3,403
                
                
                3,088
                
                
                3,329
                
                
                526
                
                
                10,346Total
                    interest-earning assets
                
                $
                16,734
                
                $
                7,085
                
                $
                3,329
                
                $
                1,080
                
                $
                28,228Interest-bearing
                    Liabilities:Deposits:Transaction
                    Accounts
                
                $
                8,474
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                8,474Certificates
                    of deposit < $100,000
                
                
                10
                
                
                1,457
                
                
                -
                
                
                -
                
                
                1,467Certificates
                    of deposit > $100,000
                
                
                -
                
                
                2,412
                
                
                -
                
                
                -
                
                
                2,412Total
                    interest-bearing liabilities
                
                $
                8,484
                
                $
                3,869
                
                $
                -
                
                $
                -
                
                $
                12,353Interest
                    rate sensitivity gap
                
                $
                8,250
                
                $
                3,216
                
                $
                3,329
                
                $
                1,080
                
                $
                15,875Cumulative
                    interest rate sensitivity gap
                
                
                8,250
                
                
                11,466
                
                
                14,795
                
                
                15,875
                
                
                15,875As
                    a percentage of total interest-earning assets
                
                
                29.2
                %
                
                40.6
                %
                
                52.4
                %
                
                56.2
                %
                
                56.2
                %
  (1)
        Excludes noninterest-earning cash balances
 (2)
        Excludes investments’ mark-to-market adjustments
 (3)
        Excludes deferred fees and allowance for loan losses.
  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 meets regularly to develop a
        strategy for the upcoming period.
  **Off-balance
        sheet arrangements**
  In
        the
        ordinary course of business, the Company enters into various off-balance
        sheet
        commitments and other arrangements to extend credit that are not reflected
        in
        the consolidated balance sheets of the Company. The business purpose of these
        off-balance sheet commitments is the routine extension of credit. As of December
        31, 2005, commitments to extend credit included approximately $1.8 million
        for
        letters of credit, approximately $1.0 million for revolving line of credit
        arrangements and $3.9 million in unused commitments for commercial and real
        estate secured loans. The Company faces the risk of deteriorating credit
        quality
        of borrowers to whom a commitment to extend credit has been made; however,
        no
        significant credit losses are expected from these commitments and
        arrangements.
  45
  **Capital
        adequacy**
  There
        are
        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. Moreover, as a newly organized national
        bank,
        the Bank is required to maintain a leverage capital ratio in excess of 8%
        for
        the first three years of operations.
  The
        following table sets forth the Bank’s capital ratios as of December 31,
        2005.
  Actual
                
                For
                    Capital
                  Adequacy
                    Purposes
                
                To
                    Be Well
                  Capitalized
                    Under
                  Prompt
                    Corrective
                  Action
                    ProvisionsAmount
                  (Thousands)
                
                Ratio
                
                Amount
                  (Thousands)
                
                Ratio
                
                Amount
                    (Thousands)
                
                Ratio**As
                    of December 31, 2005:**Total
                    Capital (to Risk-Weighted Assets)
                
                $
                17,841
                
                
                101.7
                %
                $
                1,403
                
                
                8.0
                %
                $
                1,754
                
                
                10.0
                %Tier
                    1 Capital (to Risk-Weighted Assets)
                
                $
                17,738
                
                
                101.2
                %
                $
                701
                
                
                4.0
                %
                $
                1,052
                
                
                6.0
                %Tier
                    1 Capital (to Average Assets)
                
                $
                17,738
                
                
                64.1
                %
                $
                1,108
                
                
                4.0
                %
                $
                1,385
                
                
                5.0
                %
  **Item
        7. Financial Statements**
  The
        consolidated financial statements of the Company, including the notes thereto,
        and the report of independent certified public accountants are included in
        this
        Report.
  **Item
        8. Changes in and Disagreements With Accountants on Accounting and Financial
        Disclosure.**
  Not
        applicable.
  46
  **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, 2005, 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 the Company in the reports
        it files or submits 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, 2005 that materially affected, or were
        reasonably likely to materially affect, its internal controls over financial
        reporting.
  **ITEM
        8** **B.
        Controls and Procedures**
  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.
        Directors of the Bank serve for a term of one year and are elected by the
        Company, as sole shareholder of the Bank, each year at the Bank’s annual meeting
        of shareholders. The Bank’s officers are 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, 2005, (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.
  47
  Name
                  (Age)
              
              Director
                  Since
              
              Position(s)
                  with the Company and business experienceColin
                  Forkner (62)
              
              2005
              
              Director;
                  Chief Executive OfficerMichael
                  Hahn (47)
              
              2005
              
              Director;
                  PresidentRichard
                  W. Grinyer (57)
              
              2005
              
              Director;
                  Executive Vice PresidentThomas
                  J. Applegate (53)
              
              2006
              
              Director,
                  Partner, CEA, LLP, accounting firmMichael
                  V. Cummings (64)
              
              2005
              
              Director;
                  Bank ConsultantDavid
                  E. Davies (71)
              
              2005
              
              Director;
                  Instructor of Managerial Finance at the University of
                  PhoenixFred
                  A. deBoom (70)
              
              2005
              
              Director;
                  managing partner in Sonfad Associates, a merger and acquisition
                  consulting
                  firmDavid
                  Johnson (59)
              
              2005
              
              Director;
                  Vice President-Finance of Affinity Medical Technologies,
                  LLCDennis
                  C. Lindeman (58)
              
              2005
              
              Chairman;
                  Certified Financial PlannerDenis
                  H. Morgan (53)
              
              2005
              
              Director;
                  Civil engineerJames
                  W. Shute (39)
              
              2005
              
              Director;
                  President of J.W. Shute International, a real estate development
                  and
                  consulting firmJohn
                  Vuona (48)
              
              2005
              
              Director;
                  Partner, Bentson & Vuona, LLP, accounting firmTerry
                  Stalk (51)
              
              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 David Johnson satisfies the definition of audit
        committee financial expert. Mr. Johnson 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
        Dennis Lindeman, David Davies, and David Johnson, chairman.
  (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 the Company’s
        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.
  48
  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.
  **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 adopted the Pacific Coast National Bank Code of Ethics applicable
        to
        all directors, officers and employees. The code of conduct is publicly available
        as Exhibit 14 to this Report. If the Company makes any substantive amendments
        to
        the code of conduct or grants any waiver, including any implicit waiver,
        from a
        provision of the code to the Company’s Chief Executive Officer or Chief
        Financial Officer, it will disclose the nature of such amendment or waiver
        in a
        report on Form 8-K.
 
 **Item
        10. Executive Compensation**
  **Summary
        of cash and certain other compensation**
  The
        following table sets forth certain summary information concerning the cash
        and
        non-cash compensation awarded to, earned by, or paid to the Company’s chief
        executive officer and any other officer or key employee whose salary and
        bonus
        for the fiscal year ended December 31, 2005 exceeded $100,000. No executive
        officer who would have otherwise been included in such table on the basis
        of
        salary and bonus earned for the 2005 fiscal year has been excluded by reason
        of
        his or her termination of employment or change in executive status during
        that
        year. These four officers are referred to as the named executive officers
        in
        this proxy statement.
  49
 **Annual
                    Compensation**
                
                **Long-Term
                    Compensation****Name
                      and Principal Position**
                
                **Year**
                
                **Salary
                    (1)**
                
                **Bonus**
                
                **Other
                    Annual****Compensation**
                
                **Securities
                    Underlying Options**
                
                **All
                      Other Compensation**Colin
                    M. Forkner
                
                
                2005
                
                
                216,456
                
                
                -
                
                
                5,250
                
                
                91,200
                
                
                -Chief
                    Executive Officer
                
                
                2004
                
                
                86,350
                
                
                -
                
                
                -
                
                
                -
                
                
                -2003
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Michael
                    S. Hahn
                
                
                2005
                
                
                186,203
                
                
                -
                
                
                3,500
                
                
                91,200
                
                
                -President
                    and Chief
                
                
                2004
                
                
                94,200
                
                
                -
                
                
                -
                
                
                -
                
                
                -Operating
                    Officer
                
                
                2003
                
                
                15,700
                
                
                -
                
                
                -
                
                
                -
                
                
                -Richard
                    W. Grinyer
                
                
                2005
                
                
                183,111
                
                
                -
                
                
                3,500
                
                
                91,200
                
                
                -Executive
                    Vice
                
                
                2004
                
                
                82,200
                
                
                -
                
                
                -
                
                
                -
                
                
                -President
                    and Chief
                
                
                2003
                
                
                13,700
                
                
                -
                
                
                -
                
                
                -
                
                
                -Credit
                    OfficerTerry
                    A. Stalk
                
                
                2005
                
                
                135,628
                
                
                -
                
                
                3,500
                
                
                57,000
                
                
                -Executive
                    Vice
                
                
                2004
                
                
                31,750
                
                
                -
                
                
                -
                
                
                -
                
                
                -President
                    and Chief
                
                
                2003
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Financial
                    Officer
  (1)
        Includes payments under consulting agreements and employment
        agreements.
  **Stock
        option grants in 200** **5**
  The
        following table provides information concerning individual grants of stock
        options during calendar year 2005 to each of the named executive officers.
        All
        of the stock options were granted at the time that the Bank opened for business
        and had an exercise price of $10.00 per share, the initial offering
        price.
 **Number
                    of Securities**
                
                **Percent
                    of Total Options****Underlying
                    Options**
                
                **Granted
                    to Employees in**
                
                **Exercise
                    Price**
                
                **Expiration****Name**
                
                **Granted
                    (1)**
                
                **Fiscal
                    2005**
                
                **Per
                    Share**
                
                **Date**Colin
                    M. Forkner
                
                
                91,200
                
                
                25.61%
                
                $
                10.00
                
                
                05/16/15Michael
                    S. Hahn
                
                
                91,200
                
                
                25.61%
                
                $
                10.00
                
                
                05/16/15Richard
                    W. Grinyer
                
                
                91,200
                
                
                25.61%
                
                $
                10.00
                
                
                05/16/15Terry
                    A. Stalk
                
                
                57,000
                
                
                16.01%
                
                $
                10.00
                
                
                05/16/15
  **Aggregate
        option exercises and fiscal year-end option values**
  The
        following table provides information about stock options exercised in 2005
        and
        options held as of December 31, 2005 by each of the named executive officers.
        Actual gains on exercise, if any, will depend on the value of the Company’s
        common stock on the date on which the shares are sold.
  50
  **Number
                    of Securities Underlying Unexercised Options at**
                  **December
                    31, 2005****(2)**
                
                **Value
                    of Unexercised In-the-Money Options at**
                  **December
                    31, 2005****(3)****Name**
                
                **Shares
                    Acquired on Exercise**
                
                **Value
                    Realized****(1)**
                
                **Exercisable**
                
                **Unexercisable**
                
                **Exercisable**
                
                **Unexercisable**Colin
                    M. Forkner
                
                
                -
                
                
                -
                
                
                -
                
                
                91,200
                
                
                -
                
                $
                164,160Michael
                    S. Hahn
                
                
                -
                
                
                -
                
                
                -
                
                
                91,200
                
                
                -
                
                $
                164,160Richard
                    W. Grinyer
                
                
                -
                
                
                -
                
                
                -
                
                
                91,200
                
                
                -
                
                $
                164,160Terry
                    F. Stalk
                
                
                -
                
                
                -
                
                
                -
                
                
                57,000
                
                
                -
                
                $
                102,600
  Notes
                  to table(1)
                  “Value Realized” is the difference between the exercise price and the
                  market price on the exercise date, multiplied by the number of
                  options
                  exercised. “Value Realized” numbers do not necessarily reflect what the
                  executive might receive if he or she sells the shares acquired
                  by the
                  option exercise, since the market price of the shares at the time
                  of sale
                  may be higher or lower than the price on the exercise date of the
                  option.
                  In addition, the “Value Realized” numbers do not reflect the tax impact of
                  the exercise.(2)
                  “Exercisable” refers to those options which were vested while
                  “unexercisable” refers to those options which were
                  unvested.(3)
                  “Value of Unexercised In-the-Money Options” is the aggregate, calculated
                  on a grant-by-grant basis, of the product of the number of unexercised
                  options at the end of 2005 multiplied by the difference between
                  the
                  exercise price for the grant and the year-end market price, excluding
                  grants for which the difference is equal to or less than
                  zero.
  **Stock
        incentive plan**
  The
        Company is seeking shareholder approval of the 2005 Stock Incentive Plan
        at the
        2006 annual meeting of shareholders. Set forth below a description of the
        material terms of the 2005 Stock Incentive Plan.
  ***Overview***
  The
        2005
        Stock Incentive Plan has been established for the purpose of (1) enabling
        the
        Bank and the Company to attract and retain the best available individuals
        for
        positions of substantial responsibility, (2) providing additional incentive
        to such persons by affording them an equity participation in the Company,
        (3)
        rewarding directors, executive officers and employees for their contributions
        to
        the Bank and the Company, and (4) promoting the success of the Company’s
        business by aligning the financial interests of directors, executive officers
        and employees providing personal services to the Bank and the Company with
        long-term shareholder value.
  ***Administration
        of the plan***
  The
        2005
        Stock Incentive Plan is being administered by the Compensation Committee,
        and
        may be administered by the full board of directors or any committee designated
        by the board (such committee, or the full board, as the case may be, is referred
        to as the “Committee”). The Committee has the
        authority to grant awards under the plan, to determine the terms of each
        award,
        to interpret the provisions of the plan and to make all other determinations
        that it may deem necessary or advisable to administer the plan. The plan
        authorizes the Committee to grant awards in the form of stock options or
        restricted stock to eligible persons. The Committee may grant these awards
        on an
        individual basis or design a program providing for grants to a group of eligible
        persons. Among other things, the Committee is authorized to determine, within
        the limits of the plan, the number of shares of common stock subject to an
        award, the persons to whom an award is granted and, with respect to a stock
        option award, the exercise price and forfeiture or termination provisions
        of
        each option. Each award will be subject to a separate award agreement which
        will
        reflect the terms of the stock option or restricted stock grant.
  51
  ***Shares
        subject to the plan***
  The
        2005
        Stock Incentive Plan provides that the maximum number of shares of the Company’s
        common stock that may be issued under the plan is 478,800 shares, all of
        which
        may be awardable as “incentive stock options.” To the extent that any awards
        shall terminate, expire or be canceled, the shares subject to the awards
        shall
        remain available for issuance pursuant to subsequent stock option or restricted
        stock awards.
  ***Eligibility
        and limitations***
  Stock
        options granted under the 2005 Stock Incentive Plan provide participants
        with
        the right to purchase shares of the Company’s common stock. Both “incentive
        stock options” and “non-statutory options” may be granted under the 2005 Stock
        Incentive Plan. Incentive stock options are stock options intended to satisfy
        the requirements of section 422 of the Internal Revenue Code. As such, incentive
        stock options may be granted only to employees. In addition, the plan provides
        that incentive stock options may not be granted to any eligible participant
        to
        the extent that the fair market value of all incentive stock option shares
        that
        become exercisable for the first time by the participant during any calendar
        year under all stock option plans exceeds $100,000. Nonstatutory options
        are
        stock options that do not satisfy the requirements of section 422 of the
        Internal Revenue Code and may be granted to employees and non-employee directors
        and consultants.
  Restricted
        stock awards provide participants with present ownership rights in the Company’s
        common stock, subject to certain terms, conditions, restrictions and limitations
        on full ownership that may be designated by the Committee. Restricted stock
        awards may be granted to employees and non-employee directors and consultants.
  Substantially
        all of the employees of the Company and Bank, and all of the Company’s
        non-employee directors, will be eligible for participation in the 2005 Stock
        Incentive Plan. Although authorized under the plan, the Company does not
        currently anticipate granting options to consultants under the
        plan.
  ***Exercise
        price of options***
  The
        exercise price of an incentive stock option may not be less than the fair
        market
        value of the common stock on the date of grant or less than 110% of the fair
        market value if the participant owns more than 10% of the Company’s outstanding
        common stock. When the incentive stock option is exercised, the Company will
        be
        entitled to place a legend on the certificates representing the shares of
        common
        stock purchased upon exercise of the option to identify them as shares of
        common
        stock purchased upon the exercise of an incentive stock option.
  The
        exercise price of non-statutory options may not be less than 100% of the
        fair
        market value of the common stock on the date of grant. Fair market value
        will be
        determined based upon any reasonable measure of fair market value. The Committee
        may permit the option holder to pay the exercise price in cash or, upon
        conditions established by the Committee, by delivery of shares of the Company’s
        common stock that had been owned by the participant for at least six months
        prior to the date of exercise.
  ***Term
        of options***
  The
        term
        of an option will be specified in the applicable stock option agreement.
        The
        terms of a particular option agreement may provide that the options will
        terminate, among other reasons, upon the holder’s termination of employment or
        other status with the Company or the Bank, upon a specified date, upon the
        holder’s death or disability or upon the occurrence of a change in control of
        the Company or the Bank. A stock option agreement may provide that if the
        holder
        dies or becomes disabled, the holder’s estate or personal representative may
        exercise the option. The Committee may, within the terms of the plan and
        the
        applicable stock option agreement, cancel, accelerate, pay or continue an
        option
        that would otherwise terminate for the reasons discussed above.
  52
  The
        term
        of an incentive stock option may not exceed ten (10) years from the date
        of
        grant; however, any incentive stock option granted to a participant who owns
        more than 10% of the Company’s outstanding common stock will not be exercisable
        more than five (5) years after the date the option is granted. Subject to
        any
        further limitations in the applicable stock option agreement, if a participant’s
        employment is terminated, an incentive stock option will expire and become
        unexercisable no later than three months after the date of termination of
        employment. If, however, termination of employment is due to death or
        disability, up to one year may be substituted for the three-month period.
        Incentive stock options are also subject to the further restriction that
        the
        aggregate fair market value, determined as of the date of the grant, of common
        stock as to which any incentive stock option first becomes exercisable in
        any
        calendar year is limited to $100,000 per recipient. If incentive stock options
        covering common stock with a value in excess of $100,000 first become
        exercisable in any one calendar year, the excess will be treated as
        non-qualified stock options. For purposes of
        determining which options, if any, have been granted in excess of the $100,000
        limit, options will be considered in the order they were granted.
  ***Transferability***
  Awards
        granted under the 2005 Stock Incentive Plan may not be sold, transferred,
        assigned, pledged, alienated or encumbered in any manner except by will or
        by
        the laws of descent and distribution.
  ***Recapitalizations
        and reorganizations***
  In
        the
        event of any change in the outstanding shares of stock by reason of any merger,
        reorganization, consolidation, recapitalization, stock dividend, stock split,
        reverse stock split, spinoff, combination or exchange of shares or other
        corporate change, the Committee may, subject to certain restrictions applicable
        to incentive stock options, make such substitution or adjustment as it deems
        to
        be equitable or appropriate as to the maximum number of shares that may be
        issued under the plan, the number or kind of shares subject to an option,
        the
        exercise price of an option, or any other affected terms of any option.
  ***Amendment
        and termination of the plan***
  The
        2005
        Stock Incentive Plan will become effective on the date that the plan is approved
        by the Company’s shareholders and will continue in effect until all shares
        issuable under the plan have been purchased or acquired, but in no event
        may any
        option be granted under the plan more than 10 years after it was adopted.
        The
        termination of the plan generally will not have any effect on outstanding
        stock
        option or restricted stock award.
  The
        Committee may amend, alter, suspend, or terminate the plan at any time; provided
        that no amendment, alteration, suspension or termination may be made that
        would
        substantially impair any award previously granted to without the consent
        of the
        participant.
  53
  ***Federal
        income tax consequences***
  The
        following discussion outlines generally the federal income tax consequences
        of
        participation in the 2005 Stock Incentive Plan. Individual circumstances
        may
        vary and each participant should rely on his or her own tax counsel for advice
        regarding federal income tax treatment under the plan.
  Incentive
        Stock Options .
        A
        participant will not be taxed upon the grant or exercise of all or any portion
        of an incentive stock option. Instead, the participant will be taxed when
        he or
        she sells the shares of common stock purchased upon exercise of the incentive
        stock option. The participant will be taxed on the difference between the
        price
        he or she paid for the common stock and the amount for which he or she sells
        the
        common stock. If the participant does not sell the shares of common stock
        prior
        to two years from the date of grant of the incentive stock option and one
        year
        from the date the common stock is transferred to him or her, any gain will
        be a
        capital gain, and the Company will not be entitled to a corresponding deduction.
        If the participant sells the shares of common stock at a gain before that
        time,
        the difference between the amount the participant paid for the common stock
        and
        the lesser of its fair market value on the date of exercise or the amount
        for
        which the stock is sold will be taxed as ordinary income, and the Company
        will
        be entitled to a corresponding deduction. If the participant sells the shares
        of
        common stock for less than the amount he or she paid for the stock prior
        to the
        one- or two-year period indicated, no amount will be taxed as ordinary income,
        and the loss will be taxed as a capital loss. Exercise of an incentive stock
        option may subject a participant to, or increase a participant’s liability for,
        the alternative minimum tax.
  Non-Statutory
        Options .
        A
        participant will not be taxed upon the grant of a non-statutory option or
        at any
        time before the exercise of the option or a portion of the option. When the
        participant exercises a non-statutory option or portion of the option, he
        or she
        will recognize compensation taxable as ordinary income in an amount equal
        to the
        excess of the fair market value of the common stock on the date the option
        is
        exercised over the price paid for the common stock, and the Company will
        then be
        entitled to a corresponding deduction. Depending upon the time period for
        which
        shares of common stock are held after exercise of a non-statutory option,
        the
        sale or other taxable disposition of shares acquired through the exercise
        of a
        non-statutory option generally
        will result in a short- or long-term capital gain or loss equal to the
        difference between the amount realized on the disposition and the fair market
        value of such shares when the non-statutory option was exercised.
  Restricted
        stock .
        A
        participant will generally not be taxed upon the grant of a restricted stock
        award or at any time before the restricted stock becomes freely transferable
        or
        ceases to be subject to a “substantial risk of forfeiture.” Generally speaking,
        the tax burden associated with restricted stock typically will be incurred
        when
        the vesting period or restrictions lapse. At that time, the participant will
        recognize compensation taxable as ordinary income in an amount equal to the
        difference between the fair market value of the restricted stock at the time
        of
        vesting and the amount (if any) paid for the restricted stock, and the Company
        will recognize a corresponding deduction. In addition, the participant’s holding
        period in the stock would also begin at the time of vesting.
  The
        Internal Revenue Code also permits a participant to make a special election
        to
        recognize taxable income at the time of grant, rather than upon vesting,
        in
        which case the participant would recognize compensation taxable as ordinary
        income in an amount equal to the difference between the fair market value
        of the
        restricted stock at the time of grant and the amount (if any) paid for the
        restricted stock, and the Company would recognize a corresponding deduction.
        The
        election also causes the participant’s holding period to begin at the time of
        grant. By making this election, participants are not subject to income tax
        when
        the shares vest and are not subject to further tax until the shares are sold.
        However, if a participant were to leave the company prior to vesting, he
        or she
        would not be entitled to any refund of taxes previously paid or a tax loss
        with
        respect to the stock forfeited.
  54
  Depending
        upon the time period for which the shares of common stock are held after
        vesting
        or, in the case of the special tax election, after grant, the sale or other
        taxable disposition of shares acquired by means of a restricted stock grant
        generally will result in a short- or long-term capital gain or loss equal
        to the
        difference between the amount realized on the disposition and the participant’s
        tax basis in the stock. The participant’s tax basis would generally be equal to
        the amount he or she paid for the restricted stock and the amount included
        as
        ordinary income upon grant or vesting, as applicable.
  ***Plan
        benefits***
  In
        accordance with the terms of their respective employment agreements, the
        Company
        has issued options to purchase 91,200 shares of common stock to each of Colin
        M.
        Forkner, Michael S. Hahn and Richard W. Grinyer and options to purchase 57,000
        shares of common stock to Terry A. Stalk. Each of these option grants was
        made
        under the Company’s 2005 Stock Incentive Plan. To date, the Company has not
        issued any shares of restricted stock under the 2005 Stock Incentive Plan.
        Except as noted above, it is not possible to determine the number of stock
        options or shares of restricted stock that may be awarded under the 2005
        Stock
        Incentive Plan to any particular individual.
  **Consulting
        agreements**
  On
        February 1, 2004, the Company entered into a consulting agreement with
        Mr. Forkner, providing for the payment of $7,850 per month in connection
        with his activities in organizing the Company and the Bank. In addition,
        the
        consulting agreement provided for deferred compensation of $5,083 per month
        to
        be paid on the date the Bank opened for business.
  On
        November 1, 2003, the Company entered into a consulting agreement with
        Mr. Hahn, providing for the payment of $7,850 per month in connection with
        his activities in organizing the Company and the Bank. In addition, the
        consulting agreement provided for deferred compensation of $3,834 per month
        to
        be paid on the date the Bank opened for business.
  On
        November 1, 2003, the Company entered into a consulting agreement with GRCAC,
        LLC, providing for the payment of $6,850 per month in connection with its
        activities in organizing the Company and the Bank. In addition, the consulting
        agreement provided for deferred compensation of $4,000 per month to be paid
        on
        the date the Bank opened for business. GRCAC, LLC is a California limited
        liability company organized by Richard W. Grinyer for the purpose of providing
        consulting services to Pacific Coast National Bancorp and the Bank in connection
        with the organization and pre-opening activities of each entity. Richard
        Grinyer
        is the managing member of GRCAC, LLC.
  On
        August
        1, 2004, the Company entered into a consulting agreement with Terry A. Stalk,
        providing for the payment of $6,350 per month in connection with her activities
        in organizing the Company and the Bank. In addition, the consulting agreement
        provided for deferred compensation of $3,250 per month to be paid on the
        date
        the Bank opened for business.
  **Employment
        agreements**
  The
        Company has engaged the services of four senior executive officers at the
        Bank:
        Colin M. Forkner, the Bank’s Chief Executive Officer; Michael S. Hahn, the
        Bank’s President and Chief Operating Officer; Richard W. Grinyer, the Bank’s
        Chief Credit Officer; and Terry A. Stalk, the Bank’s Chief Financial Officer.
        Each of these persons has entered into an employment agreement with the Bank,
        and those agreements are described below. The Company has not entered into
        employment agreements with any of the Bank’s employees other than Messrs.
        Forkner, Grinyer and Hahn and Ms. Stalk. All of its other employees are
        employees-at-will serving at the pleasure of the board of
        directors.
  55
  *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
        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.
  Under
        the
        terms of the agreement, Mr. Forkner receives 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 is also eligible to participate in any executive
        incentive bonus plan and all other benefit programs adopted by the Bank.
        Mr.
        Forkner also receives other customary benefits such as health, dental and
        life
        insurance, membership fees to banking and professional organizations and
        an
        automobile allowance. In addition, the agreement states that the Bank will
        maintain a split dollar life insurance policy in the amount of $1,000,000,
        for
        the benefit of Mr. Forkner. As of December 31, 2005, this had not been put
        into
        place. A one-year term policy for $1,000,000 was put into place for Mr. Forkner
        in January 2006.
  Under
        the
        terms of his agreement, Mr. Forkner has also received a grant of options
        to
        acquire 91,200 shares of the Company’s common stock at an exercise price of
        $10.00 per share, exercisable within ten (10) years from the date of grant
        of
        the options. Of these options, 30,000 are being treated as incentive stock
        options and 61,200 are being treated as non-statutory stock options. All
        of the
        options vest ratably over a period of three years beginning on the first
        anniversary of the date that the Bank opened 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 is limited in scope
        to twenty miles from the main office of the Bank.
  *Michael
        S. 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 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 receives 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 is also eligible to participate in any executive incentive
        bonus plan and all other benefit programs adopted by the Bank. Mr. Hahn also
        receives other customary benefits such as health, dental and life insurance,
        membership fees to banking and professional organizations and an automobile
        allowance In addition, the agreement states that the Bank will maintain a
        split
        dollar life insurance policy in the amount of $1,000,000, for the benefit
        of Mr.
        Hahn. As of December 31, 2005, this had not been put into place. A one-year
        term
        policy for $1,000,000 was put into place for Mr. Hahn in January 2006.
  56
  Under
        the
        terms of his agreement, Mr. Hahn has also received a grant of options to
        acquire
        91,200 shares of the Company’s common stock at an exercise price of $10.00 per
        share, exercisable within ten (10) years from the date of grant of the options.
        Of these options, 30,000 are being treated as incentive stock options and
        61,200
        are being treated as non-statutory stock options. All of the options vest
        ratably over a period of three years beginning on the first anniversary of
        the
        date that the Bank opened 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 is limited in scope to
        fifty miles from the main office of the Bank.
  *Richard
        W. 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 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. Grinyer receives 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 is also eligible to participate in any executive
        incentive bonus plan and all other benefit programs adopted by the Bank.
        Mr.
        Grinyer also receives other customary benefits such as health, dental and
        life
        insurance, membership fees to banking and professional organizations and
        an
        automobile allowance. In addition, the agreement states that the Bank will
        maintain a split dollar life insurance policy in the amount of $1,000,000,
        for
        the benefit of Mr. Grinyer. As of December 31, 2005, this had not been put
        into
        place. A one-year term policy for $1,000,000 was put into place for Mr. Grinyer
        in January 2006.
  Under
        the
        terms of his agreement, Mr. Grinyer has also received a grant of options
        to
        acquire 91,200 shares of the Company’s common stock at an exercise price of
        $10.00 per share, exercisable within ten (10) years from the date of grant
        of
        the options. Of these options, 30,000 are being treated as incentive stock
        options and 61,200 are being treated as non-statutory stock options. All
        of the
        options vest ratably over a period of three years beginning on the first
        anniversary of the date that the Bank opened 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 is 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 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.
  57
  Under
        the
        terms of the agreement, Ms. Stalk receives 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. Ms. Stalk is also eligible to participate in any executive incentive
        bonus plan and all other benefit programs adopted by the Bank. Ms. Stalk
        also
        receives other customary benefits such as health, dental and life insurance,
        membership fees to banking and professional organizations and an automobile
        allowance. In addition, the agreement states that the Bank will maintain
        a split
        dollar life insurance policy in the amount of $1,000,000, for the benefit
        of Ms.
        Stalk. As of December 31, 2005, this had not been put into place. A one-year
        term policy for $1,000,000 was put into place for Ms. Stalk in January
        2006.
  Under
        the
        terms of her agreement, Ms. Stalk has also received a grant of options to
        acquire 57,000 shares of the Company’s common stock at an exercise price of
        $10.00 per share, exercisable within ten (10) years from the date of grant
        of
        the options. Of these options, 30,000 are being treated as incentive stock
        options and 27,000 are being treated as non-statutory stock options. All
        of the
        options vest ratably over a period of three years beginning on the first
        anniversary of the date that the Bank opened 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 is limited in scope to
        fifty miles from the main office of the Bank.
  **Health
        and** **insurance
        benefits**
  The
        Bank’s full-time officers and employees are provided hospitalization and major
        medical insurance. The Bank pays a substantial part of the premiums for these
        coverages. All insurance coverage under these plans is provided under group
        plans on generally the same basis to all full-time employees. In addition,
        the
        Bank maintains term life insurance, which provides benefits to all employees
        who
        have completed one month of full-time employment with the Bank.
  **Item
        11. Security Ownership of Certain Beneficial Owners and
        Management**
  **Securities
        authorized for issuance under equity compensation plans**
  On
        April
        20, 2005, the Company’s board of directors formally adopted the 2005 Stock
        Incentive Plan, subject to shareholder approval. The 2005 Stock Incentive
        Plan
        provides for equity-based compensation incentives through the grant of stock
        options or restricted stock awards. The plan has reserved 478,800 shares
        of
        common stock for issuance pursuant to stock options or restricted stock awards.
  The
        following table sets forth the number of options granted in 2005, subject
        to
        shareholder approval of the plan, and the weighted average exercise
        price.
  58
  2005Weighted-AverageShares
                
                Exercise
                    PriceOutstanding
                    at beginning of year
                
                
                -
                
                $
                -Granted
                
                
                356,050
                
                $
                10.04Exercised
                
                
                -
                
                $
                -Forfeited
                
                
                (
                    2,250
                )
                $
                10.00Outstanding
                    at end of year
                
                
                353,800
                
                $
                10.04Options
                    exercisable at year-end
                
                
                -
                
                $
                -
  Shareholder
        approval of the 2005 Stock Incentive Plan is being sought at the 2006 annual
        meeting of shareholders. For a description of the material terms of the 2005
        Stock Incentive Plan, please see the section *“Part
        III - Item 10 - Executive compensation - Stock incentive
        plan.”*
  **Security
        ownership of certain beneficial owners and management**
  This
        following table sets forth information regarding the beneficial ownership
        of the
        Company’s common stock as of February 24, 2006, for:
  ●  each
        person known by the Company to own beneficially more than 5% of its common
        stock;
  ●  each
        named officer named in the summary compensation table;
  ●  each
        of
        the Company’s directors and director nominees; and
  ●  all
        of
        the Company’s directors and executive officers as a group.
  Beneficial
        ownership is determined in accordance with the rules of the Securities and
        Exchange Commission and includes voting and investment power with respect
        to the
        securities. Subject to applicable community property laws, the persons named
        in
        the table have sole voting and investment power with respect to all shares
        of
        common stock shown as beneficially owned by them. The applicable percentage
        of
        ownership for each shareholder is based on 2,280,000 shares of common stock
        outstanding as of February 24, 2006. In addition, shares of common stock
        issuable upon exercise of options and other rights beneficially owned that
        are
        exercisable on or before May 16, 2006, are deemed outstanding for the purpose
        of
        computing the percentage ownership of the person holding those options and
        other
        rights, and the group as a whole, but are not deemed outstanding for computing
        the percentage ownership of any other person.
  59
  **Name
                  of Beneficial Owners**
              
              **Number
                  of Shares Beneficially Owned**
              
              **Percent
                  of Class****Greater
                  Than 5% Shareholders:**None**Directors
                  and Named Executive Officers:**Thomas
                  J. Applegate
              
              6,000(2)
              
              *Michael
                  Cummings
              
              5,200(2)(3)
              
              *David
                  E. Davies
              
              4,300(2)(3)
              
              *Fred
                  A. deBoom
              
              10,000(2)(3)
              
              *Colin
                  Forkner
              
              36,400(2)(4)
              
              1.57%Richard
                  Grinyer
              
              70,400(1)(2)(4)
              
              3.03%Michael
                  Hahn
              
              52,400(1)(2)(4)
              
              2.26%David
                  Johnson
              
              16,000(2)(3)
              
              *Dennis
                  C. Lindeman
              
              35,960(2)(6)
              
              1.57%Denis
                  Hugh Morgan
              
              40,000(1)(2)
              
              1.74%James
                  Shute
              
              25,600(1)(2)
              
              1.12%John
                  Vuona
              
              6,400(2)(3)
              
              *Terry
                  Stalk
              
              25,000(2)(5)
              
              1.09%All
                  directors and executive officers as a group
              
              333,660
              
              13.40%
  Notes
        to beneficial ownership table


(1)
              Includes
                  organizer warrants to acquire 10,000 shares of common stock.
 (2)
              Includes
                  shareholder warrants to acquire one share for each five shares
                  purchased
                  in the offering.
 (3)
              Includes
                  outside director warrants to acquire 4,000 shares of common stock
                  per
                  outside director.
 (4)
              Includes
                  options to acquire 30,400 shares of common stock, which will become
                  exercisable within sixty days following the date of this proxy
                  statement.
 (5)
              Includes
                  options to acquire 19,000 shares of common stock, which will become
                  exercisable within sixty days following the date of this proxy
                  statement.
 (6)
              Includes
                  organizer warrants to acquire 14,000 shares of common stock.







**Item
      12. Certain 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.
  In
        the
        case of loans to related parties or loan guarantees by related
        parties:
  60
  ●
              the
                  loans will be evidenced by promissory notes naming the Bank as
                  payee;
  ●
              the
                  terms of the loans will be comparable to those normally assessed
                  by other
                  lenders for similar loans made in the Bank’s primary market
                  area;
  ●
              the
                  loans will be repaid pursuant to appropriate amortization schedules
                  and
                  contain default provisions comparable to those normally used by
                  other
                  commercial lenders for similar
                  loans;
  ●
              the
                  loans will be made only if credit reports and financial statements
                  show
                  the loans to be collectible and the borrowers are satisfactory
                  credit
                  risks, in light of the nature and terms of the loans and other
                  circumstances;
  ●
              the
                  loans meet the loan policies normally used by other commercial
                  lenders for
                  similar loans;
  ●
              the
                  purpose of the loans and the disbursements of proceeds will be
                  reviewed
                  and monitored in a manner comparable to that normally used by commercial
                  lenders for similar loans; and
  ●
              the
                  loans will not violate the requirements of any banking or other
                  financial
                  institution’s regulatory
                  authority.




**Organizational
      advances**




The
      Company’s organizers advanced funds for organizational and other pre-opening
      expenses prior to the time that the Bank opened for business. The advances
      were
      noninterest bearing and had no stated maturity. The Company repaid the advances
      from the proceeds of the initial public offering upon the opening of the Bank.
      In addition, in exchange for undertaking this obligation, the organizers
      received, in the aggregate, warrants to purchase 234,000 shares of the Company’s
      common stock. These warrants are exercisable at a price of $10.00 per share
      and
      may be exercised at any time within ten years of the date that the Bank opened
      for business.




61




**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 2005 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+*10.19
              
              Form
                  of Incentive Stock Option Agreement+10.20
              
              Form
                  of Nonqualified Stock Option Agreement+14
              
              Code
                  of Ethics21
              
              Subsidiaries
                  of Registrant23
              
              Consent
                  of Independent Accountants31.1
              
              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.
                  Sec.1350.





*
      Previously filed as an exhibit to the registration statement on Form SB-2 filed
      by the registrant with the Securities and Exchange Commission on September
      8,
      2004.


+
      Indicates a compensatory plan or contract.




62




**(b)**  None




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




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


**2005**
              
              **2004**Audit
                  Fees
              
              $
              13,000
              
              $
              3,000Audit-related
                  Fees
              
              
              -
              
              
              -Tax
                  Fees
              
              
              3,000
              
              
              -All
                  Other Fees
              
              
              -
              
              
              -Total
              
              $
              16,000
              
              $
              3,000




As
      defined by the Securities and Exchange Commission, (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-QSB, 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 Securities and Exchange Commission 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 Securities and Exchange Commission’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 Securities and Exchange Commission’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 the Company
      or any of its 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.




63




**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**
              
              
              By:/s/
                Colin M. Forkner
              Colin
                M. Forkner
              Chief
                Executive 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/ Colin
                      Forkner
                  
                  Director
                  
                  March
                      24, 2006Colin
                      Forkner/s/ Thomas
                      J. Applegate
                  
                  Director
                  
                  March
                      24, 2006Thomas
                      J. Applegate/s/ Michael
                      Cummings
                  
                  Director
                  
                  March
                      24, 2006Michael
                      Cummings/s/ David
                      E. Davies
                  
                  Director
                  
                  March
                      24, 2006David
                      E. Davies/s/ Fred
                      A. de Boom
                  
                  Director
                  
                  March
                      24, 2006Fred
                      A. de Boom/s/ Richard
                      Grinyer
                  
                  Director
                  
                  March
                      24, 2006Richard
                      Grinyer/s/ Michael
                      Hahn
                  
                  Director
                  
                  March
                      24, 2006Michael
                      Hahn/s/ David
                      Johnson
                  
                  Director
                  
                  March
                      24, 2006David
                      Johnson
 64
 
 SIGNATURE
                
                TITLE
                
                DATE/s/ Dennis
                    Lindeman
                
                Director
                
                March
                    24, 2006Dennis
                    Lindeman/s/ Denis
                    H. Morgan
                
                Director
                
                March
                    24, 2006Denis
                    H. Morgan/s/ James
                    W. Shute
                
                Director
                
                March
                    24, 2006James
                    W. Shute/s/ Jack
                    Vuona
                
                Director
                
                March
                    24, 2006Jack
                    Vuona/s/ Terry
                    Stalk
                
                Principal
                    Financial Officer
                
                March
                    24, 2006Terry
                    Stalk


65










**** **PACIFIC
          COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **FINANCIAL
          STATEMENTS**
 **WITH**
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 **December
          31, 2005 and 2004**


**CONTENTS**







**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
            **1****FINANCIAL
                STATEMENTS****Consolidated
                Balance Sheets**
            **2****Consolidated
                Statements of Earnings**
            **3****Consolidated
                Statements of Cash Flows**
            **4****Consolidated
                Statement of Shareholders’ Equity**
            **5****Notes
                to Consolidated Financial Statements**
            **6
                through 21**




















**Vavrinek,
              Trine, Day & Co., LLP**
              Certified
                Public Accountants & Consultants
            **VALUE
                THE DIFFERENCE**


**Report
        of Independent Registered Public Accounting Firm**
 
 The
        Board
        of Directors and Shareholders
 Pacific
        Coast National Bancorp and Subsidiary
 
 We
        have
        audited the accompanying consolidated balance sheets of Pacific Coast National
        Bancorp and **** Subsidiary
        as of December 31, 2005 and 2004, and the related consolidated statements
        of
        earnings, shareholders’ equity and cash flows for the years then ended. These
        consolidated financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
 
 We
        conducted our audits in accordance with the 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 audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Pacific Coast National
        Bancorp and Subsidiary as of December 31, 2005 and 2004, and the results
        of its
        operations and cash flows for the two years ended December 31, 2005, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 
 
 Laguna
        Hills, California
 January
        6, 2006
  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


1


**PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 **December
        31, 2005 and 2004**
  
 **ASSETS**2005
              
              
              2004Cash
                  and due from banks
              
              $
              1,699,481
              
              $
              57,270Federal
                  funds sold
              
              
              6,580,000
              
              
              -**TOTAL
                  CASH AND CASH EQUIVALENTS**
              
              
              8,279,481
              
              
              57,270Time
                  deposits in other financial institutions
              
              
              2,750,000
              
              
              -Securities
                  held to maturity
              
              
              7,997,943
              
              
              -Loans,
                  net
              
              
              10,230,122
              
              
              -Premises
                  and equipment, net
              
              
              1,154,066
              
              
              80,360Federal
                  Reserve Bank stock, at cost
              
              
              553,700
              
              
              -Accrued
                  interest and other assets
              
              
              244,853
              
              
              63,112$
              31,210,165
              
              $
              200,742**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**DepositsNoninterest-bearing
                  demand
              
              $
              4,266,093
              
              $
              -Interest-bearing
                  demand and NOW accounts
              
              
              788,633
              
              
              -Money
                  market
              
              
              3,332,615
              
              
              -Savings
              
              
              86,283
              
              
              -Time
                  certificates of deposit of $100,000 or more
              
              
              2,412,465
              
              
              -Other
                  time certificates of deposit
              
              
              1,467,341
              
              
              -**TOTAL
                  DEPOSITS**
              
              
              12,353,430
              
              
              -Note
                  payable
              
              
              -
              
              
              825,000Due
                  to organizers
              
              
              -
              
              
              735,000Accrued
                  interest and other liabilities
              
              
              146,509
              
              
              236,623**TOTAL
                  LIABILITIES**
              
              
              12,499,939
              
              
              1,796,623Commitments
                  and contingencies
              
              
              -
              
              
              -Shareholders'
                  equityCommon
                  stock - $0.01 par value; 10,000,000 shares authorized; issued and
                  outstanding: 2,280,000 shares at December 31, 2005 and none outstanding
                  at
                  December 31, 2004
              
              
              22,800
              
              
              -Additional
                  paid-in capital
              
              
              23,271,720
              
              
              -Accumulated
                  deficit
              
              
              (4,584,294
              )
              
              (1,595,881
              )**TOTAL
                  SHAREHOLDERS' EQUITY**
              
              
              18,710,226
              
              
              (1,595,881
              )$
              31,210,165
              
              $
              200,742
  The
        accompanying notes are an integral part of these financial
        statements.
  2




**PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **CONSOLIDATED
        STATEMENTS OF EARNINGS**
 **Years
        Ended December 31, 2005 and 2004**
 
 2005
              
              
              2004Interest
                  incomeInterest
                  and fees on loans
              
              $
              230,166
              
              $
              -Federal
                  funds sold
              
              
              307,687
              
              
              -Investment
                  securities
              
              
              128,206
              
              
              -Other
              
              
              135,582
              
              
              -801,641
              
              
              -Interest
                  expenseTime
                  certificates of deposit of $100,000 or more
              
              
              25,748
              
              
              -Other
                  deposits
              
              
              51,084
              
              
              -Other
              
              
              30,022
              
              
              8,204106,854
              
              
              8,204Net
                  interest income
              
              
              694,787
              
              
              (8,204
              )Provision
                  for loan losses
              
              
              87,208
              
              
              -Net
                  interest income afterprovision
                  for loan losses
              
              
              607,579
              
              
              (8,204
              )Noninterest
                  incomeService
                  charges and fees
              
              
              3,416
              
              
              -Other
                  income
              
              
              4,379
              
              
              -7,795
              
              
              -Noninterest
                  expenseSalaries
                  and employee benefits
              
              
              1,340,480
              
              
              22,405Occupancy
              
              
              448,183
              
              
              76,916Professional
                  services
              
              
              623,972
              
              
              1,243,934Data
                  processing
              
              
              223,624
              
              
              -Office
                  expenses
              
              
              84,871
              
              
              -Marketing
              
              
              164,221
              
              
              -Stock
                  warrants granted to organizers
              
              
              494,520
              
              
              -Other
              
              
              222,316
              
              
              96,6943,602,187
              
              
              1,439,949Loss
                  before income taxes
              
              
              (2,986,813
              )
              
              (1,448,153
              )Provision
                  for income taxes
              
              
              1,600
              
              
              825Net
                  loss
              
              $
              (2,988,413
              )
              $
              (1,448,978
              )Per
                  share dataWeighted-average
                  shares outstanding
              
              
              2,280,000
              
              
              -Net
                  loss, basic
              
              $
              (1.31
              )
              $
              -
 
 The
        accompanying notes are an integral part of these financial
        statements.
  3




**CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **Years
        Ended December 31, 2005 and 2004**
 
 2005
              
              
              2004Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,988,413
              )
              $
              (1,448,978
              )Adjustments
                  to reconcile net loss to net cash used by operating
                  activities:Depreciation
                  and amortization
              
              
              119,668
              
              
              -Provision
                  for loan losses
              
              
              87,208
              
              
              -Provision
                  for off balance sheet contingencies
              
              
              15,847
              
              
              -Amortization
                  (accretion) of investment securities
              
              
              133
              
              
              -Noncash
                  compensation expense for organizer warrants
              
              
              494,520
              
              
              -Other
                  items, net
              
              
              (287,703
              )
              
              173,511Net
                  cash used by operating activities
              
              
              (2,558,740
              )
              
              (1,275,467
              )Cash
                  flows from investing activities:Purchases
                  of time deposits in other financial institutions
              
              
              (2,750,000
              )
              
              -Purchases
                  of investment securities held to maturity
              
              
              (7,998,075
              )
              
              -Purchase
                  of Federal Reserve Bank stock
              
              
              (553,700
              )
              
              -Net
                  change in loans
              
              
              (10,317,330
              )
              
              -Purchases
                  of bank premises and equipment
              
              
              (1,193,374
              )
              
              (72,106
              )Net
                  cash used in investing activities
              
              
              (22,812,479
              )
              
              (72,106
              )Cash
                  flows from financing activities:Net
                  increase in demand deposits and savings accounts
              
              
              8,473,624
              
              
              -Net
                  increase in time deposits
              
              
              3,879,806
              
              
              -Advances
                  from (repayments to) organizers
              
              
              (735,000
              )
              
              315,000Net
                  change in borrowings
              
              
              (825,000
              )
              
              825,000Proceeds
                  from sale of common stock
              
              
              22,800,000
              
              
              -Net
                  cash provided by financing activities
              
              
              33,593,430
              
              
              1,140,000Net
                  increase in cash and cash equivalents
              
              
              8,222,211
              
              
              (207,573
              )Cash
                  and cash equivalents at beginning of year
              
              
              57,270
              
              
              264,843Cash
                  and cash equivalents at end of year
              
              $
              8,279,481
              
              $
              57,270Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              73,302
              
              $
              8,204Income
                  taxes paid
              
              $
              1,600
              
              $
              825
 The
          accompanying notes are an integral part of these financial
          statements.
  4




**PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **CONSOLIDATED
        STATEMENT OF SHAREHOLDERS’ EQUITY**
 **Years
        Ended December 31, 2005 and 2004**
 
 Shares
              
              
              Common
              
              
              Additional
                Paid-in
              
              
              AccumulatedOutstanding
              
              
              Stock
              
              
              Capital
              
              
              Deficit
              
              
              Total**Balance
                  at January 1, 2004**
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              (146,903
              )
              $
              (146,903
              )Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              (1,448,978
              )
              
              (1,448,978
              )**Balance
                  at December 31, 2004**
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,595,881
              )
              
              (1,595,881
              )Initial
                  Capitalization
              
              
              2,280,000
              
              
              22,800
              
              
              22,777,200
              
              
              -
              
              
              22,800,000Warrant
                  Grants
              
              
              -
              
              
              -
              
              
              494,520
              
              
              -
              
              
              494,520Net
                  Loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,988,413
              )
              
              (2,988,413
              )**Balance
                  at December 31, 2005**
              
              
              2,280,000
              
              $
              22,800
              
              $
              23,271,720
              
              $
              (4,584,294
              )
              $
              18,710,226
 
 The
        accompanying notes are an integral part of these financial
        statements.
 
 5





**PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Organization
 
 Pacific
        Coast National Bancorp, a bank holding company, is a California corporation
        that
        incorporated on July 2, 2003. Pacific Coast National Bank (the “Bank”),
        chartered as a national bank by the Office of the Comptroller of the
        Currency, **** is
        a
        wholly-owned subsidiary of Pacific Coast National Bancorp. The Bank has been
        organized as a single operating segment and maintains two branches in southern
        Orange and northern San Diego Counties. The Bank is primarily in the business
        of
        taking deposits from and making loans to businesses and individuals throughout
        Orange and San Diego counties. The Bank’s primary source of revenue is interest
        income from loans to customers. The Bank’s customers are predominantly small and
        middle-market businesses and individuals. The Bank opened for business on
        May
        16, 2005.
 
 Principles
        of Consolidation
 
 The
        financial statements include the accounts of Pacific Coast National Bancorp
        and
        the Bank, collectively referred to herein as the “Company.” All significant
        intercompany transactions have been eliminated.
 
 Basis
        of Presentation
 
 The
        accounting and reporting policies of the Company are in accordance with
        accounting principles generally accepted in the Unites States of America
        and
        prevailing practices within the banking industry. A summary of the significant
        accounting policies consistently applied in preparation of the accompanying
        financial statements follows:
 
 Use
        of
        Estimates in the Preparation of Financial Statements
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and at the date of the financial statements and the reported
        amounts
        of certain revenues and expenses during the reporting period. Actual results
        could differ from those estimates.
 
 Presentation
        of Cash Flows
 
 For
        the
        purposes of reporting cash flows, cash and cash equivalents includes cash,
        noninterest-earning deposits and federal funds sold. Generally, federal funds
        are sold for one day periods.
 
 Cash
        and Due From Banks
 
 The
        Company maintains amounts due from banks which exceed federally insured limits.
        The Company has not experienced nor does it anticipate any losses in such
        accounts.
 
 Investment
        Securities
 
 Bonds,
        notes, and debentures for which the Company has the positive intent and ability
        to hold to maturity are reported at cost, adjusted for premiums and discounts
        that are recognized in interest income using the interest method over the
        period
        to maturity. Investments not classified as trading securities nor as
        held-to-maturity
  6
 **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
   **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 Investment
        Securities - Continued
 
 securities
        are classified as available-for-sale securities and recorded at fair value.
        Unrealized gains or losses on available-for-sale securities are excluded
        from
        net income and reported as an amount net of taxes as a separate component
        of
        other comprehensive income included in shareholders’ equity. Premiums or
        discounts on held-to-maturity and available-for-sale securities are amortized
        or
        accreted into income using the interest method. Realized gains or losses
        on
        sales of held-to-maturity or available-for-sale securities are recorded using
        the specific identification method.
 
 Declines
        in the fair value of individual held-to-maturity and available-for-sale
        securities below their cost that are other-than-temporary result in write-downs
        of the individual securities to their fair value.  The related write-downs
        are included in earnings as realized losses.  In estimating
        other-than-temporary impairment losses, management considers the length of
        time
        and the extent to which the fair value has been less than cost, the financial
        condition and near-term prospects of the issuer, and the intent and ability
        of
        the Company to retain its investment in the issuer for a period of time
        sufficient to allow for any anticipated recovery in fair value.
 
 Loans
        Receivable
 
 Loans
        receivable that management has the intent and ability to hold for the
        foreseeable future or until maturity or payoff are reported at their outstanding
        unpaid principal balances reduced by any charge-offs or specific valuation
        accounts and net of any deferred fees or costs on originated loans, or
        unamortized premiums or discounts on purchased loans.
 
 Credit
        and loan decisions are made by management and the Board of Directors in
        conformity with loan policies established by the board of directors. The
        Company’s practice is to charge-off any loan or portion of a loan when the loan
        is determined by management to be uncollectible due to the borrower’s failure to
        meet repayment terms, the borrower’s deteriorating or deteriorated financial
        condition, the depreciation of the underlying collateral, the loan’s
        classification as a loss by regulatory examiners, or other reasons.
  The
        Company considers a loan to be impaired when it is probable that the Company
        will be unable to collect all amounts due (principal and interest) according
        to
        the contractual terms of the loan agreement. Measurement of impairment is
        based
        on the expected future cash flows of an impaired loan, which are to be
        discounted at the loan’s effective interest rate, or measured by reference to an
        observable market value, if one exists, or the fair value of the collateral
        for
        a collateral-dependent loan. The Company selects the measurement method on
        a
        loan- by-loan basis except that collateral-dependent loans for which foreclosure
        is probable are measured at the fair value of the collateral. The Company
        recognizes interest income on impaired loans based on its existing methods
        of
        recognizing interest income on nonaccrual loans.
 
 Provision
        and Allowance for Loan Losses
 
 Implicit
        in the Company’s lending activities is the fact that loan losses will be
        experienced and that the risk of loss will vary with the type of loan being
        made
        and the creditworthiness of the borrower over the term of the loan. To reflect
        the currently perceived risk of loss associated with the loan portfolio,
        additions are made to the allowance for loan losses in the form of direct
        charges against income to ensure that the allowance is available to
 
 7
 
 **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 Provision
        and Allowance for Loan Losses - Continued
 
 absorb
        possible loan losses. The factors that influence the amount include, among
        others, the remaining collateral and/or financial condition of the borrowers,
        historical loan loss experience, changes in the size and composition of the
        loan
        portfolio, and current economic conditions. The amount of the allowance equals
        the cumulative total of the provisions made to date, reduced by loan charge-offs
        and increased by recoveries of loans previously charged-off.
  In
        addition, a separate allowance for credit losses on off-balance sheet credit
        exposures is maintained for the undisbursed portion of approved loans. Although
        the loss exposure to the Company is reduced because the funds have not been
        released to the borrower, under certain circumstances the Company may be
        required to continue to disburse funds on a troubled credit.
  Interest
        and Fees on Loans
 
 Interest
        income is recognized daily in accordance with the terms of the note based
        on the
        ending principal balance. Loans on which the accrual of interest has been
        discontinued are designated as nonaccrual loans. The accrual of interest
        on
        loans is discontinued when principal or interest is past due 90 days based
        on
        contractual terms of the loan or when, in the opinion of management, there
        is
        reasonable doubt as to collectibility. When loans are placed on nonaccrual
        status, all interest previously accrued but not collected is reversed against
        current period interest income. Income on nonaccrual loans is subsequently
        recognized only to the extent that cash is received and the loan’s principal
        balance is deemed collectible. Interest accruals are resumed on such loans
        only
        when they are brought current with respect to interest and principal and
        when,
        in the judgment of management, the loans are estimated to be fully collectible
        as to all principal and interest. During 2005, no loans were designated as
        nonaccrual loans.
 
 Loan
        origination fees and certain direct origination costs are capitalized and
        recognized as an adjustment of the yield of the related loan.
 
 Premises
        and Equipment
 
 Premises
        and equipment are carried at cost less accumulated depreciation and
        amortization. Depreciation is computed using the straight-line method over
        the
        estimated useful lives, which ranges from three to ten years for furniture
        and
        fixtures. Expenditures for betterments or major repairs are capitalized and
        those for ordinary repairs and maintenance are charged to operations as
        incurred.
 
 Other
        Real Estate Owned
 
 Other
        real estate owned represents real estate acquired through foreclosure and
        is
        carried at the lower of the recorded investment in the property or its fair
        value. Prior to foreclosure, the value of the underlying loan is written
        down to
        the fair market value of the real estate to be acquired by a charge to the
        allowance for credit losses, if necessary. Any subsequent write-downs are
        charged against operating expenses. Operating expenses of such properties,
        net
        of related income, are included in other expenses. During 2005 the Company
        did
        not foreclose on any real estate.
  8
 **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 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 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.
 
 Advertising
        Costs
 
 The
        Company expenses the costs of advertising in the period incurred.
 
 Comprehensive
        Income
 
 Statement
        of Financial Accounting Standard (“SFAS”) No. 130, *"Reporting
        Comprehensive Income"* (SFAS
        No. 130) requires the disclosure of comprehensive income and its components.
        For
        the years ended December 31, 2005 and 2004, the Company had no components
        of
        comprehensive income other than net losses from operations.
 
 Financial
        Instruments
 
 In
        the
        ordinary course of business, the Company has entered into off-balance sheet
        financial instruments consisting of commitments to extend credit, commercial
        letters of credit, and standby letters of credit as described in Note J.
        Such
        financial instruments are recorded in the financial statements when they
        are
        funded or related fees are incurred or received.
 
 Loss
        Per Share
 
 Basic
        loss per common share is based on the weighted average number of common shares
        outstanding during the period. The effects of potential common shares
        outstanding during the period would be included in diluted loss per share;
        however, the effect of potential shares is antidilutive during all periods
        presented. As a result, the Company only reports basic loss per
        share.
 
 The
        weighted-average shares outstanding for 2005 were 2,280,000. There were no
        shares outstanding in 2004.
  Stock-Based
        Compensation
 
 The
        Company accounts for stock-based employee compensation as prescribed by
        Accounting Principals Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
        to Employees” (“APB Opinion No. 25”) and related Interpretations, which is
        permitted under SFAS No. 123. APB Opinion No. 25 provides that compensation
        expense relative to the Company’s employee stock options is measured based on
        the intrinsic value of the stock options granted. SFAS No. 123 requires pro
        forma disclosures of net income (loss) and net income (loss) per share as
        if the
        fair value based method of accounting for stock-based awards had been applied
        for employee grants. Under the fair value
        based method, compensation cost is recorded based on the value of the award
        at
        the grant date and is recognized over the service period.
 
 9
 **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 Stock-Based
        Compensation - Continued
  The
        Bank
        accounts for stock options and warrants issued to non-employees in accordance
        with Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity
        Instruments That Are Issued to Other Than Employees for Acquiring or in
        Conjunction with Selling, Goods and Services.” Accordingly, the Bank has
        recorded compensation costs for stock-based compensation issued to non-employees
        in the amount of $494,520 in 2005.
 
 The
        Company has not presented pro forma information related to employee option
        grants because its stock incentive plan is subject to shareholder
        approval.
 
 In
        connection with the Company’s initial stock offering, the Company’s outside
        Directors were awarded a total of 64,000 warrants in recognition of the
        expertise imparted, time expended and the substantial financial risks undertaken
        by the Directors. Since these warrants were not subject to shareholder approval,
        pro forma disclosure is presented below.
 
 The
        fair
        value of each warrant grant was estimated at the grant date using the
        Black-Scholes option-pricing model. The Black-Scholes option-pricing valuation
        model was developed for use in estimating the fair value of traded options
        and
        warrants that have no vesting restrictions and are fully transferable. In
        addition, option valuation models require the input of highly subjective
        assumptions, including the expected stock price volatility. Because the
        Company’s stock options and warrants have characteristics significantly
        different from those of traded options, and because changes in the subjective
        input assumptions can materially affect the fair value estimate, in management’s
        opinion, the existing models do not necessarily provide a reliable single
        measure of the fair value of its stock options and warrants.
 
 The
        following table illustrates the effect on net loss and loss per share if
        the
        fair value based method had been applied to all outstanding and unvested
        director warrants:
 2005
                
                
                2004Net
                    Loss:As
                    reported
                
                $
                (2,988,413
                )
                $
                (1,448,978
                )Fair
                    value based director warrants
                
                
                (210,994
                )
                
                -Pro
                    forma net loss
                
                $
                (3,199,407
                )
                $
                (1,448,978
                )Basic
                    loss per share:As
                    reported
                
                $
                (1.31
                )
                $
                -Pro
                    forma
                
                $
                (1.40
                )
                $
                -
  10
 **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued**
 
 Stock-Based
        Compensation - Continued
 
 In
          December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
          123 (Revised), Share-Based Payment. This standard revises SFAS 123, APB
          25 and
          related accounting Interpretations, and eliminates the use of the intrinsic
          value method for employee stock-based compensation. SFAS No. 123 (Revised)
          requires compensation costs related to share-based payment transactions
          to be
          recognized in the financial statements over the period that an employee
          provides
          service in exchange for the award. Currently, the Company uses the intrinsic
          value method of APB 25 to value share-based options granted to employees
          and
          board members. The new standard requires the expensing of all share-based
          compensation, including options, using the fair value-based method. The
          effective date of this standard for the Company will be January 1, 2006.
          Management is currently assessing the impact that this new standard will
          have on
          the Company’s financial statements.
 
 During
        2005, the Company granted options to employees from its 2005 Stock Incentive
        Plan that are subject to shareholder approval in April 2006 (see Note H).
        The
        Company will begin to record compensation expense in accordance with SFAS
        123
        (Revised) for these and any future options granted once shareholder approval
        is
        obtained. 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. The actual amount of expense
        will be based on the fair value of the Company’s stock when the Plan is approved
        and will be increased for any additional grants that are made in 2006. However,
        based on the current fair value of the Company’s stock, a risk-free rate of
        4.15%, expected volatility of 25%, and an expected life of 6.5 years, the
        amount
        of compensation expense in 2006 related to options granted in 2005 is estimated
        to be approximately $750,000.
 
 Disclosure
        About Fair Value of Financial Instruments
 
 SFAS
        No.
        107 specifies the disclosure of the estimated fair value of financial
        instruments. The Company’s estimated fair value amounts have been determined by
        the Company using available market information and appropriate valuation
        methodologies.
 
 However,
        considerable judgment is required to develop the estimates of fair value.
        Accordingly, the estimates are not necessarily indicative of the amounts
        the
        Company could have realized in a current market exchange. The use of different
        market assumptions and/or estimation methodologies may have a material effect
        on
        the estimated fair value amounts.
 
 Although
        management is not aware of any factors that would significantly affect the
        estimated fair value amounts, such amounts have not been comprehensively
        revalued for purposes of these financial statements subsequent to the balance
        sheet date and, therefore, current estimates of fair value may differ
        significantly from the amounts presented in the accompanying notes.
  Reclassifications
 
 Certain
        reclassifications have been made in the 2004 consolidated financial statements
        to conform to the presentation used in 2005.  These classifications are of
        a normal recurring nature.
 
 11
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        B - INVESTMENT SECURITIES**
 
 The
        amortized cost, carrying value and estimated fair values of investment
        securities as of December 31, 2005 are as follows:
 Amortized
                
                
                Unrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair
                    Value**Securities
                    held to maturity:****December
                    31, 2005**U.S.
                      Government and Agency Securities
                
                $
                7,997,943
                
                $
                -
                
                $
                (30,063
                )
                $
                7,967,880
 
 There
        were no securities outstanding as of December 31, 2004.
 
 The
        amortized cost and estimated fair value of debt securities at December 31,
        2005,
        by contractual maturity, are shown below. Mortgage-backed securities are
        classified in accordance with their estimated lives. Expected maturities
        may
        differ from contractual maturities because borrowers may have the right to
        prepay obligations.
  Amortized
                
                
                EstimatedCost
                
                
                Fair
                    ValueSecurities
                      held to maturity, due in one year or less
                
                $
                7,997,943
                
                $
                7,967,880
 
 The
        gross
        unrealized loss and related estimated fair value of investment securities
        that
        have been in a continuous loss position for less than twelve months and over
        twelve months at December 31, 2005 are as follows:
 
 Less
                    than Twelve Months
                Over
                    Twelve Months
                TotalUnrealized
                
                
                Estimated
                
                
                Unrealized
                
                
                Estimated
                
                
                Unrealized
                
                
                EstimatedLosses
                
                
                Fair
                    Value
                
                
                Losses
                
                
                Fair
                    Value
                
                
                Losses
                
                
                Fair
                    ValueU.S.
                      Government and Agency Securities
                
                $
                (30,063
                )
                $
                7,967,880
                
                $
                -
                
                $
                -
                
                $
                (30,063
                )
                $
                7,967,880
  Management
        evaluates investment securities for other-than-temporary impairment taking
        into
        consideration the extent and length of time the fair value has been less
        than
        cost, the financial condition of the issuer and whether the Company has the
        intent and ability to retain the investment for a period of time sufficient
        to
        allow for any anticipated recovery in fair value. As of December 31, 2005,
        no
        declines are deemed to be other than temporary.
 
 12
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        C - LOANS**
 
 The
        Company’s loan portfolio generally consists of loans to borrowers within
        southern Orange and northern San Diego counties in California. However, the
        collateral for these loans may sometimes be located outside of California.
        Although the Company seeks to avoid concentrations of loans to a single industry
        or based upon a single class of collateral, real estate and real estate
        associated businesses are among the principal industries in the Company’s market
        areas. As a result, the Company’s loan and collateral portfolios are, to some
        degree, concentrated in those industries.
 
 The
        composition of the loan portfolio at December 31, 2005 is as
        follows:
  2005
                
                
                2004Real
                    estate
                
                $
                7,791,112
                
                $
                -Commercial
                
                
                2,483,127
                
                
                -Consumer
                
                
                72,259
                
                
                -10,346,498
                
                
                -Deferred
                    loan fees
                
                
                (29,168
                )
                
                -Allowance
                    for loan losses
                
                
                (87,208
                )
                
                -$
                10,230,122
                
                $
                -
  There
        were no loans outstanding as of December 31, 2004.
 
 Changes
        in the allowance for loan losses are summarized as follows:
  2005Balance
                    at beginning of year
                
                $
                -Provision
                    charged to expense
                
                
                87,208Loans
                    charged off
                
                
                -Recoveries
                    on loans previously charged off
                
                
                -Balance
                    at end of year
                
                $
                87,208
 
 As
        of
        December 31, 2005, the Company had no nonaccrual or past due loans.
 
 13
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        D - COMPANY PREMISES AND EQUIPMENT**
 
 The
        composition of Company premises and equipment at December 31 is as
        follows:
  2005
                
                
                2004Bank
                    premises
                
                $
                311,262
                
                $
                -Furniture,
                    fixtures and equipment
                
                
                962,472
                
                
                80,3601,273,734
                
                
                80,360Less
                    accumulated depreciation
                
                
                119,668
                
                
                -$
                1,154,066
                
                $
                80,360
  **NOTE
        E - DEPOSITS**
 
 At
        December 31, 2005, the scheduled maturities of time deposits are as
        follows:
  Due
                    in one year
                
                $
                3,879,806
  **NOTE
        F - OTHER BORROWINGS**
 
 The
        Company may borrow up to $3,000,000 overnight on an unsecured basis from
        a
        correspondent bank. As of December 31, 2005, no amounts were outstanding
        under
        these arrangements.
 
 14
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        G - INCOME TAXES**
 
 Deferred
        taxes are a result of differences between income tax accounting and generally
        accepted accounting principles with respect to income and expense recognition.
        The following is a summary of the components of the net deferred tax asset
        accounts recognized in the accompanying statements of financial condition
        at
        December 31:
 2005
                
                
                2004Deferred
                    tax assets:Pre-Opening
                    Expenses
                
                $
                1,130,000
                
                $
                654,000Net
                    loss carryforward
                
                
                822,000
                
                
                -Other
                
                
                7,000
                
                
                -Total
                    deferred tax assets
                
                
                1,959,000
                
                
                654,000Deferred
                    liabilities:Tax
                    over book depreciation
                
                
                (29,000
                )
                
                -Allowance
                    for loan losses
                
                
                (8,000
                )
                
                -Accrual
                    to cash
                
                
                (36,000
                )
                
                -Total
                    deferred tax liabilities
                
                
                (73,000
                )
                
                -Net
                    deferred tax assets
                
                
                1,886,000
                
                
                654,000Valuation
                    Allowance
                
                
                (1,886,000
                )
                
                (654,000
                )Net
                    deferred taxes
                
                $
                -
                
                $
                -
 
 The
        valuation allowance was established because the Company has not reported
        earnings sufficient enough to support the recognition of the deferred tax
        assets. The Company has net operating loss carryforwards of approximately
        $2,018,000 for federal income and $2,016,000 for California franchise tax
        purposes. Federal net operating loss carry forwards, to the extent not used,
        will expire in 2025. California net operating loss carry forwards, to the
        extent
        not used, will expire in 2015.
 
 **NOTE
        H - STOCK OPTIONS**
 
 The
        Company sponsors a compensatory incentive and non-qualified stock incentive
        plan
        which provides certain key employees and the Board of Directors with the
        option
        to purchase shares of common stock. Under the 2005 Stock Incentive Plan,
        the
        Company may grant options to its directors and employees for up to 478,800
        shares of common stock. Option prices may not be less than 100% of the fair
        market value of the stock at the date of grant. The plan is subject to
        shareholder approval which is expected to occur in April 2006. As of December
        31, 2005, there is no fair value because the Plan has not yet been approved
        by
        the Company’s shareholders and therefore the measurement date has not occurred.
 
 15
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        H - STOCK OPTIONS - Continued**
 
 These
        options become exercisable at the rate of 33 1/3% per year beginning at various
        dates and expire not more than ten years from the date of grant.
 
 2005Weighted-AverageShares
                
                
                Exercise
                    PriceOutstanding
                    at beginning of year
                
                
                -
                
                $
                -Granted
                
                
                356,050
                
                $
                10.04Exercised
                
                
                -
                
                $
                -Forfeited
                
                
                (2,250
                )
                $
                10.00Outstanding
                    at end of year
                
                
                353,800
                
                $
                10.04Options
                    exercisable at year-end
                
                
                -
                
                $
                -Weighted-average
                    fair value of options granted during the year
                
                $
                N/A
 
 The
        following table summarizes information about stock options outstanding at
        December 31, 2005:
  Options
                    Outstanding
                
                Options
                    ExercisableWeighted
                Weighted
                
                
                WeightedAverage
                Average
                
                
                AverageExercise
                Number
                Remaining
                Exercise
                
                Number
                ExercisePrice
                Outstanding
                Contractual
                    Life
                Price
                
                Exercisable
                Price$10.00
                    to $10.99
                347,850
                9.4
                    years
                $10.00
                
                -
                $
                    -$11.00
                    to $11.99
                1,000
                9.9
                    years
                $11.00
                
                -
                $
                    -$12.00
                    to $13.00
                4,950
                9.6
                    years
                $12.27
                
                -
                $
                    -353,800
                9.4
                    years
                $10.04
                
                -
                $
                    -
 
 **NOTE
        I - RELATED PARTY TRANSACTIONS**
 
 The
        Company 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, served as the Company’s leasing agent in connection with the lease
        on the San Clemente location. In 2005, the director received a commission
        from
        the lessor in the amount of $55,949.
 
 16
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        I - RELATED PARTY TRANSATIONS - Continued**
 
 The
        Company entered into a month-to-month lease agreement with an organizer for
        temporary offices during the organizational period. The lease arrangement
        provided 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 periods ended December 31, 2005 and 2004 was $4,500 and $21,000
        respectively.
 
 As
        a
        matter of policy, the Bank does not make loans to executive officers, but
        may
        make loans to directors and the businesses with which they are associated.
        As of
        December 31, there were no related party loans.
 
 Deposits
        from related parties held by the Company at December 31, 2005 amounted to
        $367,529.
 
 **NOTE
        J - COMMITMENTS AND CONTINGENCIES**
 
 The
        Company’s exposure to credit loss in the event of nonperformance by the other
        party to the financial instrument for commitments to extend credit and standby
        letters of credit is represented by the contractual amount of those commitments.
        Commitments to extend credit (such as the unfunded portion on lines of credit
        and commitments to fund new loans) as of December 31, 2005 amounts to
        approximately $6,792,000, of which approximately $1,816,000 is related to
        irrevocable letters of credit. There were no commitments outstanding at December
        31, 2004. The Company uses the same credit policies in these commitments
        as is
        done for all of its lending activities. As such, the credit risk involved
        in
        these transactions is essentially the same as that involved in extending
        loan
        facilities to customers. The entire balance of standby letters of credit
        referred to above support international letters of credit issued by other
        financial institutions for which the Company has guaranteed and pledged $2
        million of its time deposits in other financial institutions that are presented
        on the Consolidated Balance Sheet as of December 31, 2005.
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Because many of the
        commitments are expected to expire without being drawn upon, the total amounts
        do not necessarily represent future cash requirements. The Company evaluates
        each client's credit worthiness on a case-by-case basis. The amount of
        collateral obtained if deemed necessary by the Company is based on management's
        credit evaluation of the customer. The majority of the Company's commitments
        to
        extend credit and standby letters of credit is secured by real
        estate.
 
 The
        Company has entered into a ten-year lease for its main office in San Clemente,
        California and a five-year lease for a banking office in Encinitas, California.
        The leases began on June 1, 2005 and August 1, 2004, respectively and have
        renewal options for two five-year periods and three three-year periods
        respectively. The leases call for fixed annual increases and the Company
        is
        responsible for its pro rata share of common area expenses and property taxes.
        Rent expense amounted to $244,165 for the period ending December 31,
        2005.
 
 17
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        J - COMMITMENTS AND CONTINGENCIES - Continued**
 
 The
        approximate future minimum payments for these leases are as
        follows:
 
 2006
                
                $
                317,8002007
                
                
                326,5002008
                
                
                335,3002009
                
                
                280,0002010
                
                
                190,500Thereafter
                
                
                893,100$
                2,343,200
 
 **NOTE
        K - WARRANTS**
 
 In
        connection with the Company’s initial stock offering, the Company’s organizers
        were awarded 234,000 warrants. Compensation expense of $494,520 was recognized
        for the warrants issued to organizers who were not also directors of the
        Company.  These
        warrants may be exercised any time before their expiration date of May 16,
        2015.
        The exercise price for these warrants is $10.00 per share. As of December
        31,
        2005, 234,000 warrants were outstanding.
 
 In
        connection with the Company’s initial stock offering, the Company’s outside
        Directors were awarded a total of 64,000 warrants in recognition of the
        expertise imparted, time expended and the substantial financial risks undertaken
        by the Directors.
 
 In
        addition to the organizer/director warrants, each of the Company’s initial
        shareholders received warrants in recognition of the additional financial
        risk
        of investing in Pacific Coast National Bancorp from inception. Each initial
        shareholder received warrants to purchase one share of common stock for every
        five shares that he or she purchased in the initial public offering. These
        warrants may be exercised any time before their expiration date of May 16,
        2008.
        The exercise price for these warrants is $12.50 per share. As of December
        31,
        2005, 456,001 warrants were outstanding.
 
 Organizer
        and initial shareholder warrants to purchase fractional shares were not issued.
        Instead, rounding down to the next whole number was used in calculating the
        number of warrants issued to any shareholder. Holders of warrants will be
        able
        to profit from any rise in the market price of the Company’s common stock over
        the exercise price of the warrants because they will be able to purchase
        shares
        of our common stock at a price that is less than the then current market
        value.
        If the Bank’s capital falls below the minimum level required by the Comptroller,
        management may be directed to require the holders to exercise or forfeit
        their
        warrants.
 
 18
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
  
 **NOTE
        L - FAIR VALUES OF FINANCIAL INSTRUMENTS**
 
 The
        fair
        value of a financial instrument is the amount at which the asset or obligation
        could be exchanged in a current transaction between willing parties, other
        than
        in a forced or liquidation sale. Fair value estimates are made at a specific
        point in time based on relevant market information and information about
        the
        financial instrument. These estimates do not reflect any premium or discount
        that could result from offering for sale at one time the entire holdings
        of a
        particular financial instrument. Because no market value exists for a
        significant portion of the financial instruments, fair value estimates are
        based
        on judgments regarding future expected loss experience, current economic
        conditions, risk characteristics of various financial instruments, and other
        factors. These estimates are subjective in nature, involve uncertainties
        and
        matters of judgment, and therefore cannot be determined with precision. Changes
        in assumptions could significantly affect the estimates.
 
 Fair
        value estimates are based on financial instruments both on and off the balance
        sheet without attempting to estimate the value of anticipated future business
        and the value of assets and liabilities that are not considered financial
        instruments. Additionally, tax consequences related to the realization of
        the
        unrealized gains and losses can have a potential effect on fair value estimates
        and have not been considered in many of the estimates.
 
 The
        following methods and assumptions were used to estimate the fair value of
        significant financial instruments:
 
 Financial
        Assets
 
 The
        carrying amounts of cash, short term investments, and due from balances are
        considered to approximate fair value. Short term investments include federal
        funds sold, securities purchased under agreements to resell, and interest
        bearing deposits with other banks. The fair values of investment securities,
        including available for sale, are generally based on quoted market prices.
        The
        fair value of loans is estimated using a combination of techniques, including
        discounting estimated future cash flows and quoted market prices of similar
        instruments where available.
 
 Financial
        Liabilities
 
 The
        carrying amounts of deposit liabilities payable on demand are considered
        to
        approximate fair value. For fixed maturity deposits, fair value is estimated
        by
        discounting estimated future cash flows using currently offered rates for
        deposits of similar remaining maturities.
 
 Off-Balance
        Sheet Financial Instruments
 
 The
        fair
        value of commitments to extend credit and standby letters of credit is estimated
        using the fees currently charged to enter into similar agreements. The fair
        values of these financial instruments are not deemed to be
        material.
 
 19
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        L - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued**
 
 The
        estimated fair value of financial instruments at December 31, 2005 is summarized
        as follows:
  December
                    31, 2005
                
                December
                    31, 2004Carrying
                
                
                Market
                
                
                Carrying
                
                
                MarketValue
                
                
                Value
                
                
                Value
                
                
                ValueFinancial
                    Assets:Cash
                    and cash equivalents
                
                $
                8,279,481
                
                $
                8,279,481
                
                $
                57,270
                
                $
                57,270Time
                    deposits in other financial institutions
                
                
                2,750,000
                
                
                2,750,000
                
                
                -
                
                
                -Investment
                    securities
                
                
                7,997,943
                
                
                7,967,880
                
                
                -
                
                
                -Loans
                    receivable, net
                
                
                10,230,122
                
                
                10,248,084
                
                
                -
                
                
                -Federal
                    Reserve Bank stock
                
                
                553,700
                
                
                553,700
                
                
                -
                
                
                -Accrued
                    interest receivable
                
                
                163,602
                
                
                163,602
                
                
                63,112
                
                
                63,112Financial
                    Liabilities:Time
                    deposits
                
                $
                3,879,806
                
                $
                3,877,386
                
                $
                -
                
                $
                -Other
                    deposits
                
                
                8,473,624
                
                
                8,473,624
                
                
                -
                
                
                -Other
                    borrowings
                
                
                -
                
                
                -
                
                
                1,560,000
                
                
                1,560,000Accrued
                    interest and other liabilities
                
                
                146,509
                
                
                146,509
                
                
                236,623
                
                
                236,623
  **NOTE
          M - REGULATORY MATTERS**
 
 The
        Bank
        is subject to various regulatory capital requirements administered by the
        federal banking agencies. Failure to meet minimum capital requirements can
        initiate certain mandatory and possible additional discretionary actions
        by
        regulators that, if undertaken, could have a direct material effect on the
        Company's financial statements. Under capital adequacy guidelines and the
        regulatory framework for prompt corrective action, the Bank must meet specific
        capital guidelines that involve quantitative measures of the assets,
        liabilities, and certain off-balance-sheet items as calculated under regulatory
        accounting practices. The Bank’s capital amounts and classification are also
        subject to qualitative judgments by the regulators about components, risk
        weightings and other factors.
 
 Quantitative
        measures established by regulation to ensure capital adequacy require the
        Bank
        to maintain minimum amounts and ratios (set forth in the table below) of
        total
        and Tier 1 capital (as defined in the regulations) to risk-weighted assets
        (as
        defined), and of Tier 1 capital (as defined) to average assets (as defined).
        Management believes, as of December 31, 2005, that the Bank meets all capital
        adequacy requirements to which it is subject.
 
 20
  **PACIFIC
        COAST NATIONAL BANCORP AND SUBSIDIARY**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005 and 2004**
 
 
 **NOTE
        M - REGULATORY MATTERS - Continued**
 
 To
                    Be WellCapitalized
                    UnderFor
                    Capital
                
                
                Prompt
                    CorrectiveActual
                
                
                Adequacy
                    Purposes
                
                
                Action
                    ProvisionsAmount
                
                
                
                
                
                Amount
                
                
                
                
                
                Amount(Thousands)
                
                
                Ratio
                
                
                (Thousands)
                
                
                Ratio
                
                
                (Thousands)
                
                
                Ratio**As
                    of December 31, 2005:**Total
                    Capital (to Risk-Weighted Assets)
                
                $
                17,841
                
                
                101.7%
                
                $
                1,403
                
                
                8.0%
                
                $
                1,754
                
                
                10.0%Tier
                    1 Capital (to Risk-Weighted Assets)
                
                $
                17,738
                
                
                101.2%
                
                $
                701
                
                
                4.0%
                
                $
                1,052
                
                
                6.0%Tier
                    1 Capital (to Average Assets)
                
                $
                17,738
                
                
                64.1%
                
                $
                1,108
                
                
                4.0%
                
                $
                1,385
                
                
                5.0%
 
 As
        of
        December 31, 2005, the Bank was categorized as well capitalized under the
        regulatory framework for prompt corrective action. To be categorized as well
        capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
        Tier 1 leverage ratio as set forth in the table. There are no conditions
        or
        events since that notification that management believes have changed the
        Bank’s
        category.
 
 The
        Company is subject to similar requirements administered by its primary
        regulator, the Federal Reserve Board. For capital adequacy purposes, the
        Company
        must maintain total capital to risk-weighted assets and Tier 1 capital to
        risk-weighted assets of 8.0% and 4.0%, respectively. Its total capital to
        risk-weighted assets and Tier 1 capital to risk-weighted assets were not
        materially different than the ratios shown above.
 
 The
        Bank
        is restricted as to the amount of dividends, which can be paid. Dividends
        declared by national banks that exceed net income (as defined by OCC
        regulations) for the current year plus retained net income for the preceding
        two
        years must be approved by the OCC. Also, the Bank may not pay dividends that
        would result in capital levels being reduced below the minimum requirements
        shown above.
 
 With
        certain exceptions, the Company may not pay a dividend to its shareholders
        unless its retained earnings equal at least the amount of the proposed dividend.
 
 **NOTE
        N - PACIFIC COAST NATIONAL BANCORP**
  Pacific
        Coast National Bancorp (the Bancorp) has no significant business activity
        other
        than its investment in Pacific Coast National Bank. Accordingly, no separate
        financial information on the Bancorp is provided.
 
 21