UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10 – Q




(MARK
ONE)


[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR15(D)OF
THE SECURITIES EXCHANGE ACT OF 1934


For
the quarterly period ended June 30, 2008




[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT




For
the transition period from _______ to _____




Commission
File Number: 000-51960




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)(949) 361- 4300(Registrant’s
      telephone number, including area code)


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the
preceding  12 months (or for such shorter period that the registrant
was required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.


Yes [X]
No [   ]




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large accelerated
filer  [   ]                                                                                                               Accelerated
Filer [    ]




Non-accelerated
filer   [   ] (Do not check if a smaller reporting
company)  Smaller reporting company  [X]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




Yes
[  ] No [X ]




The
number of shares outstanding of the issuer’s Common Stock as of August 13, 2008,
was 2,281,700 shares.







PACIFIC
COAST NATIONAL BANCORP




INDEX




PART I –
FINANCIAL INFORMATION





PAGEItem
      1 - Financial StatementsConsolidated
      Balance Sheets at June 30, 2008 (unaudited) and December 31,
      2007
            3Consolidated
      Statements of Operations for the three  and six months
      ended
              June
      30, 2008 (unaudited) and 2007 (unaudited)
            4Consolidated
      Statement of Cash Flows for the six months ended
              June
      30, 2008 (unaudited) and 2007 (unaudited)
            5Consolidated
      Statement of Shareholders’ Equity as of June 30, 2008
      (unaudited)
            6Condensed
      Notes to Unaudited Consolidated Financial Statements
            7Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            11Item
      3 – Quantitative and Qualitative Disclosures About Market
    Risk
            28Item
      4T - Controls and Procedures
            30PART
      II - OTHER INFORMATIONItem
      1 - Legal
      Proceedings
            31Item
      1A – Risk Factors
            31Item
      2 - Unregistered
      Sales of Equity Securities and Use of Proceeds
            32Item
      3 - Defaults
      upon Senior Securities
            32Item
      4 - Submission
      of Matters to a Vote of Security Holders
            32Item
      5 - Other
      Information
            32Item
      6 - Exhibits
            32Signatures
            33













i


INTRODUCTORY
NOTE – FORWARD LOOKING STATEMENTS




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 quarterly
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 the 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 the Board.  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 key personnel;




·
            the
      failure of assumptions;




·
            changes
      in various monetary and fiscal policies and
  regulations;




·
            changes
      in policies by regulatory agencies;




·
            changes
      in general economic conditions and economic conditions in Southern
      California;




·
            adverse
      changes in the local real estate market and the value of real estate
      collateral securing a substantial portion of the Bank’s loan
      portfolio;




·
            changes
      in the availability of funds resulting in increased costs or reduced
      liquidity;




·
            the
      combination of continuing asset growth and lack of profitability could
      change the Bank’s status from well-capitalized to adequately-capitalized,
      resulting in higher FDIC insurance premiums and restrictions on the amount
      of brokered deposits the Bank could
hold;




·
            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
      economics in the United States and
abroad;




·
            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;




·
            fluctuations
      in the interest rate environment, and changes in the relative differences
      between short- and long-term interest rates, which may reduce interest
      margins and impact funding sources;




·
            changes
      in the quality or composition of our loan or investment
      portfolios;








1








·
            changes
      in the level of our non-performing loans and other loans of
      concern;




·
            competition
      from bank and non-bank competitors;




·
            the
      ability to develop and introduce new banking-related products, services
      and enhancements and gain market acceptance of such
    products;




·
            the
      ability to grow our core
businesses;




·
            decisions
      to change or adopt new business
strategies;




·
            changes
      in tax laws, rules and regulations and interpretations
      thereof;




·
            technological
      changes;




·
            the
      cost and outcome of any litigation;




·
            changes
      in consumer spending and savings habits;
and




·
            management’s
      ability to manage these and other
risks.




These
factors and the risk factors referred to in “Business-Risk Factors” in the
Company’s Annual Report on Form 10-KSB filed with the SEC (and available free of
charge through www.sec.gov)
for the year ended December 31, 2007 could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
the Company, and you should not place undue reliance on any such forward-looking
statements.  Any forward-looking statement speaks only as of the date
on which it is made and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.  New factors emerge from time to time, and it is
not possible for us to predict which factors, if any, will arise.  In
addition, the Company cannot assess the impact of each factor on the Company’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.




Unless
the context indicates otherwise, as used throughout this report, the terms “we”,
“our”, “us”, or the “Company” refer to Pacific Coast National Bancorp and its
consolidated subsidiary, Pacific Coast National Bank. References to the “Bank”
refer to Pacific Coast National Bank.


2







PART I - FINANCIAL
INFORMATION




ITEM
1.  Financial
Statements




PACIFIC
COAST NATIONAL BANCORP


CONSOLDIATED
BALANCE SHEETS





ASSETS




June
      30, 2008(unaudited)
            
            
            December
      31, 2007Cash
      and due from banks
            
            $
            4,076,637
            
            
            $
            1,688,892Federal
      funds sold
            
            
            17,050,000
            
            
            
            12,785,000TOTAL
      CASH AND CASH EQUIVALENTS
            
            
            21,126,637
            
            
            
            14,473,892Loans
            
            
            
            118,432,780
            
            
            
            97,874,131Less:
      Allowance for loan losses
            
            
            ( 1,491,229
            )
            
            
            ( 1,814,860
            )Loans,
      net of allowance for loan losses
            
            
            116,941,551
            
            
            
            96,059,271Premises
      and equipment, net
            
            
            700,525
            
            
            
            887,532Federal
      Reserve Bank stock, at cost
            
            
            354,200
            
            
            
            405,150Accrued
      interest receivable and other assets
            
            
            738,466
            
            
            
            671,339TOTAL
      ASSETS
            
            $
            139,861,379
            
            
            $
            112,497,184





LIABILITIES
AND SHAREHOLDERS’ EQUITY


DepositsNoninterest-bearing
      demand
            
            $
            25,492,476
            
            
            $
            17,658,241Interest-bearing
      demand accounts
            
            
            4,633,687
            
            
            
            3,951,566Money
      market and Savings accounts
            
            
            49,085,628
            
            
            
            36,210,745Time
      certificates of deposit of $100,000 or more
            
            
            20,748,070
            
            
            
            3,177,552Other
      time certificates of deposit
            
            
            27,583,706
            
            
            
            37,993,669TOTAL
      DEPOSITS
            
            
            127,543,567
            
            
            
            98,991,773Accrued
      interest and other liabilities
            
            
            618,979
            
            
            
            754,146TOTAL
      LIABILITIES
            
            
            128,162,546
            
            
            
            99,745,919Shareholders'
      equityCommon
      stock - $0.01 par value; 10,000,000 shares authorized;issued
      and outstanding: 2,281,700 shares at June 30,2008
      and December 31, 2007
            
            
            22,817
            
            
            
            22,817Additional
      paid-in capital
            
            
            25,733,464
            
            
            
            25,561,705Accumulated
      deficit
            
            
            ( 14,057,448
            )
            
            
            ( 12,833,257
            )TOTAL
      SHAREHOLDERS' EQUITY
            
            
            11,698,833
            
            
            
            12,751,265TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            139,861,379
            
            
            $
            112,497,184










See
accompanying condensed notes to unaudited consolidated financial
statements




3


PACIFIC
COAST NATIONAL BANCORP


CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)








Three
      Months Ended June 30, 2008
            
            
            Three
      Months Ended June 30, 2007
            
            
            Six
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2007Interest
      incomeInterest
      and fees on loans
            
            $
            2,016,125
            
            
            $
            851,585
            
            
            $
            3,942,901
            
            
            $
            1,615,920Federal
      funds sold
            
            
            74,264
            
            
            
            203,008
            
            
            
            148,593
            
            
            
            350,998Investment
      securities, taxable
            
            
            -
            
            
            
            41,046
            
            
            
            -
            
            
            
            128,487Other
            
            
            5,483
            
            
            
            9,165
            
            
            
            11,560
            
            
            
            25,165Total
      interest income
            
            
            2,095,872
            
            
            
            1,104,804
            
            
            
            4,103,054
            
            
            
            2,120,570Interest
      expenseTime
      certificates of depositof
      $100,000 or more
            
            
            120,713
            
            
            
            47,400
            
            
            
            164,786
            
            
            
            90,330Other
      deposits
            
            
            651,350
            
            
            
            314,702
            
            
            
            1,378,934
            
            
            
            578,850Total
      interest expense
            
            
            772,063
            
            
            
            362,102
            
            
            
            1,543,720
            
            
            
            669,180Net
      interest income before provision for loan losses
            
            
            1,323,809
            
            
            
            742,702
            
            
            
            2,559,334
            
            
            
            1,451,390Provision
      for loan losses
            
            
            -
            
            
            
            233,185
            
            
            
            648,650
            
            
            
            318,360Net
      interest income afterprovision
      for loan losses
            
            
            1,323,809
            
            
            
            509,517
            
            
            
            1,910,684
            
            
            
            1,133,030Noninterest
      incomeService
      charges and fees
            
            
            96,077
            
            
            
            13,756
            
            
            
            132,884
            
            
            
            26,152Gain
      on Sale of SBA loans
            
            
            275,913
            
            
            
            133,711
            
            
            
            418,555
            
            
            
            133,711Loss
      on sale of investmentsecurities
            
            
            -
            
            
            
            ( 16,272
            )
            
            
            -
            
            
            
            ( 12,047
            )371,990
            
            
            
            131,195
            
            
            
            551,439
            
            
            
            147,816Noninterest
      expenseSalaries
      and employee benefits
            
            
            994,253
            
            
            
            802,834
            
            
            
            2,108,914
            
            
            
            1,804,662Occupancy
            
            
            245,461
            
            
            
            294,271
            
            
            
            488,250
            
            
            
            512,262Professional
      services
            
            
            79,684
            
            
            
            135,140
            
            
            
            222,252
            
            
            
            235,282Other
            
            
            439,184
            
            
            
            351,311
            
            
            
            865,298
            
            
            
            688,1671,758,582
            
            
            
            1,583,556
            
            
            
            3,684,714
            
            
            
            3,240,373(Loss)
      before income taxes
            
            
            (62,783
            )
            
            
            (942,844
            )
            
            
            (1,222,591
            )
            
            
            (1,959,527
            )Provision
      for income taxes
            
            
            1,600
            
            
            
            1,600
            
            
            
            1,600
            
            
            
            1,600Net
      (loss)
            
            $
            (64,383
            )
            
            $
            (944,444
            )
            
            $
            (1,224,191
            )
            
            $
            (1,961,127
            )Per
      share dataWeighted-average
      shares outstanding
            
            
            2,281,700
            
            
            
            2,281,700
            
            
            
            2,281,700
            
            
            
            2,281,672Net
      (loss), basic and diluted
            
            $
            (0.03
            )
            
            $
            (0.41
            )
            
            $
            (0.54
            )
            
            $
            (0.86
            )







See
accompanying condensed notes to unaudited consolidated financial
statements.


4


PACIFIC
COAST NATIONAL BANCORP


CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)





Six
      Months Ended June 30, 2008
            
            
            Six
      Months ended June 30, 2007Cash
      flows from operating activities:Net
      loss
            
            $
            (1,224,191
            )
            
            $
            (1,961,127
            )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
            
            
            220,688
            
            
            
            209,411Provision
      for loan losses
            
            
            648,650
            
            
            
            318,360Provision
      for off balance sheet contingencies
            
            
            1,694
            
            
            
            27,467Accretion
      of premium or (discount) on investment securities
            
            
            -
            
            
            
            (6,486
            )Loss
      on sale of available for sale securities
            
            
            -
            
            
            
            12,047Gain
      on sale of loans
            
            
            (418,555
            )
            
            
            (133,711
            )Stock-based
      compensation
            
            
            171,759
            
            
            
            582,258Net
      (increase) decrease in Other Assets
            
            
            (67,127
            )
            
            
            3,600Net
      increase (decrease) in Other Liabilities
            
            
            (136,861
            )
            
            
            61,877Net
      cash  used in operating activities
            
            
            (803,943
            )
            
            
            (886,304
            )Cash
      flows from investing activities:Proceeds
      from maturity of time deposits in other financial
    institutions
            
            
            -
            
            
            
            1,000,000Proceeds
      from sale of available for sale investment securities
            
            
            -
            
            
            
            7,937,814Net
      redemption of Federal Reserve Bank stock
            
            
            50,950
            
            
            
            39,800Proceeds
      from sale of loans
            
            
            7,108,530
            
            
            
            2,294,873Net
      (increase) in Loans
            
            
            (28,220,905
            )
            
            
            (27,749,493
            )Purchases
      of premises and equipment
            
            
            (33,681
            )
            
            
            (25,904
            )Net
      cash used in investing activities
            
            
            (21,095,106
            )
            
            
            (16,502,910
            )Cash
      flows from financing activities:Net
      increase in demand deposits and savings accounts
            
            
            21,391,239
            
            
            
            11,249,372Net
      increase in time deposits
            
            
            7,160,555
            
            
            
            6,104,228Proceeds
      from exercise of warrants
            
            
            -
            
            
            
            2,500Net
      cash provided by financing activities
            
            
            28,551,794
            
            
            
            17,356,100Net
      increase (decrease) in cash and cash equivalents
            
            
            6,652,745
            
            
            
            (33,114
            )Cash
      and cash equivalents at beginning of period
            
            
            14,473,892
            
            
            
            10,916,151Cash
      and cash equivalents at end of period
            
            $
            21,126,637
            
            
            $
            10,883,037Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            1,482,321
            
            
            $
            683,753Income
      taxes paid
            
            $
            1,600
            
            
            $
            1,600Supplemental
      schedule of non-cash investing activities:Transfer
      of held to maturity securities to available for sale
            
            $
            -
            
            
            $
            7,943,375





See
accompanying condensed notes to unaudited consolidated financial
statements


5


PACIFIC
COAST NATIONAL BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)


AS
OF JUNE 30, 2008








AdditionalShares
            
            
            Common
            
            
            Paid-in
            
            
            AccumulatedOutstanding
            
            
            Stock
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalance
      at December 31, 2007
            
            
            2,281,700
            
            
            $
            22,817
            
            
            $
            25,561,705
            
            
            $
            (
      12,833,257
            )
            
            $
            12,751,265Stock-based
      Compensation
            
            
            -
            
            
            
            -
            
            
            
            171,759
            
            
            
            -
            
            
            
            171,759Net
      Loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,224,191
            )
            
            
            (1,224,191
            )Balance
      at June 30, 2008
            
            
            2,281,700
            
            
            $
            22,817
            
            
            $
            25,733,464
            
            
            $
            (
      14,057,448
            )
            
            $
            11,698,833















































































See accompanying condensed notes to
unaudited consolidated financial statements






6






PACIFIC
COAST NATIONAL BANCORP


CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





Note
1 – Basis of Presentation




The
consolidated financial statements include the Company and its wholly-owned
subsidiary, the Bank. All significant inter-company accounts have been
eliminated on consolidation.




The
accounting principles followed by the Company and the methods of applying these
principles conform with accounting principles generally accepted in the United
States of America, or GAAP, and with general practices within the banking
industry. In preparing financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results could differ significantly from
those estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include, but are
not limited to, the determination of the allowance for loan losses, the
estimation of compensation expense related to stock options granted to employees
and directors, and valuation allowances associated with deferred tax assets, the
recognition of which are based on future taxable income.




The
consolidated interim financial statements included in this report are unaudited
but reflect all adjustments which, in the opinion of management, are necessary
for a fair presentation of the financial position and results of operations for
the interim periods presented. All such adjustments are of a normal recurring
nature. The results of operations for the three and six month periods ended June
30, 2008 are not necessarily indicative of the results of a full year’s
operations. For further information, refer to the audited financial statements
and footnotes included in the Company’s annual report on Form 10-KSB for the
year ended December 31, 2007.




Note
2 – Loss Per Share




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 would be antidilutive during the periods
presented. There were no shares that would have been included during the three
and six months ended June 30, 2008. For the three and six months ended June 30,
2007, the conversion of approximately 543,000 and 581,000, respectively, common
shares issuable upon exercise of the employee stock options and common stock
warrants have not been included in the 2007 loss per share computation because
their inclusion would have been antidilutive on loss per share.




Note
3 – Stock-Based Compensation




The
Company follows SFAS 123(R), “Share-Based Payment” utilizing the modified
prospective approach.  SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently repurchased or
cancelled. Under the modified prospective approach, compensation cost recognized
includes compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123, and
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Prior periods were not restated to reflect the impact
of adopting the new standard.




As of
June 30, 2008, there was approximately $52 thousand of unrecognized compensation
cost related to unvested stock options. This cost is expected to be recognized
over a weighted average period of approximately 1 year.




The fair
value at the grant date of stock-based awards to employees is calculated through
the use of option-pricing models, even though such models were developed to
estimate the fair value of freely tradable fully transferable options with
vesting restrictions which significantly differ from the Company’s stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated value.




Outstanding
unvested stock options generally vest ratably over three years based upon
continuous service. The Company accounts for these grants as separate grants and
recognizes share-based compensation cost using the straight-line method for each
separate vesting portion.






7







Note
4 – Fair Value Measurements




SFAS No. 157,Fair Value
Measurements,which the Company adopted effective
January 1, 2008,defines
fair value, establishes a framework for measuring fair value, establishes a
three-levelvaluation hierarchy for disclosure of
fair value measurement and enhances disclosure requirements for fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follow:





Level 1:  Inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or liabilities in active
markets.


Level 2:  Inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.


Level 3:  Inputs to the valuation methodology are
unobservable and significant to the fair value
measurement.




Following is a description of the
valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to the valuation
hierarchy:





Assets





Impaired
loans





SFAS No. 157 applies to loans measured
for impairment using the practical expedients permitted by SFAS No.
114,Accounting by Creditors for Impairment of a Loan, including impaired loans measured at
an observable market price (if available), or at the fair value of the loan’s
collateral (if the loan is collateral dependent). Fair value of the loan’s
collateral, when the loan is dependent on collateral, is determined by
appraisals or independent valuation which is then adjusted for the cost related
to liquidation of the collateral.At June 30, 2008, we had nine loans
that were considered impaired for a total of $4.7 million. Upon being classified
as impaired, charge offs were taken to reduce the balance of each loan to an
estimate of the collateral fair market value less cost to dispose. This estimate
was a level 3 valuation. There was no direct impact on the income statement. The
charge-offs were recorded as a reduction in the allowance for loan
losses.





Note
5 – Loans and Subsequent Event




The composition of the loan portfolio
at June 30, 2008 and December 31, 2007, was as follows:




June
      30, 2008
            
            
            December
      31, 2007Real
      estate
            
            (Dollars
      in thousands)1-4
      residential (1)
            
            $
            4,763
            
            
            
            4.0
            %
            
            $
            2,655
            
            
            
            2.7
            %Multi-Family
            
            
            2,127
            
            
            
            1.8
            %
            
            
            720
            
            
            
            0.7
            %Non-farm,
      non-residential
            
            
            47,656
            
            
            
            40.3
            %
            
            
            40,951
            
            
            
            41.9
            %Construction
      & Land Development
            
            
            34,658
            
            
            
            29.3
            %
            
            
            31,164
            
            
            
            31.9
            %Commercial
            
            
            28,677
            
            
            
            24.3
            %
            
            
            21,827
            
            
            
            22.4
            %Consumer
            
            
            281
            
            
            
            0.2
            %
            
            
            327
            
            
            
            0.3
            %118,162
            
            
            
            100
            %
            
            
            97,644
            
            
            
            100
            %Net
      deferred loan costs, premiums and discounts
            
            
            270
            
            
            
            
            
            
            
            230Allowance
      for loan losses
            
            
            ( 1,491
            )
            
            
            
            
            
            
            ( 1,815
            )$
            116,941
            
            
            
            
            
            
            $
            96,059(1)
      Comprised of second mortgage home loans under home equity lines of
      credit.







At June
30, 2008, and December 31, 2007, the Bank had total commitments to lend
outstanding of $35.5 million and $29.5 million respectively.




Management
evaluates loan impairment according to the provisions of SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Under SFAS No. 114, loans are considered impaired
when it is probable that we will be unable to collect all amounts due as
scheduled according to the contractual terms of the loan agreement,






8








including
contractual interest and principal payments. Impaired loans are measured for
impairment based on the present value of expected future cash flows discounted
at the loan’s effective interest rate, or, alternatively, at the loan’s
observable market price or the fair value of the collateral of the loan is
collateralized, less costs to sell.




At June
30, 2008, the Bank had five construction loans with outstanding balances of $3.8
million, three commercial loans with outstanding balances of  $787
thousand, and one consumer loan with an outstanding balance of $91 thousand, all
of which were considered impaired compared to two construction loans which were
considered impaired at December 31, 2007 for $2.5 million.




If a loan
is collateral-dependent and considered impaired, the outstanding principal is
reduced through a charge off to the bulk-sale value less costs to sell. Once the
loss has been recognized, no additional reserves for losses are taken for these
loans, however additional charge-offs could be required if there is continued
deterioration in collateral value. Therefore, the related allowance for loan
losses on impaired loans represents only the allowance for non-collateral
dependent loans. As of June 30, 2008, two impaired loans for $1.7 million were
not considered collateral-dependent and had allowances for losses totaling $683
thousand.




At June
30, 2008, the Bank had $4.7 million in non-performing loans. Of this total,
loans on nonaccrual were $3.8 million and restructured debt totaled $954
thousand.




The
following table provides information on nonperforming loans:




June
      30, 2008
              
              
              December
      31, 2007(Dollars
      in thousands)Impaired
      loans with specific reserves
              
              
              (1)
              
              
              $
              1,745
              
              
              $
              2,467Impaired
      loans without specific reserves
              
              
              
              
              
              
              2,998
              
              
              
              -Total
      impaired loans
              
              
              
              
              
              
              4,743
              
              
              
              2,467Related
      allowance for loan losses on impaired loans
              
              
              
              
              
              
              683
              
              
              
              590Net
      recorded investment in impaired loans
              
              
              
              
              
              $
              4,060
              
              
              $
              1,877Average
      balance during the year on impaired loans
              
              
              
              
              
              $
              5,551
              
              
              $
              2,456Interest
      income recognized on impaired loans
              
              
              
              
              
              $
              116
              
              
              $
              126




(1) At
June 30, 2008, $791 thousand in impaired loans with specific reserves held SBA
guarantees for approximately $175 thousand.




On July
23, 2008, the Bank received payoffs of $1 million and recoveries of
$174 thousand on a construction loan that is shown in the table above as an
impaired, non-accruing loan.




The
following table sets forth the activity for the six months ended June 30, 2008
and 2007 in our allowance for loan losses account.




9







2008
            
            
            2007
            
            
            2006($
      in thousands)Balance
      at beginning of year
            
            $
            1,815
            
            
            $
            432
            
            
            $
            87Provision
      charged to expense
            
            
            649
            
            
            
            1,383
            
            
            
            350Real
      estate1-4
      residential (1)
            
            
            -
            
            
            
            -
            
            
            
            -Multi-Family
            
            
            -
            
            
            
            -
            
            
            
            -Non-farm,
      non-residential
            
            
            -
            
            
            
            -
            
            
            
            -Construction
      & Land Development
            
            
            ( 1,066
            )
            
            
            -
            
            
            
            -Commercial
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            -
            
            
            
            -
            
            
            
            ( 5
            )Total
      loans charged off
            
            
            ( 1,066
            )
            
            
            -
            
            
            
            ( 5
            )Real
      estate1-4
      residential (1)
            
            
            -
            
            
            
            -
            
            
            
            -Multi-Family
            
            
            -
            
            
            
            -
            
            
            
            -Non-farm,
      non-residential
            
            
            -
            
            
            
            -
            
            
            
            -Construction
      & Land Development
            
            
            93
            
            
            
            -
            
            
            
            -Commercial
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            -
            
            
            
            -
            
            
            
            -Recoveries
      on loans previously charged off
            
            
            93
            
            
            
            -
            
            
            
            -Balance
      at end of period
            
            $
            1,491
            
            
            $
            1,815
            
            
            $
            432





Note
6 – Other Expenses




A summary of other expenses for the
three and six months ended June 30, 2008 and 2007 is as follows:




Three
      Months Ended June 30, 2008
            
            
            Three
      Months Ended June 30, 2007
            
            
            Six
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2007Data
      Processing
            
            $
            143,740
            
            
            $
            94,757
            
            
            $
            281,960
            
            
            $
            195,926Office
      Expenses
            
            
            144,964
            
            
            
            71,439
            
            
            
            246,245
            
            
            
            148,689Marketing
            
            
            94,266
            
            
            
            67,616
            
            
            
            193,972
            
            
            
            128,332Regulatory
      Assessments
            
            
            22,423
            
            
            
            17,598
            
            
            
            52,763
            
            
            
            25,222Insurance
      Costs
            
            
            27,889
            
            
            
            24,939
            
            
            
            54,895
            
            
            
            55,101Recruiting
      Costs
            
            
            184
            
            
            
            808
            
            
            
            184
            
            
            
            33,497Director-related
      expenses (1)
            
            
            2,242
            
            
            
            47,829
            
            
            
            5,931
            
            
            
            64,251Other
            
            
            3,476
            
            
            
            26,325
            
            
            
            29,348
            
            
            
            37,149$
            439,184
            
            
            $
            351,311
            
            
            $
            865,298
            
            
            $
            688,167(1)
      Consists primarily of costs associated with training conferences and
      director stock option expense.







Note
7 – Income Taxes




We adopted the provisions of Financial
Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB State No. 109, or FIN 48, on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, Accounting for Income
Taxes. FIN 48 prescribes a threshold and a measurement process for
recognizing in the financial statements a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. We have determined that there are no significant
uncertain tax positions requiring recognition in our financial
statements.






10






The Company has two tax jurisdictions:
The U.S. Government and the State of California. As of January 1, 2007, and June
30, 2008, the Bank had no recognized tax benefits. The Bank still has the tax
years of 2003, 2004, 2005, 2006, and 2007 subject to examination by either the
Internal Revenue Service or the Franchise Tax Board of the State of
California.




The Company will classify any interest
required to be paid on an underpayment of income taxes as interest expense. Any
penalties assess by a taxing authority will be classified as other
expense.







Note
8 - Current Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS No. 157 defines
the fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and
accordingly, does not require any new fair value measurements. We adopted SFAS
No. 157 as of January 1, 2008 and the adoption did not have a material impact on
the consolidated financial statements or results of operations of the
Company.





In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115”. SFAS 159 permits an entity to choose to measure many financial instruments
and certain other items at fair value. Most of the provisions of SFAS 159 are
elective; however, the amendment to SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities”, applies to all entities with
available for sale or trading securities. For financial instruments elected to
be accounted for at fair value, an entity will report the unrealized gains and
losses in earnings. We adopted SFAS No. 159 on January 1, 2008. We chose not to
elect the option to measure the fair value of eligible financial assets and
liabilities.





Note
9 – Reclassifications





Certain reclassifications have been
made in the 2007 consolidated financial statements and footnotes to conform to
the presentation used in 2008 with no change to previously reported net loss or
shareholders' equity.





ITEM
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




The
following discussion and analysis address the Company’s consolidated financial
condition as of June 30, 2008 compared to December 31, 2007, and results of
operations for the three and six months ended June 30, 2008 and 2007. The
discussion should be read in conjunction with the financial statements and the
notes related thereto which appear elsewhere in this Quarterly Report on
Form 10-Q.




Critical Accounting
Policies





Our
accounting policies are integral to understanding the results
reported.  In preparing our consolidated financial statements, the
Company is required to make judgments and estimates that may have a significant
impact upon our reported financial results.  Certain accounting
policies require the Company to make significant estimates and assumptions,
which have a material impact on the carrying value of certain assets and
liabilities, and are considered critical accounting policies.  The
estimates and assumptions used are based on historical experiences and other
factors, which are believed to be reasonable under the
circumstances.  Actual results could differ significantly from these
estimates and assumptions, which could have a material impact on the carrying
value of assets and liabilities at the balance sheet dates and results of
operations for the reporting periods.  For example, the Company’s
determination of the adequacy of its allowance for loan losses is particularly
susceptible to management’s judgment and estimates.  The following is
a brief description of the Company’s current accounting policies involving
significant management valuation judgments.





Allowance for Loan
Losses





The
allowance for loan losses represents management’s best estimate of probable
losses inherent in the existing loan portfolio.  The allowance for
loan losses is increased by the provision for loan losses charged to expense and
reduced by loans charged off, net of recoveries.  The provision for
loan losses is determined based on management’s assessment of several factors
including, among others, the following: reviews and evaluations of specific
loans, changes in the nature and volume of the loan portfolio, current and
anticipated economic conditions






11






and the
related impact on specific borrowers and industry groups, historical loan loss
experiences, the levels of classified and nonperforming loans and the results of
regulatory examinations.





The
adequacy of the allowance is determined using two different methods to determine
a range. The first method involves classifying the loans by type and applying
historical loss rates using an 8 year rolling average determined from Call
Report data for all banks obtained from the Federal Reserve Board website. To
this number is added the reserves for loans classified as substandard,
substandard non-accrual, and doubtful, as established by management. The second
method involves classifying the portfolio by risk weighting and applying a loss
factor for each rating, again using the FRB historic database to determine
appropriate factors as the Bank has limited loss history. Again, the related
reserves for the loans classified as substandard, substandard non-accrual, and
doubtful, are added to the general allowance to arrive at a total allowance. In
addition, qualitative, or “Q”, factors are used to adjust the general allowance.
These Q factors include changes in lending policies and procedures, in national
and local economic conditions, in the mature and volume of the loan portfolio,
in the tenure of the lending staff, in the non-performing loans, and in the
quality of the loan review system. In addition, the existence and effect of
concentrations within the portfolio and the effect of external factors are also
taken into account





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 the 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 Company 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 the 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 condition of the various markets in which
collateral may be sold may all affect the required level of the allowance for
loan losses and the associated provision for loan losses.





Stock-Based
Compensation





The
Company accounts for stock-based employee compensation as prescribed by SFAS
123(R), Share-Based
Payment. SFAS 123(R) 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.




The
Company uses the Black-Scholes option pricing model to estimate the fair values
of the options granted.  The estimates that are a part of the
calculation for the compensation costs include the average life of the stock
options, the future price of the Company’s stock when the options are exercised,
and the average forfeiture rate of pre-vested options. These estimates have
significant influence over the final expense and the Company does not have a
history on which to base these assumptions. Please refer to Note H – Stock Optionsof the
Notes to Consolidated Financial Statements of the December 31, 2007
10-KSB.







12


Deferred
Tax Assets





Management
estimates the need for a valuation allowance on deferred tax assets by comparing
the total recorded to the amount available for carry back and the amount that
will be utilized by estimated future earnings.







Executive
Overview




Introduction




Pacific
Coast National Bancorp is a bank holding company headquartered in San Clemente,
California, offering a broad array of banking services through its wholly owned
banking subsidiary, Pacific Coast National Bank. In 2005, the Company completed
an initial public offering of its common stock, issuing 2,280,000 shares at a
price of $10.00 per share.  The net proceeds received from the
offering were approximately $20.5 million.  The Bank opened for
business on May 16, 2005.




The
Bank’s principal markets include the coastal regions of Southern Orange County
and Northern San Diego County.   As of June 30, 2008, the Company
had, on a consolidated basis, total assets of $139.9 million, net loans of
$116.9 million, total deposits of $127.6 million, and shareholders’ equity of
$11.7 million.  The Bank currently operates through a main branch
office located at 905 Calle Amanecer in San Clemente, California and a branch
office at 499 North El Camino Real in Encinitas, California.




The Company incurreda net loss for thesecond quarter of 2008of $(64) thousandor $(0.03)per share, as compared toa net loss of$(944) thousandor $(0.41)per share,during the same period of
2007. Theimprovementin loss per share for the quarter was
primarily attributable to a78% increase in the net interest income due to an increase in earning assets and
a 183% increase in non-interest income due primarilyto gain on sales of SBA loans,
partially offset by a 11% increase in non-interest expenses.




The Company incurreda net loss for thesix months ended June 30, 2008 of$(1.2) millionor $(0.54)per share, as compared toa net loss of$(2.0) millionor $(0.86)per share,during the same period of
2007. Theimprovementin loss per share for the quarter was
primarily attributable to a76% increase in the net interest income due to an increase in earning assets and
a 273% increase in non-interest income due primarily to gain on sales of SBA loans,
partially offset by a 1% increase in non-interest expenses.




The
following discussion focuses on the Company’s financial condition as of June 30,
2008 compared to December 31, 2007 and results of operations for the three and
six months ended June 30, 2008 and 2007.




Results
of Operations




Net
Interest Income and Net Interest Margin




Net
interest income is the difference between interest income, principally from our
loan portfolio, and interest expense, principally on customer deposits. Net
interest income is the Bank’s principal source of earnings.  Changes
in net interest income result from changes in volume, spread and
margin.  Volume refers to the average dollar level of interest-earning
assets and interest-bearing liabilities.  Spread refers to the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities.  Margin refers to net interest
income divided by average interest-earning assets, and is influenced by the
level and relative mix of interest-earning assets and interest-bearing
liabilities.




Net
interest income for the three and six months ended June 30, 2008, before the
provision for loan losses was $1.3 million and $2.6 million compared to $743
thousand and $1.5 million for the same time periods in 2007. This growth was
attributable to the increase in the volume of earning assets and the greater
percentage of loans comprising earning assets in the 2008 periods.




During
the three months ended June 30, 2008, loans accounted for 85% of average earning
assets, with a weighted average yield of 7.23%, compared to the same period in
2007 when 66% of the average earning assets were loans, with a weighted average
yield of 7.88%. The increase in loans as a percentage of average earning assets
occurred as a result of significantly increased loan originations in the second
half of 2007 and the first six months of 2008. The decrease in the average yield
resulted from the decrease in market rates prompted by the actions of the
Federal Reserve Board over the last year. Total loan interest income was $2.0
million, including net loan fees of $117 thousand, for the three months ended
June 30, 2008 compared to $852 thousand in total loan interest income, including
$(44) thousand in net loan costs, for the same period in 2007.






13







During
the first six months of 2008, loans accounted for 86% of average earning assets,
with a weighted average yield of 7.49%, compared to the first six months of 2007
when 64% of the average earning assets were loans, with a weighted average yield
of 8.13%. The increase in loans as a percentage of average earning assets
occurred as a result of significantly increased loan originations in the second
half of 2007 and the first six months of 2008. The decrease in the average yield
resulted from the decrease in market rates prompted by the actions of the
Federal Reserve Board over the last year. Total loan interest income was $3.9
million, including net loan fees of $188 thousand, for the first six months of
2008 compared to $1.6 million in total loan interest income, including $(21)
thousand in net loan costs, in the first six months of 2007.





Other
earning assets consist of investments, capital stock of the Federal Reserve
Bank, time deposits with other financial institutions and overnight fed funds.
For the three months ended June 30, 2008, fed funds sold averaged $15.0 million
with an average yield of 1.99% compared to the same period in 2007 with average
fed funds sold of $14.2 million with an average yield of 5.73%. The remaining
earning assets for the three months ended June 30, 2008, consisted of stock in
the Federal Reserve Bank with an average yield of 6.03% compared to the same
period in 2007 with other earning assets consisting of investment securities and
stock in the Federal Reserve Bank averaging $3.9 million with an average yield
of 5.18%.




For the
first six months of 2008, fed funds sold averaged $11.7 million with an average
yield of 2.54% compared to the first six months of 2007 with average fed funds
sold of $12.8 million with an average yield of 5.51%. The remaining earning
assets for the first six months of 2008 consisted of stock in the Federal
Reserve Bank with an average yield of 4.19% compared to the first six months of
2007 with other earning assets consisting of investment securities and stock in
the Federal Reserve Bank averaging $6.2 million with an average yield of
4.93%.




Interest-bearing
liabilities, consisting entirely of deposits, averaged $88.4 million with an
average rate of 3.50% during the first six months of 2008, compared with $32.7
million in interest-bearing deposits at a rate of 4.12% for the same period in
2007. The decrease in the average rate on deposit products was the result of
decreases in market rates as a result of actions taken by the Federal Reserve
Board  in recent months, offset by higher-rate  time
deposits obtained through brokers.  The increase in deposits was a
result of our marketing campaign, the cross-selling of deposit products to our
borrowers, direct sales calls and the utilization of brokered deposits to fund
increased loan originations.




Due to
strong loan demand, we began utilizing brokered deposits in the second quarter
of 2007. As discussed under “Capital Resources and Capital Adequacy Management”,
we seek to limit the amount of brokered deposits as their utilization typically
would be expected to increase our overall cost of funds. As of June 30, 2008,
$23.1 million in brokered funds were on deposit with an average rate of 3.9%,
compared with $5.9 million in brokered funds on deposit as of June 30, 2007,
with an average rate of 5.4%, and $28.2 million in brokered funds as of December
31, 2007, with an average rate of 4.9%.




The net
interest margin was 4.17% and 4.35% for the three and six months ended June 30,
2008, compared to 4.85% and 4.95% for the same periods in 2007. Non-interest
bearing demand account balances averaged $23.9 million and $21.8 million for the
three and six months ended June 30, 2008, representing 20% of total deposits in
each period. This compares with $16.3 million and $15.6 million for the same
periods in 2007, representing 32% of total deposits in each period. While the
dollar amount of demand deposits continues to increase, the percentage of demand
deposits to total deposits has decreased. This is the result of a significant
increase in money market accounts and the increase in time deposits to maintain
liquidity as the loan portfolio has grown. The growth in money market accounts
was the result of marketing efforts of new personnel in the San Clemente office,
which has allowed us to not renew some brokered time deposits as they have
matured.




We earned
$1.3 million in net interest income on average interest-earning assets of $127.2
million and $2.6 million on average earning assets of $117.9 million for the
three and six months ended June 30, 2008. For the same periods in 2007, we
earned $743 thousand on average interest-earning assets of $61.5 million and
$1.5 million on average interest-earning assets of $59.2 million, respectively.
For the three and six months ended June 30, 2008 compared to the same periods in
2007, net interest income before provision for loan losses increased by $652
thousand due to the increase in volume of earning assets, and decreased by $72
thousand due to changes in interest rates, and increased by $1.2 million due to
the increase in volume of earning assets, and decreased by $122 thousand due to
changes in interest rates.




The
following table sets forth our average balances of assets, liabilities and
shareholders’ equity, in addition to the major components of net interest income
and the net interest margin for the three and six month periods
indicated.






14








Three
      Months Ended June 30, 2008
            
            
            Three
      Months Ended June 30, 2007Average Balance
            
            
            Interest
            
            
            Average
      Yield / Cost (4)
            
            
            Average Balance
            
            
            Interest
            
            
            Average
      Yield / Cost (4)(Dollars
      in thousands)Assets:Interest-earning
      Assets:Net
      Loans Receivable (1)
            
            $
            111,854
            
            
            $
            2,016
            
            
            
            7.23
            %
            
            $
            43,329
            
            
            $
            852
            
            
            
            7.88
            %Investment
      Securities
            
            
            -
            
            
            
            -
            
            
            
            4.76
            %
            
            
            3,458
            
            
            
            41
            
            
            
            4.76
            %Investment
      in capital stock of
              Federal
      Reserve Bank and Other
              Investments
            
            
            365
            
            
            
            5
            
            
            
            6.03
            %
            
            
            454
            
            
            
            9
            
            
            
            8.10
            %Fed
      funds sold
            
            
            14,970
            
            
            
            74
            
            
            
            1.99
            %
            
            
            14,211
            
            
            
            203
            
            
            
            5.73
            %Total
      interest-earning assets
            
            
            127,189
            
            
            
            2,096
            
            
            
            6.61
            %
            
            
            61,452
            
            
            
            1,105
            
            
            
            7.21
            %Noninterest-earning
      assets
            
            
            5,106
            
            
            
            
            
            
            
            
            
            
            
            4,740Total
      Assets
            
            $
            132,295
            
            
            
            
            
            
            
            
            
            
            $
            66,192Liabilities
      and Shareholders' EquityMoney
      Market and Savings Deposits
            
            $
            45,989
            
            
            $
            262
            
            
            
            2.29
            %
            
            $
            25,458
            
            
            
            276
            
            
            
            4.34
            %Interest-bearing
      Checking
            
            
            4,120
            
            
            
            16
            
            
            
            1.56
            %
            
            
            3,411
            
            
            
            11
            
            
            
            1.34
            %Time
      Deposits of $100,000 or more
            
            
            11,850
            
            
            
            121
            
            
            
            4.09
            %
            
            
            3,937
            
            
            
            47
            
            
            
            4.83
            %Other
      Time Deposits
            
            
            34,393
            
            
            
            373
            
            
            
            4.35
            %
            
            
            2,618
            
            
            
            28
            
            
            
            4.21
            %Total
      Interest-bearing liabilities
            
            
            96,352
            
            
            
            772
            
            
            
            3.21
            %
            
            
            35,425
            
            
            
            362
            
            
            
            4.10
            %Non-interest
      bearing checking accounts
            
            
            23,886
            
            
            
            
            
            
            
            
            
            
            
            16,327Non-interest
      bearing liabilities
            
            
            785
            
            
            
            
            
            
            
            
            
            
            
            351Shareholders'
      Equity
            
            
            11,272
            
            
            
            
            
            
            
            
            
            
            
            14,089Total
      Liabilities andShareholders'
      Equity
            
            $
            132,295
            
            
            
            
            
            
            
            
            
            
            $
            66,192Net
      Interest Income
            
            
            
            
            
            $
            1,324
            
            
            
            
            
            
            
            
            
            
            $
            743Net
      Interest Spread (2)
            
            
            
            
            
            
            3.40
            %
            
            
            
            
            
            
            
            
            
            
            3.11
            %Net
      Interest Margin (3)
            
            
            
            
            
            
            4.17
            %
            
            
            
            
            
            
            
            
            
            
            4.85
            %(1)
      Loan fees (costs) are included in total interest income as follows: 2008
      $117 thousand; 2007 $(44) thousand.(2)
      Net interest spread represents the yield earned on average total
      interest-earning assets less therate
      paid on average interest-bearing liabilities.(3)
      Net interest margin is computed by dividing annualized net interest income
      by average totalinterest-earning
      assets.(4)
      Annualized







15





Six
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2007Average Balance
            
            
            Interest
            
            
            Average
      Yield / Cost (4)
            
            
            Average Balance
            
            
            Interest
            
            
            Average
      Yield / Cost (4)(Dollars
      in thousands)Assets:Interest-earning
      Assets:Net
      Loans Receivable (1)
            
            $
            105,607
            
            
            $
            3,943
            
            
            
            7.49
            %
            
            $
            40,104
            
            
            $
            1,616
            
            
            
            8.13
            %Investment
      Securities
            
            
            -
            
            
            
            -
            
            
            
            4.85
            %
            
            
            5,339
            
            
            
            128
            
            
            
            4.85
            %Investment
      in capital stock of
              Federal
      Reserve Bank and Other
              Investments
            
            
            553
            
            
            
            12
            
            
            
            4.19
            %
            
            
            874
            
            
            
            25
            
            
            
            5.81
            %Fed
      funds sold
            
            
            11,715
            
            
            
            149
            
            
            
            2.54
            %
            
            
            12,849
            
            
            
            351
            
            
            
            5.51
            %Total
      interest-earning assets
            
            
            117,875
            
            
            
            4,103
            
            
            
            6.98
            %
            
            
            59,166
            
            
            
            2,120
            
            
            
            7.23
            %Noninterest-earning
      assets
            
            
            4,735
            
            
            
            
            
            
            
            
            
            
            
            3,949Total
      Assets
            
            $
            122,610
            
            
            
            
            
            
            
            
            
            
            $
            63,115Liabilities
      and Shareholders' EquityMoney
      Market and Savings Deposits
            
            $
            43,056
            
            
            $
            575
            
            
            
            2.68
            %
            
            $
            23,409
            
            
            
            508
            
            
            
            4.37
            %Interest-bearing
      Checking
            
            
            3,726
            
            
            
            27
            
            
            
            1.45
            %
            
            
            3,196
            
            
            
            21
            
            
            
            1.34
            %Time
      Deposits of $100,000 or more
            
            
            7,821
            
            
            
            165
            
            
            
            4.23
            %
            
            
            3,735
            
            
            
            90
            
            
            
            4.88
            %Other
      Time Deposits
            
            
            33,841
            
            
            
            777
            
            
            
            4.60
            %
            
            
            2,406
            
            
            
            50
            
            
            
            4.16
            %Total
      Interest-bearing liabilities
            
            
            88,443
            
            
            
            1,544
            
            
            
            3.50
            %
            
            
            32,747
            
            
            
            669
            
            
            
            4.12
            %Non-interest
      bearing checking accounts
            
            
            21,764
            
            
            
            
            
            
            
            
            
            
            
            15,600Non-interest
      bearing liabilities
            
            
            753
            
            
            
            
            
            
            
            
            
            
            
            354Shareholders'
      Equity
            
            
            11,650
            
            
            
            
            
            
            
            
            
            
            
            14,414Total
      Liabilities andShareholders'
      Equity
            
            $
            122,610
            
            
            
            
            
            
            
            
            
            
            $
            63,115Net
      Interest Income
            
            
            
            
            
            $
            2,559
            
            
            
            
            
            
            
            
            
            
            $
            1,451Net
      Interest Spread (2)
            
            
            
            
            
            
            3.48
            %
            
            
            
            
            
            
            
            
            
            
            3.11
            %Net
      Interest Margin (3)
            
            
            
            
            
            
            4.35
            %
            
            
            
            
            
            
            
            
            
            
            4.95
            %(1)
      Loan fees (costs) are included in total interest income as follows: 2008
      $188 thousand; 2007 $(21) thousand.(2)
      Net interest spread represents the yield earned on average total
      interest-earning assets less therate
      paid on average interest-bearing liabilities.(3)
      Net interest margin is computed by dividing annualized net interest income
      by average totalinterest-earning
      assets.(4)
      Annualized







The
following tables present the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected interest income and interest expense in the three and
six months ended June 30, 2008 compared to the same periods in 2007. Because of
our significant loan and deposit growth, changes due to volume account for most
of the overall change. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate) and (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.






16








Three
      Months Ended June 30, 2008 Compared to Three Months Ended June 30,
      2007Increase/(Decrease) in
      Net Interest IncomeDue
      ToRate
            
            
            Volume
            
            
            NetInterest-earning
      Assets:
            
            (Dollars
      in thousands)Net
      Loans Receivable
            
            $
            (70
            )
            
            $
            1,234
            
            
            $
            1,164Investment
      Securities
            
            
            -
            
            
            
            (41
            )
            
            
            (41
            )Investment
      in capital stock of
              Federal
      Reserve Bank and Other
              Investments
            
            
            (2
            )
            
            
            (1
            )
            
            
            (4
            )Cash,
      fed funds sold and other
            
            
            (133
            )
            
            
            4
            
            
            
            (129
            )Total
            
            
            (205
            )
            
            
            1,196
            
            
            
            990Interest-bearing
      Liabilities:Money
      Market and Savings Deposits
            
            
            (130
            )
            
            
            116
            
            
            
            (14
            )Interest-bearing
      Checking
            
            
            2
            
            
            
            3
            
            
            
            5Time
      Deposits of $100,000 or more
            
            
            (7
            )
            
            
            81
            
            
            
            73Other
      Deposits
            
            
            1
            
            
            
            346
            
            
            
            347Total
            
            
            (135
            )
            
            
            545
            
            
            
            410Net
      Change in Net Interest Income
            
            $
            (70
            )
            
            $
            650
            
            
            $
            580







Six
      Months Ended June 30, 2008 Compared to Six Months Ended June 30,
      2007Increase/(Decrease) in
      Net Interest IncomeDue
      ToRate
            
            
            Volume
            
            
            NetInterest-earning
      Assets:
            
            (Dollars
      in thousands)Net
      Loans Receivable
            
            $
            (128
            )
            
            $
            2,456
            
            
            $
            2,327Investment
      Securities
            
            
            -
            
            
            
            (128
            )
            
            
            (128
            )Investment
      in capital stock of
              Federal
      Reserve Bank and Other
              Investments
            
            
            (7
            )
            
            
            (6
            )
            
            
            (13
            )Cash,
      fed funds sold and other
            
            
            (189
            )
            
            
            (13
            )
            
            
            (202
            )Total
            
            
            (325
            )
            
            
            2,308
            
            
            
            1,984Interest-bearing
      Liabilities:Money
      Market and Savings Deposits
            
            
            (197
            )
            
            
            264
            
            
            
            67Interest-bearing
      Checking
            
            
            2
            
            
            
            4
            
            
            
            6Time
      Deposits of $100,000 or more
            
            
            (12
            )
            
            
            87
            
            
            
            75Other
      Deposits
            
            
            5
            
            
            
            722
            
            
            
            728Total
            
            
            (202
            )
            
            
            1,078
            
            
            
            875Net
      Change in Net Interest Income
            
            $
            (122
            )
            
            $
            1,230
            
            
            $
            1,108







17


Provision
for Loan Losses


A
provision for loan losses is determined that is considered sufficient to
maintain an allowance to absorb probable losses inherent in the loan portfolio
as of the balance sheet date.  For additional information concerning
this determination, see the section of this discussion and analysis captioned
“Allowance for Loan
Losses.”
  In the
three and six months ended June 30, 2008 and 2007, the provision for loan losses
was $0 and $649 thousand compared to $233 thousand and $318 thousand,
respectively.  As a result of the $649 thousand provision for loan
losses for the three months ended March 31, 2008, no further provision was
deemed necessary during the three months ended June 30, 2008.
  There
were eight loans for $3.8 million on nonaccrual and one restructured loan for
$954 thousand for a total of $4.7 million in loans considered impaired as of
June 30, 2008 compared to eight loans for a total of $5.2 million in impaired
loans at March 31, 2008, including two loans for a total of $2.0 million on
nonaccrual. During the three months ended June 30, 2008, two construction loans
were partially charged off to their bulk-sale value less costs to sell,
reducing the allowance for loan losses by $497 thousand compared to charge-offs
of $569 thousand on two construction loans during the first three months of
2008. Recoveries of $93 thousand on construction loans were received during the
second quarter of 2008.  There were no charge-offs, recoveries or
non-performing loans during the same periods in 2007. Based on the recoveries
received, recoveries received early in the third quarter of 2008, and the
identification of, and reduction to, bulk-sale value on most of the construction
loans purchased, no additional provision was taken during the three months ended
June 30, 2008.
  The
allowance for loan losses is determined based on management’s assessment of
several factors including, among others, the following: review and evaluation of
individual loans, changes in the nature and volume of the loan portfolio,
current economic conditions and the related impact on specific borrowers and
industry groups, historical loan loss experiences and the levels of classified
and nonperforming loans. Because the Bank has insufficient history on which to
build assumptions for future loan losses, a national bank peer group average is
also used to estimate adequate levels of loan loss reserves.




Noninterest
Income




Non-interest
income for the three and six months ended June 30, 2008 was $372 thousand
including $276 thousand from gain on sale of the guaranteed portion of SBA
loans, and $551 thousand including $419 thousand from gain on sale of the
guaranteed portion of SBA loans, respectively. For the same periods in 2007,
non-interest income was $131 thousand including $134 thousand from gain on sale
of the guaranteed portion of SBA loans, and $148 thousand including $134
thousand from gain on sale of the guaranteed portion of SBA loans thousand. Loan
brokerage fees were $73 thousand and $90 thousand for the three and six months
ended June 30, 2008. There were no loan brokerage fees earned in the first six
months of 2007, as our Real Estate Industries Group, which brokers commercial
real estate loans in excess of our legal lending limit or that do not otherwise
meet our lending criteria, did not commence its activities until April
2007.  During the three and six months ended June 30, 2007, we had a
loss on the sale of available-for-sale securities of $16 thousand and $12
thousand, respectively. Fees on deposit accounts make up the remainder of the
noninterest income for all periods, and the increases in these fees during the
2008 periods were due to the increase in the volume of deposits.





Noninterest
Expense




Total
noninterest expense was $1.8 million and $3.7 million for the three and six
months ended June 30, 2008, respectively, compared to $1.6 million and $3.2
million for the same periods in 2007. The major components of the expense are
discussed below.  Our infrastructure, personnel and fixed operating
base can support a substantially larger asset base. As a result, we believe we
can cost-effectively grow and control noninterest expenses relative to revenue
growth.




Salaries
and employee benefits totaled $994 thousand for the second quarter, and $2.1
million for the first half of 2008 compared to $803 thousand and $1.8 million
for the second quarter and first six months of 2007. Included in this category
for the three and six months ended June 30, 2008 were $75 thousand and $166
thousand representing a portion of the expense for the employee stock options
granted from May 16, 2005, through June 30, 2008. In the three and six months
ended June 30, 2007, this expense was $256 thousand and $526 thousand. FAS No.
123(R) 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. Excluding the expense associated
with FAS No. 123(R), salaries and employee benefits increased by $372 thousand
and increased by $664 thousand, respectively in the three and six months ended
June 30, 2008 compared with the same periods in 2007. The increase occurred due
to the hiring of additional personnel to accommodate the growth in the Bank’s
customer base, but is also the result of the implementation of FAS No. 91 in the
second quarter of 2007. In the second quarter of 2007, FAS No. 91 was
implemented resulting in recovered costs associated with loan generation of $281
thousand. This expense represents the costs for loans currently outstanding and
is expected to be less on a quarterly basis going forward. Employee benefit
costs including employer taxes and group insurance which accounted for
approximately 15% and 17% of the salary and employee benefits expense in the
three and six months






18








ended
June 30, 2008, compared to 22% and 18% in the same periods in 2007. The Bank
employed 37 full-time equivalent (FTE) employees as of June 30, 2008 compared to
38 FTE as of June 30, 2007. The volume of assets per employee as of the end of
the second quarter of 2008 was $3,780,000 compared to $1,901,600 at the end of
June 2007.




Occupancy
and equipment expenses totaled $245 thousand and $488 thousand for the three and
six months ended June 30, 2008, compared to $294 thousand and $512 thousand for
the three and six month periods ended June 30, 2007.  Depreciation
expense of fixed asset and tenant improvements for the three and six months
ended June 30, 2007, were $95 thousand and $189 thousand compared to the same
periods in 2007 of $88 thousand and $176 thousand.




Professional
fees for the three and six months ended June 30, 2008, were $80 thousand and
$222 thousand compared to $135 thousand and $235 thousand for the same time
periods in 2007. The decrease in 2008 is primarily due to reduced legal fees
resulting from a fixed-fee contract and a reduction in the use of
consultants.









A summary
of other expenses for the three and six months ended June 30, 2008 and 2007 is
as follows:




Three
      Months Ended June 30, 2008
            
            
            Three
      Months Ended June 30, 2007
            
            
            Six
      Months
              Ended
      June 30, 2008
            
            
            Six
      Months
              Ended
      June 30, 2007Data
      Processing
            
            $
            143,740
            
            
            $
            94,757
            
            
            $
            281,960
            
            
            $
            195,926Office
      Expenses
            
            
            144,964
            
            
            
            71,439
            
            
            
            246,245
            
            
            
            148,689Marketing
            
            
            94,266
            
            
            
            67,616
            
            
            
            193,972
            
            
            
            128,332Regulatory
      Assessments
            
            
            22,423
            
            
            
            17,598
            
            
            
            52,763
            
            
            
            25,222Insurance
      Costs
            
            
            27,889
            
            
            
            24,939
            
            
            
            54,895
            
            
            
            55,101Recruiting
      Costs
            
            
            184
            
            
            
            808
            
            
            
            184
            
            
            
            33,497Director-related
      expenses (1)
            
            
            2,242
            
            
            
            47,829
            
            
            
            5,931
            
            
            
            64,251Other
            
            
            3,476
            
            
            
            26,325
            
            
            
            29,348
            
            
            
            37,149$
            439,184
            
            
            $
            351,311
            
            
            $
            865,298
            
            
            $
            688,167(1)
      Consists primarily of costs associated with training conferences and
      director stock option expense.







Data
processing expenses increased for the three and six months ended June 30, 2008
compared to the same periods in 2007 due primarily to costs associated with new
cash management products for deposit customers such as Remote Deposit Capture
and online wire originations. Network administration fees have increased as the
Bank has increased capacity by automating more processes rather than increasing
staff.




Office
Expenses increased for the three and six months ended June 30, 2008 compared to
the same periods in 2007 due primarily to auto expenses, which have increased
due to the cost of fuel and an increase in the number of business development
staff, armored and courier expenses, which have increased as the Bank’s customer
base has grown, and correspondent bank charges, due to increased activity in
these accounts and reduced earnings credits.




Marketing
expenses have increased for the three and six months ended June 30, 2008
compared to the same periods in 2007 due primarily to an enhanced quarterly
newsletter with expanded distribution, and an increased number of press
releases.




Director-related
expenses decreased for the three and six months ended June 30, 2008 compared to
the same periods in 2007 due primarily director stock option expenses. In 2007,
the directors were given stock options in lieu of cash compensation which were
immediately vested. Director stock option expense for the second quarter of 2007
was $48 thousand, compared with $2 thousand for the same period in 2008. No
options in lieu of cash compensation have been granted to the directors in
2008.






19







Income
Taxes




Two
thousand in state taxes were paid during the second quarter of 2008 and 2007. No
federal tax expense or federal or state tax benefit has been recorded for the
quarters ended June 30, 2008 and 2007 based upon net operating
losses.  We will begin to recognize an income tax benefit when it
becomes more likely than not that such benefit will be realized.




Financial
Condition as of June 30, 2008




Total
assets as of June 30, 2008 were $139.9 million, consisting primarily of cash and
fed funds sold of $21.1 million and net loans of $116.9 million compared with
total assets as of December 31, 2007 of $112.5 million, consisting primarily of
cash and fed funds sold of $14.5 million and net loans of $96.1
million  Total deposits as of June 30, 2008 were $127.6 million
compared with $99.0 million as of December 31, 2007, and shareholder’s equity as
of June 30, 2008 was $11.7 million compared with $12.8 million as of December
31, 2007.




Short-Term
Investments and Interest-bearing Deposits in Other Financial
Institutions




At June
30, 2008, we had $17.0 million in federal funds (“fed funds”) sold. Federal
funds sold allow us to meet liquidity requirements and provide temporary
holdings until the funds can be otherwise deployed or invested. At December 31,
2007, we had $12.8 million in fed funds. The increase in fed funds was due to
the increase in demand and money market deposit accounts.




Investment
Securities




The
investment portfolio serves primarily as a source of interest income and,
secondarily, as a source of liquidity and a management tool for our interest
rate sensitivity.  The investment portfolio is managed according to a
written investment policy established by the Bank’s Board of Directors and
implemented by the Investment/Asset-Liability Committee.




At June
30, 2008 and December 31, 2007, our securities consisted solely of Federal
Reserve Bank Stock, having a book and estimated fair value of $354 thousand and
$405 thousand, respectively, and a weighted average yield of 4.2%. At June 30,
2008, this stock was not pledged as collateral for any purpose.




Loan
Portfolio




Our
primary source of income is interest on loans. The following table presents the
composition of the loan portfolio by category as of the dates
indicated:




June
      30, 2008
            
            
            December
      31, 2007Real
      estate
            
            (Dollars
      in thousands)1-4
      residential (1)
            
            $
            4,763
            
            
            
            4.0
            %
            
            $
            2,655
            
            
            
            2.7
            %Multi-Family
            
            
            2,127
            
            
            
            1.8
            %
            
            
            720
            
            
            
            0.7
            %Non-farm,
      non-residential
            
            
            47,656
            
            
            
            40.3
            %
            
            
            40,951
            
            
            
            41.9
            %Construction
      & Land Development
            
            
            34,658
            
            
            
            29.3
            %
            
            
            31,164
            
            
            
            31.9
            %Commercial
            
            
            28,677
            
            
            
            24.3
            %
            
            
            21,827
            
            
            
            22.4
            %Consumer
            
            
            281
            
            
            
            0.2
            %
            
            
            327
            
            
            
            0.3
            %118,162
            
            
            
            100
            %
            
            
            97,644
            
            
            
            100
            %Net
      deferred loan costs, premiums
              and
      discounts
            
            
            270
            
            
            
            
            
            
            
            230Allowance
      for loan losses
            
            
            ( 1,491
            )
            
            
            
            
            
            
            ( 1,815
            )$
            116,941
            
            
            
            
            
            
            $
            96,059(1)
      Comprised of second mortgage home loans under home equity lines of
      credit.







Net loans
as a percentage of total assets were 83.6% as of June 30, 2008, and 85.4% as of
December 31, 2007.






20








The real
estate portion of the loan portfolio is comprised of the following: mortgage
loans secured typically by commercial and multi-family residential properties,
occupied by the borrower, having terms of three to seven years with both fixed
and floating rates; second mortgage loans under revolving lines of credit
granted to consumers, secured by equity in residential properties; and
construction loans. Construction loans consist primarily of high-end,
single-family residential properties, primarily located in the coastal
communities, and commercial properties for owner-occupied, have a term of less
than one year and have floating rates and commitment
fees.  Construction loans are typically made to builders that have an
established record of successful project completion and loan repayment. At June
30, 2008, we held $49.8 million in commercial and multi-family real estate loans
outstanding, representing 42.1% of gross loans receivable, and undisbursed
commitments of $1.2 million. Of this total, $3.6 million were SBA loans with
$198 thousand in undisbursed commitments. The remaining real estate portfolio
was comprised of $34.7 million in construction loans representing 29.3% of gross
loans receivable with undisbursed commitments of $10.8 million, and $4.0 million
in second mortgage loans under revolving lines secured by equity in 1-4 family
residences, representing 4.0% of gross loans receivable with undisbursed
commitments of $4.0 million.




The
commercial loan portfolio is comprised of lines of credit for working capital
and term loans to finance equipment and other business assets.  The
lines of credit typically are limited to a percentage of the value of the assets
securing the line.  Lines of credit and term loans typically are
reviewed annually and can be supported by accounts receivable, inventory,
equipment and other assets of the client’s businesses.  At June 30,
2008, we held $28.7 million in commercial loans outstanding, representing 24.3%
of gross loans receivable, and undisbursed commitments of $19.5 million. Of this
total, $7.4 million were SBA loans with $1.2 million in undisbursed
commitments.




The
consumer loan portfolio consists of personal lines of credit and loans to
acquire personal assets such as automobiles and boats.  The lines of
credit generally have terms of one year and the term loans generally have terms
of three to five years.  The lines of credit typically have floating
rates.  At June 30, 2008, consumer loans totaled $281 thousand,
representing 0.2% of gross loans receivable and undisbursed commitments of $116
thousand.  Of this total, $91 thousand were SBA loans with no
undisbursed commitments.




Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions.  We have
established select concentration percentages within the loan portfolio. It also
includes groups of credit considered of either higher risk or worthy of further
review as part of its concentration reporting. As of June 30, 2008, real estate
loans comprised 75.4% of the total loan portfolio. A high percentage of
these loans are for commercial purposes with owner occupied real estate taken as
collateral.  In addition, all the SBA loans secured by real estate are
to owner-users. Although classified as commercial real estate for reporting
purposes, the intended source of the cash flow to repay the obligations is from
the commercial enterprise of the borrower and not directly from the sale or
lease of the property. The assessment of the borrower’s repayment ability is
therefore based on the financial strength of the business and not the real
estate held as collateral.





Management
may renew loans at maturity when requested by a customer whose financial
strength appears to support such a renewal or when such a renewal appears to be
in our best interest. We require payment of accrued interest in such instances
and may adjust the rate of interest, require a principal reduction, or modify
other terms of the loan at the time of renewal. Loan terms vary according to
loan type.  The following table shows the maturity distribution of
loans as of June 30, 2008:




As
      of June 30, 2008(Dollars
      in thousands)One
      Year
            
            
            Over
      1 Year
            
            
            Over
      5 Yearsor
      Less
            
            
            through
      5 Years
            
            
            TotalFixed
      Rate
            
            
            Floating
      or Adjustable Rate
            
            
            Fixed
      Rate
            
            
            Floating
      or Adjustable RateReal
      estate — secured
            
            $
            1,441
            
            
            $
            5,149
            
            
            $
            2,803
            
            
            $
            12,243
            
            
            $
            32,910
            
            
            $
            54,546Real
      estate — construction
            
            
            30,776
            
            
            
            1,221
            
            
            
            2,661
            
            
            
            -
            
            
            
            -
            
            
            
            34,658Commercial
            
            
            9,784
            
            
            
            4,801
            
            
            
            4,951
            
            
            
            3,219
            
            
            
            5,922
            
            
            
            28,677Consumer
            
            
            107
            
            
            
            48
            
            
            
            -
            
            
            
            126
            
            
            
            
            
            
            
            281Total
            
            $
            42,108
            
            
            $
            11,219
            
            
            $
            10,415
            
            
            $
            15,588
            
            
            $
            38,832
            
            
            $
            118,162







21






Nonperforming
Loans and Other Assets


Nonperforming
assets consist of non-performing loans, other real estate owned and other
repossessed assets.  Non-performing loans consist of loans in one or
more of the following categories: impaired loans, loans on nonaccrual status,
loans 90 days or more past due and still accruing interest and loans that have
been restructured resulting in a reduction or deferral of interest or principal.
At June 30, 2008 and December 31, 2007, the Bank had $4.7 million and $2.5
million in non-performing loans, respectively, and no other non-performing
assets.
  Other
loans of concern consist of loans where information about possible credit
problems of the borrower is known, causing management to have serious doubts as
to the ability of the borrower to comply with the present loan payment terms and
which may result in the inclusion of such loan in one of the nonperforming asset
categories.  In addition, an internally classified loan list is maintained
pursuant to federal regulations that helps management assess the overall quality
of the loan portfolio and the adequacy of the allowance for loan losses. 
Loans classified as "substandard" are those loans with clear and defined
weaknesses, such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment resources or poor financial condition, which may jeopardize
recoverability of the loan.  Loans classified as "doubtful" are those loans
that have characteristics similar to substandard loans, but also have an
increased risk that loss may occur or at least a portion of the loan may require
a charge-off if liquidated at present.  Although loans classified as
substandard do not duplicate loans classified as doubtful, both substandard and
doubtful loans may include some loans that are past due at least 90 days, are on
nonaccrual status or have been restructured.  Loans classified as "loss"
are those loans that are in the process of being charged-off.
  Of the
$4.7 million in non-performing loans at June 30, 2008, six loans for a total of
$3.9 million were classified as "substandard" and three loans for a total of
$791 thousand were classified as "doubtful."  This compares to eight loans
classified as "substandard" at March 31, 2008, totaling $5.2 million, and two
loans for a total of $2.5 million at December 31, 2007.  Other loans of
concern, not included in non-performing loans, consisted of three loans for a
total of $1.4 million at June 30, 2008 compared to five loans for a total of
$1.5 million at March 31, 2008, and two loans for a total of $349 thousand at
December 31, 2007.
 The table below
provides information with respect to the components of the Bank’s non-performing
loans as of the dates indicated:
   22


June
      30, 2008
            
            
            December
      31, 2007(Dollars
      in thousands)Impaired
      loans with specific reserves
            
            
            (1
            )
            
            $
            1,745
            
            
            $
            2,467Impaired
      loans without specific reserves
            
            
            
            
            
            
            2,998
            
            
            
            -Total
      impaired loans
            
            
            
            
            
            
            4,743
            
            
            
            2,467Related
      allowance for loan losses on impaired loans
            
            
            
            
            
            
            683
            
            
            
            590Net
      recorded investment in impaired loans
            
            
            
            
            
            $
            4,060
            
            
            $
            1,877Average
      balance during the year on impaired loans
            
            
            
            
            
            $
            5,551
            
            
            $
            2,456Interest
      income recognized on impaired loans
            
            
            
            
            
            $
            116
            
            
            $
            126Nonaccrual
      LoansReal
      estate
            
            
            
            
            
            $
            -
            
            
            $
            -Construction
      & Land Development
            
            
            
            
            
            
            2,911
            
            
            
            2,467Commercial
            
            
            
            
            
            
            787
            
            
            
            -Consumer
            
            
            
            
            
            
            91
            
            
            
            -Past
      Due 90 days or more
            
            
            
            
            
            
            -
            
            
            
            -Restructured
      Debt
            
            
            
            
            
            
            954
            
            
            
            -Total
      Nonaccrual and restructured debt
            
            
            
            
            
            $
            4,743
            
            
            $
            2,467Related
      allowance for loan losses on impaired loans
            
            
            
            
            
            
            683
            
            
            
            590Total
      Non-Performing Loans Net of Allowance
            
            
            
            
            
            $
            4,060
            
            
            $
            1,877Nonperforming
      loans as a percent of total gross loans
            
            
            
            
            
            
            4.01
            %
            
            
            2.53
            %Allowance
      for loan losses to nonperforming loans
            
            
            
            
            
            
            31
            %
            
            
            74
            %Allowance
      for loan losses to classified loans net of related
              allowance
      for impaired loans
            
            
            
            
            
            
            20
            %
            
            
            65
            %(1)
      As of June 30, 2008, $791 thousand in impaired loans held SBA guarantees
      for approximately $175 thousand.







Management’s
classification of a loan as nonaccrual or restructured is an indication that
there is reasonable doubt as to the full collectability of principal and/or
interest on the loan. At this point, we stop recognizing interest income on the
loan and reverse any uncollected interest that had been accrued but unpaid.
Additional payments made by the borrower are applied to the principal balance.
If the loan deteriorates further due to a borrower’s bankruptcy or similar
financial problems, unsuccessful collection efforts or a loss classification,
the remaining balance of the loan is then charged off. These loans may or may
not be collateralized, but collection efforts are continuously
pursued.




The loans
that have been classified as non-performing since December 31, 2007, are
primarily construction loans. These loans have been classified based on current
appraisals which reflect the general deterioration in the real estate market,
especially in the Inland Empire region of Southern California. The commercial
and consumer loans are part of the Bank’s SBA loan portfolio. The Bank is
working with the borrowers and the SBA to liquidate assets as partial repayment
on these loans.




One
construction loan for $646 thousand that was classified as impaired at March 31,
2008, and reduced through a charge-off of $93 thousand to bulk-sale value, was
paid off during the second quarter of 2008 and the charge-off was fully
recovered.




Of the
two loans that were classified as impaired at December 31, 2007, one loan for
$967 was renegotiated with the borrower, paid down to $954 thousand and is shown
above as restructured debt at June 30, 2008. The second loan, with an
outstanding balance of $1.5 million at December 31, 2007, was reduced through a
charge-off to $1.0 million which management believed represented the bulk-sale
value of the property less costs to sell. This is shown above both as an
impaired loan and a non-accruing loan at June 30, 2008.  Subsequent to
June 30, 2008, we received a payoff of $1 million and recoveries of $174
thousand on this loan.




23


Management
evaluates loan impairment according to the provisions of SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Under SFAS No. 114, loans are considered impaired
when it is probable that we will be unable to collect all amounts due as
scheduled according to the contractual terms of the loan agreement, including
contractual interest and principal payments. Impaired loans are measured for
impairment based on the present value of expected future cash flows discounted
at the loan’s effective interest rate, or, alternatively, at the loan’s
observable market price or the fair value of the collateral of the loan is
collateralized, less costs to sell.




If a loan
is collateral-dependent and considered impaired, the outstanding principal is
reduced through a charge off to the bulk-sale value less costs to sell. Once the
loss has been recognized, no additional reserves for losses are taken for these
loans however additional charge-offs could be required if there is a continued
deterioration in collateral value. Therefore, the related allowance for loan
losses on impaired loans represents only the allowance for non-collateral
dependent loans. As of June 30, 2008, one impaired loan for $954 thousand was
not considered collateral-dependent and had an allowance for losses of $191
thousand. This loan is also shown in the table above as a restructured
debt.




Allowance
for Loan Losses




Implicit
in our 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 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, changes in the size and composition of the loan
portfolio, and general economic conditions. Management believes that our
allowance for loan losses as of June 30, 2008, was adequate to absorb the known
and inherent risks of loss in the loan portfolio at that date. While management
believes the estimates and assumptions used in its determination of the adequacy
of the allowance are reasonable, there can be no assurance that such estimates
and assumptions will not be proven incorrect in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions or
that any increased provisions that may be required will not adversely impact our
financial condition and results of operations. In addition, the determination of
the amount of the Bank’s allowance for loan losses is subject to review by bank
regulators, as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination.




The
amount of the allowance equals the cumulative total of the provisions made from
time to time, reduced by loan charge-offs and increased by recoveries of loans
previously charged-off.  The adequacy of the allowance is determined
using two different methods to determine a range. The first method involves
classifying the loans by type and applying historical loss rates using an 8 year
rolling average determined from Call Report data for all banks obtained from the
Federal Reserve Board website. To this number is added the reserves for loans
classified as substandard, substandard non-accrual, and doubtful, as established
by management. The second method involves classifying the portfolio by risk
weighting and applying a loss factor for each rating, again using the FRB
historic database to determine appropriate factors as the Bank has limited loss
history. Again, the related reserves for the loans classified as substandard,
substandard non-accrual, and doubtful, are added to the general allowance to
arrive at a total allowance. In addition, qualitative, or “Q”, factors are used
to increase the allowance. These Q factors include changes in lending policies
and procedures, in national and local economic conditions, in the mature and volume of
the loan portfolio, in the tenure of the lending staff, in the non-performing
loans, and in the quality of the loan review system. In addition, the existence
and effect of concentrations within the portfolio and the effect of external
factors are also taken into account.





We made
provisions for loan losses of $649 thousand for the six months ended June 30,
2008, as compared to provisions of $318 thousand for the comparable period of
2007. The increase was attributable to a $4.7 million increase in
non-performing assets, a 21% increase in net loans from December 31, 2007, and
the continuing real estate slump in Southern California. The housing slump in
Southern California and the nation and its uncertain future have unfavorably
impacted our homebuilding borrowers and the value of their collateral. At June
30, 2008, we had outstanding construction loans to developers for tract projects
and single homes for sale to unidentified buyers totaling $18.6 million,
representing 16% of our loan portfolio, and additional commitments for these
projects in the amount of $1.9 million. We began curtailing the origination
of construction loans in early 2008, and these types of loans now represent a
smaller portion of our loan portfolio (29% at June 30, 2008 from 33% at June 30,
2007). We do not intend to originate any material amount of new construction
loans under present market conditions, and we expect that construction loans
will decrease through 2008, both in total amount and as a percentage of our loan
portfolio. While we have increased our loan loss provisions, a prolonged or
deeper decline in the housing market will impact our homebuilder borrowers. We
will continue to monitor this closely to determine whether further loan loss
provisions are required. We do expect credit losses in our residential
construction loan portfolio to remain at elevated levels into the remainder of
2008.




24


The
credit quality of our loans will be influenced by underlying trends in the
economic cycle, particularly in Southern California, and other factors, which
are ostensibly beyond management’s control. Accordingly, no assurance can be
given that we will not sustain loan losses that in any particular period will be
sizable in relation to the Allowance. Although we believe that we employ an
appropriate approach to downgrading credits that are experiencing slower than
projected sales and/or increases in loan to value ratios, subsequent evaluation
of the loan portfolio by us and by our regulators, in light of factors then
prevailing, may require increases in the Allowance through changes to the
provision for loan losses.





Our
allowance was $1.5 million, or 1.26% of outstanding principal as of June 30,
2008.  A recovery was received on July 23, 2008, and brought the allowance
to 1.41% of outstanding principal.




In
addition, a separate allowance for credit losses on off-balance sheet credit
exposures is maintained for the undisbursed portion of certain types of approved
loans. Although our loss exposure is reduced because the funds have not been
released to the borrower, under certain circumstances we may be required to
continue to disburse funds on a troubled credit. As of June 30, 2008, this
allowance was $74 thousand.




Credit
and loan decisions are made by management and the Board of Directors in
conformity with loan policies established by the Board of Directors. Our
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.  During the six months ended June 30, 2008, charge-offs
totaling $1.1 million were taken, all related to construction loans. During the
same period, recoveries of $93 thousand were received from these same
loans.




Nonearning
Assets




Premises,
leasehold improvements and equipment totaled $701 thousand at June 30, 2008, net
of accumulated depreciation of $1.2 million compared to $888 thousand at
December 31, 2007, net of accumulated depreciation of $934 thousand. This
decrease occurred due to the ongoing depreciation of fixed assets net of new
purchases of $34 thousand.




Deposits




Deposits
are our primary source of funds.  Demand, or non-interest bearing
checking, accounts as a percentage of total deposits were 20.0% at June 30,
2008, compared to 17.8% at December 31, 2007.




The
following table sets forth the amount and maturities of the time deposits as of
June 30, 2008:






25








At
      June 30, 2008Time
      Deposits of
              $100,00
      or more
            
            
            Other
      Time
              Deposits
            
            
            Total
      Time
              Deposits(Dollars
      in thousands)Three
      months or less
            
            $
            1,527
            
            
            
            13,260
            
            
            $
            14,787Over
      three months through six months
            
            
            957
            
            
            
            10,780
            
            
            
            11,737Over
      six months through 12 months
            
            
            11,190
            
            
            
            3,091
            
            
            
            14,281Over
      12 months
            
            
            7,074
            
            
            
            453
            
            
            
            7,527Total
            
            $
            20,748
            
            
            $
            27,584
            
            
            $
            48,332







We had
$23.1 million of brokered certificates of deposit at June 30, 2008. These
deposits represent individual deposits of less than $100 thousand. The records
identifying the individual depositors are maintained either by us or the broker.
Of this total, $97 thousand consisted of public funds, none of which required
collateralization. Also in this total is $1.7 million in “reciprocal” deposits
whereby customers of Pacific Coast National Bank, utilizing the CDAR program,
have placed deposits in other financial institutions to maximize their FDIC
insurance and reciprocal deposits have been placed in Pacific Coast National
Bank. In the table above the brokered funds are shown as part of Time Deposits
of $100,000 or More with maturities of $8.6 million in Over six months through
12 months and $6.2 million in Over 12 months, and are shown as part of Other
Time Deposits with maturities of $4.0 million in Three months or less, $4.1
million in Over three months through six months, and $233 thousand in Over 12
months. At December 31, 2007, we had $28.2 million in brokered deposits. We
intend to limit non-local and brokered deposits to 35% or less of total
deposits.




Return
on Equity and Assets




The
following table sets forth certain information regarding our return on equity
and assets for the six months ended June 30, 2008:




At June 30, 2008Return
      on assets
            
            
            -1.87
            %Return
      on equity
            
            
            -21.90
            %Dividend
      payout ratio
            
            
            0
            %Equity
      to assets ratio
            
            
            8.5
            %







Off-Balance
Sheet Arrangements and Loan Commitments




In the ordinary course of business, we
enter 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 June 30, 2008, commitments to extend credit
included approximately $265 thousand for letters of credit, $21.8 million for
revolving lines of credit arrangements including $4.0 million in real-estate
secured lines, and $13.5 million in unused commitments for commercial and real
estate secured loans. We face the risk of deteriorating credit quality of
borrowers to whom a commitment to extend credit has been made; however, we
currently expect no significant credit losses from these commitments and
arrangements.




Borrowings




The Bank
has access to a variety of borrowing sources including $8 million in federal
funds lines through two correspondent banks. The Bank also has the option of
applying for a line of credit from the Federal Home Loan Bank of San Francisco.
As of June 30, 2008, and December 31, 2007, there were no borrowings
outstanding.




Capital
Resources and Capital Adequacy Requirements




Risk-based
capital guidelines are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks, to account for
off-balance sheet exposure, and to minimize disincentives for holding liquid
assets.  Under the regulations, assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights.  The
resulting capital ratios represent capital as a percentage of total risk
weighted assets and off-balance sheet items.  Under the prompt
corrective action regulations, to be adequately capitalized a bank must maintain
minimum ratios of total capital to risk-weighted assets of 8.00%, Tier 1 capital
to






26








risk-weighted
assets of 4.00%, and Tier 1 capital to total assets of 4.00%.  Failure
to meet these capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s business, financial condition and
results of operations.




On April
2, 2008, the Holding Company downstreamed $200 thousand in capital to the Bank
in order to ensure that the Bank would remain well-capitalized.




As of
June 30, 2008, the Bank was categorized as well-capitalized.  A
well-capitalized institution must maintain a minimum ratio of total capital to
risk-weighted assets of at least 10.00%, a minimum ratio of Tier 1 capital to
risk weighted assets of at least 6.00%, and a minimum ratio of Tier 1 capital to
total assets of at least 5.00% and must not be subject to any written order,
agreement, or directive requiring it to meet or maintain a specific capital
level.




The
following table sets forth the Bank’s capital ratios as of the dates
specified:




To
      Be WellCapitalized
      UnderFor
      Capital
            
            
            Prompt
      CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      ProvisionsAmount
            
            
            
            
            
            Amount
            
            
            
            
            
            Amount(Thousands)
            
            
            Ratio
            
            
            (Thousands)
            
            
            Ratio
            
            
            (Thousands)
            
            
            RatioAs
      of June 30, 2008:Total
      Capital (to Risk-Weighted Assets)
            
            $
            13,002
            
            
            
            10.2
            %
            
            $
            10,206
            
            
            
            8.0
            %
            
            $
            12,757
            
            
            
            10.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            11,437
            
            
            
            9.0
            %
            
            $
            5,103
            
            
            
            4.0
            %
            
            $
            7,654
            
            
            
            6.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            11,437
            
            
            
            8.7
            %
            
            $
            5,292
            
            
            
            4.0
            %
            
            $
            6,615
            
            
            
            5.0
            %As
      of December 31, 2007:Total
      Capital (to Risk-Weighted Assets)
            
            $
            13,672
            
            
            
            11.6
            %
            
            $
            9,470
            
            
            
            8.0
            %
            
            $
            11,837
            
            
            
            10.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            12,193
            
            
            
            10.3
            %
            
            $
            4,735
            
            
            
            4.0
            %
            
            $
            7,102
            
            
            
            6.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            12,193
            
            
            
            12.2
            %
            
            $
            4,002
            
            
            
            4.0
            %
            
            $
            5,002
            
            
            
            5.0
            %







It is
possible that the Bank’s capital ratios could drop to “adequately capitalized”
from “well capitalized” if the strong growth in earning assets continues. This
could increase the premiums that the Bank pays for the FDIC insurance and could
limit our ability to use brokered funds to fund this growth. Possible
alternatives to remain or regain well-capitalized include adding capital
organically through net income, raising additional capital to allow for growth,
or restraining future growth. While there is no guarantee that the Company will
be able to do so, we are currently exploring several alternative financing
arrangements that would provide additional capital to permit additional
growth.







The
following table sets forth the Company’s capital ratios as of the dates
specified:




For
      CapitalActual
            
            
            Adequacy
      PurposesAmount
            
            
            
            
            
            Amount(Thousands)
            
            
            Ratio
            
            
            (Thousands)
            
            
            RatioAs
      of June 30, 2008:Total
      Capital (to Risk-Weighted Assets)
            
            $
            13,264
            
            
            
            10.4
            %
            
            $
            10,206
            
            
            
            8.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            11,699
            
            
            
            9.2
            %
            
            $
            5,103
            
            
            
            4.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            11,699
            
            
            
            8.8
            %
            
            $
            5,292
            
            
            
            4.0
            %As
      of December 31, 2007:Total
      Capital (to Risk-Weighted Assets)
            
            $
            14,230
            
            
            
            12.0
            %
            
            $
            9,459
            
            
            
            8.0
            %Tier
      1 Capital (to Risk-Weighted Assets)
            
            $
            12,751
            
            
            
            10.8
            %
            
            $
            4,730
            
            
            
            4.0
            %Tier
      1 Capital (to Average Assets)
            
            $
            12,751
            
            
            
            12.7
            %
            
            $
            4,002
            
            
            
            4.0
            %







27






Liquidity
Management




At June
30, 2008, the Company (excluding the Bank) had approximately $262 thousand in
cash. These funds can be used for Company operations, investment and for later
infusion into the Bank and other corporate activities.  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 that will not be granted until the accumulated deficit has
been eliminated. Existing restrictions also require the Bank to maintain its
“well-capitalized” status under regulatory capital guidelines in order to pay
dividends to the Company.




The Bank
had cash and cash equivalents of $21.1 million, or 15% of total Bank assets, at
June 30, 2008.  The Bank’s liquidity is monitored by its staff, the
Investment/Asset-Liability Committee and the Board of Directors, who review
historical funding requirements, current liquidity position, sources and
stability of funding, marketability of assets, options for attracting additional
funds, and anticipated future funding needs, including the level of unfunded
commitments.




The
Bank’s primary sources of funds are currently retail and commercial deposits,
loan repayments, other short-term borrowings, and other funds provided by
operations.  While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and early loan prepayments are more
influenced by interest rates, general economic conditions, and
competition.  The Bank maintains investments in liquid assets based
upon management’s assessment of (1) the need for funds, (2) expected deposit
flows, (3) yields available on short-term liquid assets, and (4) objectives of
the asset/liability management program.




The Bank
also has access to borrowing lines from correspondent banks. These are usually
restricted to short time periods (30 days or less). The Bank also has the option
of applying for a line of credit with the Federal Home Loan Bank of San
Francisco (FHLB).




The Bank
currently utilizes brokered funds to support loan demand. Traditionally these
funds come at a higher cost than local, “core”, deposits. These funds are rate
sensitive and therefore easy to attract or discourage depending on the needs of
the Bank.




The Bank
often sells the guaranteed portion of SBA loans at a premium. The Bank could
also sell the unguaranteed portion of these loans, and sell other loans as well,
if management deemed this necessary for liquidity needs. In extreme
circumstances, the Bank could postpone the funding of loans until deposits could
be raised to provide the necessary liquidity.




As loan
demand increases, greater pressure is being exerted on the Bank’s
liquidity.  However, it is management’s intention to maintain a loan
to deposit ratio in the range of 90% - 105%. Given this goal, the Bank will not
aggressively pursue lending opportunities if sufficient funding sources (i.e., deposits, Fed Funds,
other borrowing lines) are not available.  We intend to limit
non-local and brokered deposits to 35% or less of total deposits. As of June 30,
2008, the loan to deposit ratio was 92% and brokered deposits represented 18% of
total deposits.




Item
3.  Quantitative and Qualitative Disclosure About Market
Risk




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. 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 manages the structure of 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.






28









Interest
rate risk is the most significant market risk affecting the
Bank.  Other types of market risk, such as foreign currency risk and
commodity price risk, do not arise in the normal course of the Bank’s business
activities.  Interest rate risk can be defined as the exposure to a
movement in interest rates that could have an adverse effect on the net interest
income or the market value of the Bank’s financial instruments.  The
ongoing monitoring and management of this risk is an important component of the
asset and liability management process, which is governed by policies
established by the Company’s Board of Directors and carried out by the Bank’s
Investment/Asset-liability Committee. The Investment/Asset-liability Committee’s
objectives are to manage the exposure to interest rate risk over both the one
year planning cycle and the longer term strategic horizon and, at the same time,
to provide a stable and steadily increasing flow of net interest
income.





The
primary measurement of interest rate risk is earnings at risk, which is
determined through computerized simulation modeling.  The primary
simulation model assumes a static balance sheet, using the balances, rates,
maturities and repricing characteristics of all of the Bank’s existing assets
and liabilities.  Net interest income is computed by the model
assuming market rates remaining unchanged and comparing those results to other
interest rate scenarios with changes in the magnitude, timing and relationship
between various interest rates. At June 30, 2008, an analysis was performed
using the Risk Monitor model provided by Fidelity Regulatory Solutions and
utilizing the Bank’s June 30, 2008 Call Report data. The table below shows the
impact of rising and declining interest rate simulations in 100 basis point
increments over a 12-month period. Changes in net interest income in the rising
and declining rate scenarios are measured against the current net interest
income. The changes in equity capital represent the changes in the present value
of the balance sheet without regards to business continuity, otherwise known as
“liquidation value”.





Interest
      Rate ShockShock
            
            
            -2%
            
            
            
            -1%
            
            
            Annualized
            
            
            
            +1%
            
            
            
            +2%Fed
      Funds Rate
            
            
            0.00%
            
            
            
            1.00%
            
            
            
            2.00%
            
            
            
            3.00%
            
            
            
            4.00%Net
      Interest Income Change
            
            
            (472
            )
            
            
            (225
            )
            
            
            -
            
            
            
            88
            
            
            
            170%
      Change
            
            
            -8.7
            %
            
            
            -4.1
            %
            
            
            -
            
            
            
            1.6
            %
            
            
            3.1
            %Equity
      Capital Change %
            
            
            -10.6
            %
            
            
            -4.6
            %
            
            
            -
            
            
            
            3.9
            %
            
            
            7.8
            %Net
      Interest Margin
            
            
            6.37
            %
            
            
            3.86
            %
            
            
            4.02
            %
            
            
            4.09
            %
            
            
            4.15
            %




The interest rate risk inherent in a
bank’s assets and liabilities may also be determined by analyzing the extent to
which such assets and liabilities are "interest rate sensitive” and by measuring
the bank’s interest rate sensitivity “gap." An asset or liability is said to be
interest rate sensitive within a defined time period if it matures or reprices
within that period.  The difference or mismatch between the amount
of  interest-earning assets  maturing
or  repricing  within  a  defined  period  and
the amount  of
interest-bearing  liabilities  maturing
or  repricing  within the same period is defined as the
interest rate sensitivity gap. A bank is considered to have a positive gap if
the amount of interest-earning assets maturing or repricing within a specified
time period exceeds the amount of interest-bearing liabilities maturing or
repricing within the same period.  If more interest-bearing
liabilities than interest-earning assets mature or reprice within a specified
period, then the bank is considered to have a negative
gap.  Accordingly, in a rising interest rate environment, in an
institution with a positive gap, the yield on its rate sensitive assets would
theoretically rise at a faster pace than the cost of its rate sensitive
liabilities, thereby increasing future net interest income.  In a
falling interest rate environment, a positive gap would indicate that the yield
on rate sensitive assets would decline at a faster pace than the cost of rate
sensitive liabilities, thereby decreasing net interest income. For a bank with a
negative gap, the reverse would be expected.  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 the following variables: yield; credit quality; appropriate funding
sources; and liquidity.





The
following table sets forth, on a stand-alone basis, the Bank’s amounts of
interest-earning assets and interest-bearing liabilities outstanding at June 30,
2008, which are anticipated, based upon certain assumptions, to reprice or
mature in each of the future time periods shown.  The projected
repricing of assets and liabilities anticipates prepayments and scheduled rate
adjustments, as well as contractual maturities under an interest rate unchanged
scenario within the selected time intervals.  While it is believed
that such assumptions are reasonable, there can be no assurance that assumed
repricing rates will approximate actual future deposit activity.  The
table indicates a negative cumulative interest rate sensitivity gap for the zero
to 3 years repricing scenarios and a positive interest rate sensitivity gap for
all future periods.




29





As
      of June 30, 2008Volumes
      Subject to Repricing Within0-1
      Day
            
            
            2-90
      Days
            
            
            91-365
      Days
            
            
            1-3
      Years
            
            
            Over
      3 Years
            
            
            Non-Interest
      Sensitive
            
            
            TotalAssets:
            
            (Dollars
      in thousands)Cash,
      fed funds and other
            
            $
            17,050
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,077
            
            
            $
            21,127Investments
      and FRB Stock
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            354
            
            
            
            -
            
            
            
            354Loans  (1)
            
            
            -
            
            
            
            46,873
            
            
            
            9,800
            
            
            
            11,730
            
            
            
            46,853
            
            
            
            2,906
            
            
            
            118,162Fixed
      and other assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            219
            
            
            
            219Total
      Assets
            
            $
            17,050
            
            
            $
            46,873
            
            
            $
            9,800
            
            
            $
            11,730
            
            
            $
            47,207
            
            
            $
            7,201
            
            
            $
            139,862Liabilities
      and Stockholders’ Equity:Interest-bearing
      checking, savings and
              money
      market accounts
            
            $
            53,719
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            25,492
            
            
            $
            79,212Certificates
      of deposit
            
            
            -
            
            
            
            14,787
            
            
            
            26,018
            
            
            
            7,440
            
            
            
            87
            
            
            
            -
            
            
            
            48,332Borrowed
      funds
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      liabilities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            619
            
            
            
            619Stockholders’
      equity
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,699
            
            
            
            11,699Total
      liabilities and stockholders’ equity
            
            $
            53,719
            
            
            $
            14,787
            
            
            $
            26,018
            
            
            $
            7,440
            
            
            $
            87
            
            
            $
            37,810
            
            
            $
            139,862Interest
      rate sensitivity gap
            
            $
            (36,669
            )
            
            $
            32,086
            
            
            $
            (16,218
            )
            
            $
            4,290
            
            
            $
            47,120Cumulative  interest
      rate sensitivity gap
            
            $
            (36,669
            )
            
            $
            (4,583
            )
            
            $
            (20,801
            )
            
            $
            (16,511
            )
            
            $
            30,609Cumulative
      gap to total assets
            
            
            -26.2
            %
            
            
            -3.3
            %
            
            
            -14.9
            %
            
            
            -11.8
            %
            
            
            21.9
            %Cumulative
      interest-earning assets to cumulative interest-bearing
      liabilities
            
            
            31.7
            %
            
            
            93.3
            %
            
            
            78.0
            %
            
            
            83.8
            %
            
            
            130.0
            %(1)
      Excludes deferred fees and allowance for loan losses.




Certain shortcomings are inherent in
the method of analysis presented in the gap table.  For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates.  Additionally, certain assets, such as adjustable-rate loans,
have features that restrict changes in interest rates, both on a short-term
basis and over the life of the asset.  More importantly, changes in
interest rates, prepayments and early withdrawal levels may deviate
significantly from those assumed in the calculations in the table.  As
a result of these shortcomings, the Bank will focus more on earnings at risk
simulation modeling than on gap analysis.  Even though the gap
analysis reflects a ratio of cumulative gap to total assets within acceptable
limits, the earnings at risk simulation modeling is considered by management to
be more informative in forecasting future income at risk.




Item
4T.  Controls and Procedures




As of
June  30, 2008, the Company’s management, with the participation of
the Company’s chief executive officer and chief financial officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, the Company’s chief executive officer and
chief financial officer concluded that as of June 30, 2008, the Company’s
disclosure controls and procedures were effective to ensure that the information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company’s
management (including the chief executive officer and chief financial officer)
to allow timely decisions regarding required disclosure, and is recorded,
processed, summarized and reported with in the time periods specified in the
Securities and Exchange Commission’s rules and forms.




During
the quarter ended June 30, 2008, no change occurred in the Company’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.






30






PART II - OTHER
INFORMATION




ITEM
1.  Legal
Proceedings




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




ITEM
1A.  Risk Factors





Our business is subject to general
economic risks that could adversely impact our results of operations and
financial condition.





·
            Changes
      in economic conditions, particularly a further economic slowdown in
      Southern California, could hurt our
business.




Our
business is directly affected by market conditions, trends in industry and
finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our
control.  In 2007, the housing and real estate sectors experienced an
economic slowdown that has continued into 2008.  Further deterioration
in economic conditions, in particular within the Southern California real estate
markets, could result in the following consequences, among others, any of which
could hurt our business materially:




·
            loan
      delinquencies may increase;


·
            problem
      assets and foreclosures may
increase;


·
            demand
      for our products and services may decline;
and


·
            collateral
      for loans made by us, especially real estate, may decline in value, in
      turn reducing a customer’s borrowing power and reducing the value of
      assets and collateral securing our
loans.





Our
success depends on the general economic condition of Southern California, which
management cannot forecast with certainty.  Unlike many of our larger
competitors, substantially all of our borrowers and depositors are individuals
and businesses located or doing business in our service areas.  As a
result, our operations and profitability may be more adversely affected by a
local economic downturn than those of our larger, more geographically diverse
competitors. Conditions such as inflation, recession, unemployment, high
interest rates, short money supply, scarce natural resources, international
disorders, terrorism and other factors beyond our control may also adversely
affect our profitability.  We do not have the ability of a larger
institution to spread the risks of unfavorable local economic conditions across
a large number of diversified economies.  Any sustained period of
increased payment delinquencies, foreclosures or losses caused by adverse market
or economic conditions in Southern California could adversely affect the value
of our assets, revenues, profitability and financial condition.




·
            Downturns
      in the Southern California real estate markets could hurt our
      business.




Our
business activities and credit exposure are primarily concentrated in Southern
California.  While we do not have any sub-prime loans, our
construction and land loan portfolios, our commercial and multifamily loan
portfolios and certain of our other loans have been affected by the downturn in
the residential real estate market.  We anticipate that further
declines in the Southern California real estate markets will hurt our
business.  As of June 30, 2008, substantially all of our real estate
secured loan portfolio consisted of loans located in Southern
California.  If real estate values continue to decline in this area,
the collateral for our loans will provide less security.  As a result,
our ability to recover on defaulted loans by selling the underlying real estate
will be diminished, and we would be more likely to suffer losses on defaulted
loans.  The events and conditions described in this risk factor could
therefore have a material adverse effect on our business, results of operations
and financial condition.




·
            We
      may suffer losses in our loan portfolio despite our underwriting
      practices.




We seek
to mitigate the risks inherent in our loan portfolio by adhering to specific
underwriting practices.   Although we believe that our underwriting
criteria are appropriate for the various kinds of loans we make, we may incur
losses on loans that meet our underwriting criteria, and these losses may exceed
the amounts set aside as reserves in our allowance for loan losses.






31






Recent negative developments in the
financial industry and credit markets may continue to adversely impact our
financial condition and results of operations.





Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with
substantially increased oil prices and other factors, have resulted in
uncertainty in the financial markets in general and a related general economic
downturn, which have continued in 2008.  Many lending institutions,
including us, have experienced declines in the performance of their loans,
including construction and land loans, multifamily loans, commercial loans and
consumer loans.  Moreover, competition among depository institutions
for deposits and quality loans has increased significantly. In addition, the
values of real estate collateral supporting many construction and land,
commercial and multifamily and other commercial loans and home mortgages have
declined and may continue to decline. Bank and bank holding company stock prices
have been negatively affected, as has the ability of banks and bank holding
companies to raise capital or borrow in the debt markets compared to recent
years. These conditions may have a material adverse effect on our financial
condition and results of operations.  In addition, as a result of the
foregoing factors, there is a potential for new federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and
bank regulatory agencies are expected to be very aggressive in responding to
concerns and trends identified in examinations, including the expected issuance
of formal enforcement orders.  Negative developments in the financial
industry and the impact of new legislation in response to those developments
could restrict our business operations, including our ability to originate or
sell loans, and adversely impact our results of operations and financial
condition.




Other than as set forth above, there
have been no material changes to the risk factors set forth in Part I, Item 1 of
the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2007.




ITEM
2.  Unregistered
Sales of Equity Securities and Use of Proceeds




None.




ITEM
3.  Defaults
Upon Senior Securities




None.




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




None.




ITEM
5.  Other
Information




In
connection with the previously reported promotion of Michael S. Hahn from
President and Chief Operating Officer of the Company and the Bank to President
and Chief Executive Officer of the Company and the Bank, the Company and the
Bank entered into a new employment agreement with Mr. Hahn effective May 20,
2008 that replaces his prior employment agreement with the Bank.  The
new agreement has an initial term of five years, after which the agreement will
automatically renew for successive one-year terms unless the Company and the
Bank notify Mr. Hahn within 90 days prior to the expiration of the then-current
term that the agreement will not renew.
 
 The new
agreement entitles Mr. Hahn to a minimum annual base salary of $190,000, an
annual incentive bonus opportunity of up to 15% of base salary and the right to
participate in any benefit programs applicable to executive officers of the
Company and the Bank. The new agreement requires the Bank to maintain Mr. Hahn’s
existing $1.5 million term life insurance policy and to name Mr. Hahn’s estate
as beneficiary of $1.0 million of the death benefit, as well as to purchase and
maintain a long-term disability policy for Mr. Hahn’s benefit. The new agreement
increases Mr. Hahn’s monthly auto allowance and provides for payment of
membership fees and dues at a club deemed beneficial to the Bank’s presence in
the local community.
 
 As under
the prior employment agreement, the new employment agreement provides that if
Mr. Hahn’s employment is terminated by the Company and the Bank without cause,
he will be entitled to a lump sum severance payment equal to his then-current
annual base salary.  The new employment agreement increases the lump
sum payment Mr. Hahn would receive in the event of a change in control from 199%
of his base amount (as defined in Section 280G of the Internal Revenue Code) to
299% of his base amount.
 
 The
foregoing description of Mr. Hahn’s new employment agreement is qualified in its
entirety by reference to the full text of the agreement, a copy of which is
filed as Exhibit 10.1 to this report.




32






ITEM
6.  Exhibits




(a)
            Exhibits








Exhibit
      Number
            Description
      of Exhibit3.1
            Articles
      of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s
      Registration Statement on Form SB-2 filed on September 8, 2004 (File No.
      333-11859) and incorporated herein by reference3.2
            Bylaws
      of the Company (filed as Exhibit 3.2 to the Company’s Registration
      Statement on Form SB-2 filed on September 8, 2004 (File No. 333-118859)
      and incorporated herein by reference10.1
            Employment
      Agreement of Michael Stephen Hahn, President and CEO, dated May 20,
      200831.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.







SIGNATURES




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




PACIFIC COAST
      NATIONAL BANCORPDate: 
      August 14, 2008
              By:
              /s/ Michael
      S. HahnMichael
      S. HahnPresident
      & Chief Executive Officer




Date: 
      August 14, 2008
                By:
                /s/ Terry
      StalkTerry
      StalkChief
      Financial Officer