**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10 - QSB**




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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the quarterly period ended March 31, 2006**




Commission
      File Number: 333-118859




**PACIFIC
      COAST NATIONAL BANCORP**


(Exact
      name of registrant as specified in its charter)




**California**
            
            **61-1453556**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)905
                Calle Amanecer, Suite 100, San Clemente, California
                92673(Address
                of principal executive offices, including zip code)(949)
                361- 4300(Registrant’s
                telephone number, including area code)


Indicate
      by check mark whether the registrant: (i) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (ii) has been subject to such filing requirements
      for
      the past 90 days.


Yes
x
      No o




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




Yes
o
      No x




The
      number of shares outstanding of the issuer’s Common Stock as of April 18, 2006,
      was 2,281,300 shares.







i


PACIFIC
      COAST NATIONAL BANCORP


INDEX




PART
      I -
      FINANCIAL INFORMATION


PAGE


Item
                1 - Financial Statements (unaudited)Consolidated
                Balance Sheet at March 31, 2006 and December 31, 2005
            
            
            3Consolidated
                Statements of Operations for the three months endedMarch
                31 2006 and 2005
            
            
            4Consolidated
                Statement of Cash Flows for the three months endedMarch
                31 2006 and 2005
            
            
            5Condensed
                Notes to Unaudited Consolidated Financial Statements
            
            
            6Item
                2 - Management’s Discussion and Analysis of Financial Condition
                andResults
                of Operations
            
            
            7Item
                3 - Controls and Procedures
            
            
            18PART
                II - OTHER INFORMATIONItem
                1 - Legal Proceedings
            
            
            19Item
                2 - Changes in Securities and Use of Proceeds
            
            
            19Item
                3 - Defaults upon Senior Securities
            
            
            19Item
                4 - Submission of Matters to a Vote of Security Holders
            
            
            19Item
                5 - Other Information
            
            
            19Item
                6 - Exhibits and Reports on Form 8-K
            
            
            19Signatures
            
            
            20





ii




**PART
      I -** **FINANCIAL
      INFORMATION**




**ITEM
      1.**  **Financial
      Statements**




**PACIFIC
      COAST NATIONAL BANCORP**


**CONSOLDIATED
      BALANCE SHEETS (UNAUDITED)**


**MARCH
      31, 2006 and DECEMBER 31, 2005**


**2006**
              ****
              **2005****ASSETS**Cash
                  and due from banks
              
              $
              1,122,908
              
              $
              1,699,481Federal
                  funds sold
              
              
              8,065,000
              
              
              6,580,000**TOTAL
                  CASH AND CASH EQUIVALENTS**
              
              
              9,187,908
              
              
              8,279,481Time
                  deposits in other financial institutions
              
              
              2,000,000
              
              
              2,750,000Securities
                  held to maturity
              
              
              7,997,846
              
              
              7,997,943Loans,
                  net
              
              
              14,897,441
              
              
              10,230,122Premises
                  and equipment, net
              
              
              1,177,060
              
              
              1,154,066Federal
                  Reserve Bank stock, at cost
              
              
              553,700
              
              
              553,700Accrued
                  interest and other assets
              
              
              217,785
              
              
              244,853$
              36,031,740
              
              $
              31,210,165**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**DepositsNoninterest-bearing
                  demand
              
              $
              5,762,904
              
              $
              4,266,093Interest-bearing
                  demand and NOW accounts
              
              
              1,305,421
              
              
              788,633Money
                  market
              
              
              5,045,438
              
              
              3,332,615Savings
              
              
              88,990
              
              
              86,283Time
                  certificates of deposit of $100,000 or more
              
              
              3,614,652
              
              
              2,412,465Other
                  time certificates of deposit
              
              
              1,924,087
              
              
              1,467,341**TOTAL
                  DEPOSITS**
              
              
              17,741,492
              
              
              12,353,430Accrued
                  interest and other liabilities
              
              
              195,680
              
              
              146,509**TOTAL
                  LIABILITIES**
              
              
              17,937,172
              
              
              12,499,939Shareholders'
                  equityCommon
                  stock - $0.01 par value; 10,000,000 shares authorized;issued
                  and outstanding: 2,281,300 shares at March 31,2006
                  and 2,280,000 shares at December 31, 2005
              
              
              22,813
              
              
              22,800Additional
                  paid-in capital
              
              
              23,287,957
              
              
              23,271,720Accumulated
                  deficit
              
              
              (
                  5,216,202
              )
              
              (
                  4,584,294
              )**TOTAL
                  SHAREHOLDERS' EQUITY**
              
              
              18,094,568
              
              
              18,710,226$
              36,031,740
              
              $
              31,210,165




See
      accompanying condensed notes to unaudited consolidated financial
      statements.


3


**PACIFIC
      COAST NATIONAL BANCORP**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (UNAUDITED)**


**Three
                  Months Ended March 31, 2006**
              
              **Three
                  Months Ended March 31, 2005**Interest
                  incomeInterest
                  and fees on loans
              
              $
              277,465
              
              $
              -Federal
                  funds sold
              
              
              62,284
              
              
              -Investment
                  securities
              
              
              84,986
              
              
              -Other
              
              
              30,008
              
              
              -454,743
              
              
              -Interest
                  expenseTime
                  certificates of deposit of $100,000 or more
              
              
              31,076
              
              
              -Other
                  deposits
              
              
              48,972
              
              
              -Other
              
              
              -
              
              
              17,98180,048
              
              
              17,981Net
                  interest income
              
              
              374,695
              
              
              (
                  17,981
              )Provision
                  for loan losses
              
              
              49,572
              
              
              -Net
                  interest income afterprovision
                  for loan losses
              
              
              325,123
              
              
              (
                  17,981
              )Noninterest
                  incomeService
                  charges and fees
              
              
              5,601
              
              
              -Other
                  income
              
              
              82,500
              
              
              -88,101
              
              
              -Noninterest
                  expenseSalaries
                  and employee benefits
              
              
              567,751
              
              
              67,939Occupancy
              
              
              179,566
              
              
              30,840Professional
                  services
              
              
              57,159
              
              
              287,234Data
                  processing
              
              
              99,599
              
              
              -Office
                  expenses
              
              
              92,196
              
              
              -Marketing
              
              
              36,746
              
              
              -Other
              
              
              12,115
              
              
              31,6701,045,132
              
              
              417,683Loss
                  before income taxes
              
              
              (
                  631,908
              )
              
              (
                  435,664
              )Provision
                  for income taxes
              
              
              -
              
              
              -Net
                  loss
              
              $
              (
                  631,908
              )
              $
              (
                  435,664
              )Per
                  share dataWeighted-average
                  shares outstanding
              
              
              2,280,246
              
              
              -Net
                  loss, basic
              
              $
              (
                  0.28
              )
              $
              -


See
      accompanying condensed notes to unaudited consolidated financial
      statements.





4


**PACIFIC
      COAST NATIONAL BANCORP**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS (UNAUDITED)**


Three
                  Months Ended March 31, 2006
              
              Three
                  Months Ended March 31, 2005Cash
                  flows from operating activities:Net
                  loss
              
              $
              (
                  631,908
              )
              $
              (
                  435,664
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              
              91,899
              
              
              -Provision
                  for loan losses
              
              
              49,572
              
              
              -Provision
                  for off balance sheet contingencies
              
              
              5,205
              
              
              -Amortization
                  (accretion) of investment securities
              
              
              97
              
              
              -Gain
                  on Sale of Loans
              
              
              82,500
              
              
              -Other
                  items, net
              
              
              71,034
              
              
              173,509Net
                  cash used by operating activities
              
              
              (
                  331,601
              )
              
              (
                  262,155
              )Cash
                  flows from investing activities:Maturity
                  of time deposits in other financial institutions
              
              
              750,000
              
              
              -Proceeds
                  from Sale of Loans
              
              
              1,500,000
              
              
              -Loan
                  Originations
              
              
              (
                  6,299,391
              )
              
              -Purchases
                  of bank premises and equipment
              
              
              (
                  114,893
              )
              
              (
                  440,278
              )Net
                  cash used in investing activities
              
              
              (
                  4,164,284
              )
              
              (
                  440,278
              )Cash
                  flows from financing activities:Net
                  increase in demand deposits and savings accounts
              
              
              3,729,129
              
              
              -Net
                  increase in time deposits
              
              
              1,658,933
              
              
              -Net
                  change in borrowings
              
              
              -
              
              
              675,000Proceeds
                  from sale of common stock
              
              
              16,250
              
              
              -Net
                  cash provided by financing activities
              
              
              5,404,312
              
              
              675,000Net
                  increase in cash and cash equivalents
              
              
              908,427
              
              
              (
                  27,433
              )Cash
                  and cash equivalents at beginning of year
              
              
              8,279,481
              
              
              57,270Cash
                  and cash equivalents at end of year
              
              $
              9,187,908
              
              $
              29,837Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              36,247
              
              $
              17,981Income
                  taxes paid
              
              $
              -
              
              $
              -





See
      accompanying condensed notes to unaudited consolidated financial
      statements


5


**PACIFIC
      COAST NATIONAL BANCORP**


**CONDENSED
      NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS** ****





**Note
      1 - Basis of Presentation**




The
      consolidated financial statements include the amounts of Pacific Coast National
      Bancorp (the “Company”) and its wholly-owned subsidiary, Pacific Coast National
      Bank (the “Bank”). All significant inter-company accounts have been eliminated
      on consolidation. The Bank opened for business on May 16, 2005. Prior to May
      16,
      2005, the Company was a “Development-Stage Company” as defined by Statement on
      Financial Standards 7. The cumulative loss from operations through the Company’s
      development period (July 2, 2003 to May 16, 2005) was $2.3 million.




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 (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
      valuation of real estate acquired in connection with or in lieu of foreclosure
      on loans, 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 period ended March 31, 2006, are
      not
      necessarily indicative of the results of a full year’s operations. For further
      information, refer to the financial statements and footnotes included in the
      Company’s annual report on Form 10-KSB for the year ended December 31,
      2005.




**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 all periods
      presented.




**Note
      3 - Stock-Based Compensation**




The
      Company accounts for stock-based employee compensation as prescribed by APB
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and has
      adopted Statement of Financial Accounting Standards 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”), that amends
      certain aspects of Financial Accounting Standards No. 123, “Accounting for
      Stock-Based Compensation” (“SFAS 123”). APB 24 provides that compensation
      expense relative to the Company’s employee stock options is measured based on
      the intrinsic value of the stock options granted. SFAS 123 and 148 require
      pro
      forma disclosures of net income (loss) and net income (loss) per share as if
      the
      fair value based method of accounting for stock-based awards had been applied
      for employee grants. They also require disclosure of option status on a more
      prominent and frequent basis. Under the fair value based method, compensation
      cost is recorded based on the value of the award at the grant date and is
      recognized over the service period.




The
      Company accounts for stock options and warrants issued to non-employees in
      accordance with Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring
      or
      in Conjunction with Selling, Goods and Services.”




In
      December 2004, the FASB issued SFAS No. 123 (Revised), *Share-Based
      Payment* .
      This
      standard revises SFAS No. 123, APB Opinion No. 25 and related accounting
      interpretations, and eliminates the use of the intrinsic value method for
      employee stock-based compensation. SFAS 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. Prior to January 1, 2006, the Company uses the intrinsic value method
      of
      APB Opinion No. 25 to value share-based options granted to employees and board
      members. The new standard requires the expensing of all share-based
      compensation, including options, using the fair value-based method. The
      effective date of this standard for the Company was January 1, 2006.




6




During
      2005, the Company granted options to employees from its 2005 Stock Incentive
      Plan that received shareholder approval on April 17, 2006. The Company will
      begin to record compensation expense in accordance with SFAS 123 (Revised)
      for
      these and any future options granted in the second quarter of 2006. The Company
      is unable to estimate the impact of this Statement on its financial condition
      and results of operations as the decision to grant option awards is made
      annually on a case-by-case basis. The actual amount of expense will be based
      on
      the fair value of the Company’s stock when the Plan was approved and will be
      increased for any additional grants that are made in 2006. However, based on
      the
      current fair value of the Company’s stock, a risk-free rate of 4.15%, expected
      volatility of 25%, and an expected life of 6.5 years, the amount of compensation
      expense in 2006 related to options granted in 2005 is estimated to be
      approximately $800,000 and will be recognized over the remaining vesting period
      after the Plan is approved.




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




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


**OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




The
      following discussion and analysis presents the Company’s consolidated financial
      condition as of March 31, 2006 and results of operations for the three months
      ended March 31, 2006. The discussion should be read in conjunction with our
      financial statements and the notes related thereto which appear elsewhere in
      this Quarterly Report on Form 10-QSB.




This
      report contains certain statements that are forward-looking within the meaning
      of section 21E of the Securities Exchange Act of 1934, as amended. These
      statements are not guarantees of future performance and involve certain risks,
      uncertainties and assumptions that are difficult to predict. Actual outcomes
      and
      results may differ materially from those expressed in, or implied by, the
      forward-looking statements. These
      statements are often, but not always, made through the use of words or phrases
      such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will
      likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,”
“intend,” “plan,” “projection,” “would” and “outlook,” and other similar
      expressions or future or conditional verbs. Readers of this annual report should
      not rely solely on the forward-looking statements and should consider all
      uncertainties and risks throughout this report. The statements are
      representative only as of the date they are made, and Pacific Coast National
      Bancorp (“Company”) undertakes no obligation to update any forward-looking
      statement.




These
      forward-looking statements, implicitly and explicitly, include the assumptions
      underlying the statements and other information with respect to the Company’s
      beliefs, plans, objectives, goals, expectations, anticipations, estimates,
      financial condition, results of operations, future performance and business,
      including management’s expectations and estimates with respect to revenues,
      expenses, return on equity, return on assets, efficiency ratio, asset quality
      and other financial data and capital and performance ratios.




Although
      the Company believes that the expectations reflected in the forward-looking
      statements are reasonable, these statements involve risks and uncertainties
      that
      are subject to change based on various important factors, some of which are
      beyond the control of the Company and Pacific Coast National Bank (“Bank”). The
      following factors, among others, could cause the Company’s results or financial
      performance to differ materially from its goals, plans, objectives, intentions,
      expectations and other forward-looking statements:


·
              the
                  loss of senior management or operating personnel and the potential
                  inability to hire qualified personnel at reasonable compensation
                  levels;
  ·
              the
                  failure of assumptions underlying the establishment of and provisions
                  made
                  to the allowance for credit losses;
  ·
              changes
                  in various monetary and fiscal policies and regulations, including
                  those
                  determined by the Board of Governors of the Federal Reserve System
                  (FRB),
                  the Office of the Comptroller of the Currency (OCC) and the Federal
                  Deposit Insurance Corporation
                  (FDIC);
  ·
              changes
                  in general economic conditions and economic conditions in the geographic
                  regions and industries in which the Bank operates which may affect,
                  among
                  other things, the level of nonperforming assets, charge-offs and
                  provision
                  expense;
  7
  ·
              adverse
                  changes in the local real estate market, which is where most of
                  the Bank’s
                  loans are concentrated, the substantial majority of which have
                  real estate
                  as collateral;
  ·
              changes
                  in the availability of funds resulting in increased costs or reduced
                  liquidity;
  ·
              geopolitical
                  conditions, including acts or threats of terrorism, actions taken
                  by the
                  United States or other governments in response to acts or threats
                  of
                  terrorism and/or military conflicts which could impact business
                  and
                  economic in the United States and
                  abroad;
  ·
              changes
                  in market rates and prices which may adversely impact the value
                  of
                  financial products including securities, loans, deposits, debt
                  and
                  derivative financial instruments and other similar financial
                  instruments;
  ·
                changes in the interest rate environment,
                  which may reduce interest margins and impact funding
                  sources;
  ·
                  increased asset levels and changes
                    in the
                    composition of assets and the resulting impact on the capital
                    levels and
                    regulatory capital ratios of the Company or the
                    Bank;
 ·
              competition
                  with other banks, thrifts, credit unions and other nonbank financial
                  institutions and the willingness of users to substitute competitors’
                  products and services for the products and services offered by
                  the
                  Bank;
  ·
                the
                      ability to develop and introduce new banking-related products,
                      services
                      and enhancements and gain market acceptance of such
                      products;
 ·
                  the
                        ability to grow the Bank’s core
                        businesses;
 ·
                    decisions
                          to change or adopt new business
                          strategies;
 ·
                      changes
                            in tax laws, rules and regulations as well as Internal
                            Revenue Service
                            (IRS) and other governmental agencies’ interpretations
                            thereof;
 ·
                        technological
                            changes;
 ·
                          changes
                                in consumer spending and savings habits;
                                and
 ·
                            management’s
                                  ability to manage these and other
                                  risks.
  These
                      factors and the risk factors referred to in our Annual Report
                      on Form 10-KSB for
                      the year ended December 31, 2005 could cause actual results
                      or outcomes to
                      differ materially from those expressed in any forward-looking
                      statements made by
                      us, and you should not place undue reliance on any such forward-looking
                      statements. Any forward-looking statement speaks only as of
                      the date on which it
                      is made and we do not undertake any obligation to update any
                      forward-looking
                      statement or statements to reflect events or circumstances
                      after the date on
                      which such statement is made or to reflect the occurrence of
                      unanticipated
                      events. New factors emerge from time to time, and it is not
                      possible for us to
                      predict which will arise. In addition, we cannot assess the
                      impact of each
                      factor on our 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.




**Critical
      Accounting Policies**





Our
      accounting policies are integral to understanding the results reported. In
      preparing its consolidated financial statements, the Company is required to
      make
      judgments and estimates that may have a significant impact upon its 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 the 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 our current
      accounting policies involving significant management valuation
      judgments.


8




*Allowance
      for Loan Losses*





The
      allowance for loan losses represents management’s best estimate of 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 allowance for loan losses is
      determined based on management’s assessment of several factors: reviews 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.





Loans
      are
      considered impaired if, based on current information and events, it is probable
      that we 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 and methodologies
      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.





*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 our wholly owned
      banking subsidiary, Pacific Coast National Bank. The Bank’s principal markets
      include the coastal regions of Southern Orange County and Northern San Diego
      County. As of March 31, 2006, the Company had, on a consolidated basis, total
      assets of $36.0 million, net loans of $14.9 million, total deposits of $17.7
      million, and shareholders’ equity of $18.1 million. The Bank currently operates
      through a main office located at 905 Calle Amanecer, San Clemente, California
      and a branch office at 499 North El Camino Real, Encinitas, California.




The
      Company was incorporated under the laws of the State of California on July
      2,
      2003, to organize and serve as the holding company for the Bank. In 2005, an
      initial public offering of our common stock was completed, 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
      following discussion focuses on the Company’s financial condition as of March
      31, 2006 and results of operations for the three months ended March 31, 2006.
      The Company’s principal operations for this time period consisted primarily of
      the operations of Pacific Coast National Bank. The operations during the three
      months ended March 31, 2005 consisted primarily of raising capital and
      organizing the Bank and a comparison of results of the two periods would not
      be
      meaningful.




**Results
      of Operations for the Three Months Ended March 31, 2006**




***Net
      Interest Income and Net Interest Margin***




Net
      interest income is the difference between interest income, principally from
      loan, lease and investment securities portfolios, and interest expense,
      principally on customer deposits and borrowings. Net interest income is our
      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.




9




Net
      interest income was $375 thousand in the first quarter of 2006. The net interest
      spread was 2.88% and the net interest margin was 4.86%.




The
      Company earned 6.03% on its average interest-earning assets of $30.6 million
      for
      the first quarter of 2006. Slightly less than 50% of the earning assets were
      net
      loans, earning 7.96%, with the remaining earning assets held in investments
      and
      overnight fed funds with a combined yield of 4.38%. Total interest income,
      including $6 thousand in loan fees, was $455 thousand for the first quarter
      of
      2006.




Interest-bearing
      liabilities, consisting entirely of deposits, averaged $10.3 million with an
      average yield of 3.15% during the first quarter of 2006. Total interest expense
      was $80 thousand for the same period.




The
      following table sets forth the Company’s 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 quarter ended March 31,
      2006.


**Three
                  Months Ended March 31, 2006**ASSETS:
              
              
              **Average
                  Balance**
              
              
              **Income
                  / Expense**
              
              
              **Average
                  Rate or Yield**(Dollars
                  in thousands)Interest-earning
                  assets:Net
                  loans and leases
              
              $
              14,143
              
              $
              277
              
              
              7.96
              %Securities
                  of U.S. government agencies
              
              
              7,998
              
              
              85
              
              
              4.31
              %Other
                  investment securities
              
              
              2,721
              
              
              30
              
              
              4.47
              %Federal
                  funds sold
              
              
              5,702
              
              
              62
              
              
              4.43
              %Total
                  interest-earning assets
              
              
              30,564
              
              
              455
              
              
              6.03
              %Total
                  noninterest-earning assets
              
              
              2,556TOTAL
                  ASSETS
              
              $
              33,120LIABILITIES
                  AND STOCKHOLDERS’ EQUITY:Interest-bearing
                  liabilities:Money
                  market deposits
              
              $
              4,353
              
              $
              30
              
              
              2.77
              %NOW
                  deposits
              
              
              1,047
              
              
              3
              
              
              1.31
              %Savings
                  deposits
              
              
              96
              
              
              0
              
              
              1.01
              %Time
                  certificates of deposit in denominations of $100,000 or more
              
              
              3,104
              
              
              31
              
              
              4.06
              %Other
                  time deposits
              
              
              1,707
              
              
              16
              
              
              3.72
              %Total
                  interest-bearing liabilities
              
              
              10,307
              
              
              80
              
              
              3.15
              %Noninterest-bearing
                  liabilities:
              
              
              -Noninterest-bearing
                  deposits
              
              
              4,236
              
              
              80
              
              
              2.23
              %Other
                  liabilities
              
              
              174Total
                  noninterest-bearing liabilities
              
              
              4,410**SHAREHOLDERS’
                  EQUITY**
              
              
              18,403TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              33,120Net
                  interest income
              
              
              
              
              $
              375Net
                  interest spread
              
              
              
              
              
              
              
              
              2.88
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              4.86
              %




Changes
      in volume and changes in interest rates affect our interest income and interest
      expense. The effect of these changes is typically displayed in a volume, mix
      and
      rate analysis table which compares the changes in income and expense over
      periods. Since the Company has a limited operating history, comparisons are
      not
      yet meaningful.




10




***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
      first quarter of 2006, the provision for loan and lease losses was $50 thousand.
      The provision amount is directly related to loan volumes. There were no
      charge-offs or non-performing loans during the first quarter of 2006.




***Noninterest
      Income***




The
      non-interest income for the quarter ended March 31, 2006 was $88 thousand.
      This
      was almost entirely the result of sales of the guaranteed portion of SBA loans.
      Fees collected on deposit accounts were minimal.




***Noninterest
      Expense***




Our
      total
      noninterest expense was $1.0 million in the first quarter of 2006. The major
      components of this expense are discussed below. As the Bank grows, management
      is
      committed to controlling costs and expects to moderate noninterest expenses
      relative to revenue growth.




Salaries
      and employee benefits totaled $568 thousand for the first quarter of 2006.
      Employee benefit costs including employer taxes and group insurance accounted
      for approximately 18% of this expense. The Bank employed 24 full-time equivalent
      (FTE) employees as of March 31, 2006. The volume of assets per employee as
      of
      the end of the first quarter of 2005 was $1,501,000.




Occupancy
      and equipment expenses totaled $179 thousand for the first quarter of 2006,
      attributable primarily to lease costs of $78 thousand and depreciation expense
      of fixed asset and tenant improvement of $77 thousand.




Data
      processing expense was $100 thousand for the first quarter of 2006, attributable
      primarily to costs associated with the core processing system of $41 thousand,
      network maintenance and security of $20 thousand, software amortization of
      $15
      thousand, and website maintenance of $10 thousand.




Promotional
      expenses were $37 thousand for the first quarter of 2006. This included expenses
      for advertising in the Bank’s two primary markets, direct mail campaigns to
      local businesses, and sponsorship of key community events.




Professional
      fees of $57 thousand for the first quarter of 2006 were primarily attributable
      to legal fees of $15 thousand, audit expenses of $26 thousand and expenses
      related to the preparation of the 10-KSB and the annual shareholders’ meeting of
      $7 thousand.




Office
      expenses of $92 thousand for the first quarter of 2006 included auto and mileage
      expense of $21 thousand; workers compensation insurance premiums of $21
      thousand; office supplies of $15 thousand; fidelity bond and other insurance
      premiums of $10 thousand; armored car and courier expense of $9 thousand; and
      regulatory assessments of $6 thousand.




Other
      expenses of $12 thousand consisted primarily of loan-related costs of $7
      thousand and the provision for contingent liabilities of $5
      thousand.




***Income
      Taxes***




No
      federal or state tax expense or benefit has been recorded for the quarter ended
      March 31, 2006, based upon net operating losses. The Company will begin to
      recognize income tax benefit at the time it becomes profitable.




11




**Financial
      Condition as of March 31, 2006**




Total
      assets as of March 31, 2006, were $36.0 million, consisting primarily of cash
      and investments of $19.7 million and net loans of $14.9 million. Total deposits
      were $17.7 million and shareholder’s equity was $18.1 million.




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




At
      March
      31, 2006, the Bank had $8.1 million in federal funds (“fed funds”) sold. Federal
      funds sold allow the Bank to meet liquidity requirements and provide temporary
      holdings until the funds can be otherwise deployed or invested. A portion of
      the
      growth in the loan portfolio has been funded by the overnight investments in
      fed
      funds. At March 31, 2006, the Bank had an interest-bearing deposit of $2 million
      with Union Bank of California pledged as collateral for a financial letter
      of
      credit issued on behalf of one of the Bank’s customers. This deposit had a term
      of 180 days and a rate of 4%.




***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 the Bank’s
      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
      March
      31, 2006, the Bank’s investment securities consisted of $8.0 million in U.S.
      government-sponsored agencies, with an estimated fair value of $8.0 million
      and
      a weighted average yield of 4.3%, and $554 thousand in Federal Reserve Bank
      Stock, having a book value of $554 thousand, an estimate fair value of $554
      thousand, and a weighted average yield of 6.0%. At March 31, 2006, none of
      these
      investment securities were pledged as collateral for any purpose.




The
      table
      below sets forth the amounts and distribution of the investment securities
      and
      the weighted average yields as pf March 31, 2006.


**Book
                  Value**
              
              **Market
                  Value**
              
              **Weighted
                  Average Yield****Securities
                  held to maturity****U.S.
                  Government and Agency Securities:**Within
                  One Year
              
              $
              4,000,563
              
              $
              3,981,240
              
              
              4.10
              %One
                  to Five Years
              
              
              3,997,283
              
              
              3,977,700
              
              
              4.51
              %**Total
                  Securities held to maturity**
              
              $
              7,997,846
              
              $
              7,958,940
              
              
              4.31
              %




***Loan
      Portfolio***




The
      Bank’s 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:




**March
                  31, 2006**Real
                  estate
              
              $
              11,933,635Commercial
              
              
              3,118,241Consumer
              
              
              46,826Gross
                  Loans
              
              
              15,098,702Deferred
                  loan fees
              
              
              (
                  64,481
              )Allowance
                  for loan losses
              
              
              (
                  136,780
              )Net
                  Loans
              
              $
              14,897,441




12




Net
      loans
      as a percentage of total assets were 41.3% as of March 31, 2006.




The
      real
      estate loan portfolio is comprised of short-term mortgage loans secured
      typically by commercial properties, occupied by the borrower, have terms of
      three to seven years with both fixed and floating rates, and revolving lines
      of
      credit granted to consumers, secured by equity in residential properties. It
      is
      anticipated that the Bank’s real estate loan portfolio will include construction
      loans in the future. Construction loans consist primarily of single-family
      residential properties, 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 March 31, 2006, the Bank held $10.4 million in commercial real
      estate loans outstanding, representing 68.8% of gross loans receivable, with
      undisbursed commitments of $88 thousand, and $1.5 million in revolving lines
      secured by 1-4 family residences representing 10.2% of gross loans receivable
      with undisbursed commitments of $1.4 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 March 31, 2006, the Bank held $3.1 million in
      commercial loans outstanding, representing 20.7% of gross loans receivable,
      and
      undisbursed commitments of $3.4 million.




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
      March
      31, 2006, consumer loans totaled $47 thousand, representing 0.3% of gross loans
      receivable and undisbursed commitments of $30 thousand.




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. The Bank has
      established select concentrations percentages within the loan portfolio. It
      also
      includes families of credit considered of either higher risk or worthy of
      further review as part of its concentration reporting. While the framework
      has
      been set in place to evaluate the Bank’s potential risk in its portfolio, the
      overall concentration results are not meaningful at this time as limited
      activity presently exists.




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 the best interest of the Bank. The Bank requires 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 and leases as of March 31, 2006:


**As
                  of March 31, 2006****(Dollars
                  in thousands)****One
                  Year**
              
              **Over
                  1 Year****or
                  Less**
              
              **through
                  5 Years**
              
              **Over
                  5 Years**
              
              **Total****Fixed
                  Rate**
              
              **Floating
                  or Adjustable Rate**
              
              **Fixed
                  Rate**
              
              **Floating
                  or Adjustable Rate**Real
                  estate — construction
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Real
                  estate — secured
              
              
              6,117
              
              
              -
              
              
              5,817
              
              
              -
              
              
              -
              
              
              11,934Commercial
                  and industrial
              
              
              2,427
              
              
              691
              
              
              -
              
              
              -
              
              
              -
              
              
              3,118Consumer
              
              
              7
              
              
              40
              
              
              -
              
              
              -
              
              
              -
              
              
              47Total
              
              $
              8,551
              
              $
              731
              
              $
              5,817
              
              $
              -
              
              $
              -
              
              $
              15,099




***Nonperforming
      Loans, Leases and Assets***




Nonperforming
      assets consist of loans and leases on nonaccrual status, loans 90 days or more
      past due and still accruing interest, loans that have been restructured
      resulting in a reduction or deferral of interest or principal, OREO, and other
      repossessed assets. As of March 31, 2006, there were no nonperforming
      assets.




A
      potential problem loan is defined as a loan 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. An internally classified loan list is maintained
      that helps management assess the overall quality of the loan portfolio and
      the
      adequacy of the allowance for loan losses. Loans classified as “special mention”
are those that contain a weakness that, if left unattended, could develop into
      a
      problem affecting the ultimate collectibility of the loan. 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. The Bank had no loans classified in these categories at March
      31,
      2006.




13




***Allowance
      for Loan Losses***




Implicit
      in the Bank’s lending activities is the fact that loan losses will be
      experienced and that the risk of loss will vary with the type of loan being
      made
      and the creditworthiness of the borrower over the term of the loan. To reflect
      the currently perceived risk of loss associated with the loan portfolio,
      additions are made to the allowance for loan losses in the form of direct
      charges against income to ensure that the allowance is available to 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.




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. Until management has adequate historical data upon
      which
      to base the estimate of the allowance for loan losses, a balance of
      approximately 1.0% of the outstanding principal will be used unless additional
      information regarding the ability of the borrower to repay the loan, current
      economic conditions or other pertinent factors indicate a different allowance
      is
      needed. The allowance was $137 thousand, or 0.9% of outstanding principal as
      of
      March 31, 2006. The Bank has not incurred any loan losses as of March 31, 2006.




The
      following table sets forth information concerning the allocation of the
      allowance for loan losses, which is maintained on the Bank’s loan portfolio, by
      loan category at March 31, 2006.


**Amount**
              
              **Percentage
                  of loans in each category to total loans**
              
              **Percentage
                  of allowance at March 31, 2006**
              
              **Percentage
                  of reserves to net loans by category**Real
                  estate
              
              $
              62,965
              
              
              79.0
              %
              
              46.0
              %
              
              0.8
              %Commercial
              
              
              20,535
              
              
              20.7
              %
              
              15.0
              %
              
              0.8
              %Consumer
              
              
              70
              
              
              0.3
              %
              
              0.1
              %
              
              0.1
              %Unallocated
              
              
              53,211
              
              
              
              
              
              38.9
              %Total
                  Allowance for Loan Losses
              
              $
              136,780
              
              
              100.0
              %
              
              100.0
              %
              
              0.9
              %




In
      addition, a separate allowance for credit losses on off-balance sheet credit
      exposures is maintained for the undisbursed portion of approved loans. Although
      the loss exposure to the Bank is reduced because the funds have not been
      released to the borrower, under certain circumstances the Bank may be required
      to continue to disburse funds on a troubled credit. As of March 31, 2006, this
      allowance was $21 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. The Bank’s
      practice is to charge-off any loan or portion of a loan when the loan is
      determined by management to be uncollectible due to the borrower’s failure to
      meet repayment terms, the borrower’s deteriorating or deteriorated financial
      condition, the depreciation of the underlying collateral, the loan’s
      classification as a loss by regulatory examiners, or other reasons. During
      the
      first quarter of 2006, there were no charge-offs.




14




***Nonearning
      Assets***




Premises,
      leasehold improvements and equipment totaled $1.2 million at March 31, 2006,
      net
      of accumulated depreciation of $212 thousand. There are no definitive agreements
      regarding acquisition or disposition of owned or leased facilities.




***Deposits***




Deposits
      are the Bank’s primary source of funds. The following table sets forth, for the
      period indicated, the distribution of the average deposit account balances
      and
      average cost of funds on each category of deposits:


**Three
                  Months Ended March 31, 2006****Average
                  Balance**
              
              **Percent
                  of Deposits**
              
              **Average
                  Rate****(Dollars
                  in thousands)**Noninterest-bearing
                  demand deposits
              
              $
              5,177
              
              
              33
              %
              
              0
              %Money
                  market deposits
              
              
              4,353
              
              
              28
              %
              
              2.77
              %NOW
                  deposits
              
              
              1,047
              
              
              7
              %
              
              1.31
              %Savings
                  deposits
              
              
              96
              
              
              1
              %
              
              1.01
              %Time
                  certificates of deposit in denominations of $100,000 or more
              
              
              3,104
              
              
              20
              %
              
              4.06
              %Other
                  time deposits
              
              
              1,707
              
              
              11
              %
              
              3.15
              %Total
                  deposits
              
              $
              15,484
              
              
              100
              %
              
              2.23
              %




The
      following table sets forth the amount and maturities of the time deposits as
      of
      March 31, 2006:


**At
                  March 31, 2006****Time
                  Deposits of $100,00 or more**
              
              **Other
                  Time Deposits**
              
              **Total
                  Time Deposits****(Dollars
                  in thousands)**Three
                  months or less
              
              $
              603
              
              
              251
              
              $
              854Over
                  three months through six months
              
              
              532
              
              
              870
              
              
              1,402Over
                  six months through 12 months
              
              
              2,480
              
              
              725
              
              
              3,205Over
                  12 months
              
              
              -
              
              
              78
              
              
              78Total
              
              $
              3,615
              
              $
              1,924
              
              $
              5,539




**Return
      on Equity and Assets**




The
      following table sets forth certain information regarding the Company’s return on
      equity and assets for the first quarter of 2006:




**At
                  March 31, 2006**Return
                  of assets
              
              
              -7.74
              %Return
                  on equity
              
              
              -13.93
              %Dividend
                  payout ratio
              
              
              0
              %Equity
                  to assets ratio
              
              
              55.6
              %




***Off-Balance
      Sheet Arrangements and Loan Commitments***




In
      the
      ordinary course of business, the Bank enters into various off-balance sheet
      commitments and other arrangements to extend credit that are not reflected
      in
      the consolidated balance sheets of the Company. The business purpose of these
      off-balance sheet commitments is the routine extension of credit. As of March
      31, 2006, commitments to extend credit included approximately $1.8 million
      for
      letters of credit, $4.1 million for revolving lines of credit arrangements
      and
      $929 thousand in unused commitments for commercial and real estate secured
      loans. The Bank faces the risk of deteriorating credit quality of borrowers
      to
      whom a commitment to extend credit has been made; however, no significant credit
      losses are expected from these commitments and arrangements.




15




***Borrowings***




The
      Company has access to a variety of borrowing sources including federal funds
      purchased. As of March 31, 2006, 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 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 bank’s financial statements.




As
      of
      March 31 2006, 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.


**Actual**
              
              **For
                    Capital****Adequacy
                  Purposes**
              
              **To
                        Be Well****Capitalized
                      Under****Prompt Corrective****Action
                  Provisions****Amount**
              
              
              
              **Amount**
              
              
              
              **Amount****(Thousands)**
              
              **Ratio**
              
              **(Thousands)**
              
              **Ratio**
              
              **(Thousands)**
              
              **Ratio**
              ******As
                  of  March
                  31, 2006:**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****Total
                  Capital (to Risk-Weighted Assets)
              
              $
              17,278
              
              
              99.1
              %
              $
              1,382
              
              
              8.0
              %
              $
              1,728
              
              
              10.0
              %Tier
                  1 Capital (to Risk-Weighted Assets)
              
              $
              17,120
              
              
              99.1
              %
              $
              691
              
              
              4.0
              %
              $
              1,037
              
              
              6.0
              %Tier
                  1 Capital (to Average Assets)
              
              $
              17,120
              
              
              51.8
              %
              $
              1,322
              
              
              4.0
              %
              $
              1,652
              
              
              5.0
              %




***Liquidity
      Management***




At
      March
      31, 2006, the Company (excluding the Bank) had approximately $991 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.




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 is retail and commercial deposits, loan and
      securities 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.




As
      loan
      demand increases, greater pressure will be exerted on the Bank’s liquidity.
      However, it is management’s intention to maintain a conservative loan to deposit
      ratio in the range of 80% - 85% over time. Given this goal, the Bank will not
      aggressively pursue lending opportunities if sufficient funding sources
      ( *i.e.* ,
      deposits, Fed Funds, etc.) are not available, nor will the Bank seek to attract
      transient volatile, non-local deposits with above market interest rates. As
      of
      March 31, 2006, the loan to deposit ratio was 84%.




16




The
      Bank
      had cash and cash equivalents of $9.1 million, or 25% of total Bank assets,
      at
      March 31, 2006. Management feels that the Bank has adequate liquidity to meet
      anticipated future funding needs.




The
      Bank
      is subject to various regulatory capital requirements administered by federal
      and state banking agencies, which could affect its ability to pay dividends
      to
      the Company. Failure to meet minimum capital requirements can initiate certain
      mandatory and discretionary actions by regulators that, if undertaken, could
      have a direct material adverse effect on our financial statements. The minimum
      ratios required for the Bank to be considered “well capitalized” for regulatory
      purposes, and therefore eligible to consider the payment of dividends to the
      Company, will be 10% total capital to risk weighted assets, 6% tier 1 capital
      to
      risk weighted assets and 5% tier 1 capital to average assets. At March 31,
      2006,
      the Bank was considered “well capitalized” by regulatory standards.




***Quantitative
      and Qualitative Disclosure About Market Risks***




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 March 31, 2006, no such analysis was performed as the results would
      not yet have been meaningful. In the future, rising and declining interest
      rate
      simulations in 100 basis point increments over a 12-month period will be
      performed. The impact of imbedded options in such products as callable and
      mortgage-backed securities, real estate mortgage loans and callable borrowings
      will be considered. Changes in net interest income in the rising and declining
      rate scenarios will then measured against the net interest income in the rates
      unchanged scenario. The Investment/Asset-liability Committee will utilize the
      results of the model to quantify the estimated exposure of net interest income
      to sustained interest rate changes.




The
      following table sets forth, on a stand-alone basis, the Bank’s amounts of
      interest-earning assets and interest-bearing liabilities outstanding at March
      31, 2006, 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.




17


**As
                  of March 31, 2006****Volumes
                  Subject to Repricing Within****0-1
                  Days**
              
              **2-90
                  Days**
              
              **91-365
                  Days**
              
              **1-3
                  Years**
              
              **Over
                  3 Years**
              
              **Non-Interest
                  Sensitive**
              
              **Total****Assets:**
              
              
              **(Dollars
                  in thousands****)**Cash,
                  fed funds and other
              
              $
              8,065
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1,122
              
              $
              9,187Time
                  Deposits held at other financial institutions
              
              
              -
              
              
              2,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,000Investments
                  and FRB Stock (1)
              
              
              -
              
              
              -
              
              
              4,001
              
              
              3,997
              
              
              554
              
              
              -
              
              
              8,552Loans
                  (2)
              
              
              -
              
              
              4,972
              
              
              3,579
              
              
              1,556
              
              
              4,992
              
              
              -
              
              
              15,099Fixed
                  and other assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,194
              
              
              1,194Total
                  Assets
              
              $
              8,065
              
              $
              6,972
              
              $
              7,580
              
              $
              5,553
              
              $
              5,546
              
              $
              2,316
              
              $
              36,032**Liabilities
                  and Stockholders’ Equity:**Interest-bearing
                  checking, savings and money market accounts
              
              $
              6,440
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              5,762
              
              $
              12,202Certificates
                  of deposit
              
              
              -
              
              
              854
              
              
              4,607
              
              
              78
              
              
              -
              
              
              -
              
              
              5,539Borrowed
                  funds
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  liabilities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              196
              
              
              196Stockholders’
                  equity
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              18,095
              
              
              18,095Total
                  liabilities and stockholders’ equity
              
              $
              6,440
              
              $
              854
              
              $
              4,607
              
              $
              78
              
              $
              -
              
              $
              24,053
              
              $
              36,032Interest
                  rate sensitivity gap
              
              $
              1,625
              
              $
              6,118
              
              $
              2,973
              
              $
              5,475
              
              $
              5,546Cumulative
                  interest rate sensitivity gap
              
              $
              1,625
              
              $
              7,743
              
              $
              10,716
              
              $
              16,191
              
              $
              21,737Cumulative
                  gap to total assets
              
              
              4.5
              %
              
              21.5
              %
              
              29.7
              %
              
              44.9
              %
              
              60.3
              %Cumulative
                  interest-earning assets to cumulative interest-bearing liabilities
              
              
              125.2
              %
              
              206.2
              %
              
              190.0
              %
              
              235.2
              %
              
              281.5
              %


(1)
                  Excludes investments' mark-to-market adjustments(2)
                  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
      3.**  **Controls
      and Procedures**




With
      the
      participation of management, the Company’s chief executive officer and the chief
      financial officer reviewed and evaluated the Company’s disclosure controls and
      procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
      period covered by this report. Based on this evaluation, the chief executive
      officer and chief financial officer concluded that the disclosure controls
      and
      procedures are 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
      recorded, processed, summarized and reported to the Company’s management within
      the time periods specified in the Securities and Exchange Commission’s rules and
      forms.




There
      have been no significant changes in the Company’s internal controls for
      financial reporting or in other factors that could significantly affect these
      controls, including any significant deficiencies or material weaknesses of
      internal controls that would require corrective action. In connection with
      the
      new rules, the Company is currently in the process of further reviewing and
      documenting its disclosure controls and procedures, including its internal
      accounting controls, and may from time to time make changes aimed at enhancing
      their effectiveness ands ensuring that the Company’s systems evolve with its
      business.




18




**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 our 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
      2.**  **Changes
      in Securities and Use of Proceeds**




During
      the first quarter of 2006, warrants to purchase 1,300 shares of stock at $12.50
      per share were exercised, resulting in proceeds of $16,250.




**ITEM
      3.**  **Defaults
      Upon Senior Securities**




None.




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




None.




**ITEM
      5.**  **Other
      Information**




Not
      applicable.




**ITEM
      6.**  **Exhibits** **and Reports on Form 8-K**




(a)  Exhibits




**Exhibit
                Number**
            
            **Description
                of Exhibit**31.1
            
            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.





(b)  Reports
      on Form 8-K




None




19


SIGNATURES




Pursuant
      to the requirements of the Securities 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 BANCORP**Date: May 15, 2006
            By:
            /s/
              Colin M. ForknerColin M. Forkner
              Chief Executive Officer


Date: May
              15,
              2006
            By:
            /s/ Terry
              StalkTerry Stalk
              Chief Financial Officer




20