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 periodended March 31, 2008




OR




[  ]
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 May 12, 2008,
was 2,281,700 shares.







PACIFIC
COAST NATIONAL BANCORP




INDEX




PART
I – FINANCIALINFORMATION


PAGE


Item
      1 - Financial StatementsConsolidated
      Balance Sheets at March 31, 2008 (unaudited) and December 31,
      2007
              3Consolidated
      Statements of Operations for the three months endedMarch
      31, 2008 (unaudited) and 2007 (unaudited)
              4Consolidated
      Statements of Cash Flows for the three months endedMarch
      31, 2008 (unaudited) and 2007 (unaudited)
              5Consolidated
      Statement of Shareholders’ Equity as of March 31, 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
              24Item
      4T - Controls and Procedures
              26PART
      II - OTHER INFORMATIONItem 1 -Legal
      Proceedings
              27Item
      1A
      – Risk FactorsItem 2 -Unregistered
      Sales of Equity Securities and Use of Proceeds
              27Item 3 -Defaults
      upon Senior Securities
              27Item 4 -Submission
      of Matters to a Vote of Security Holders
              27Item 5 -Other
      Information
              27Item 6 -Exhibits
              27Signatures
              28












INTRODUCTORY
NOTE




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 Pacific
Coast National Bancorp (sometimes referred to herein as on a consolidated basis
as the Company, we, us, or similar phrasing) 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.




Althoughthe Companybelieves 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;






1










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




●
            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




March 31,
    2008(unaudited)
            
            
            December 31,
      2007Cash and due from
      banks
            
            $
            2,831,826
            
            
            $
            1,688,892Federal funds
      sold
            
            
            5,300,000
            
            
            
            12,785,000TOTAL CASH AND CASH
      EQUIVALENTS
            
            
            8,131,826
            
            
            
            14,473,892Loans
            
            
            
            106,663,445
            
            
            
            97,874,131Less: Allowance for loan
      losses
            
            
            ( 1,895,090
            )
            
            
            ( 1,814,860
            )Loans, net of allowance for loan
      losses
            
            
            104,768,355
            
            
            
            96,059,271Premises and equipment,
      net
            
            
            797,553
            
            
            
            887,532Federal Reserve Bank stock, at
      cost
            
            
            405,150
            
            
            
            405,150Accrued interest receivable and
      other assets
            
            
            747,483
            
            
            
            671,339TOTAL
ASSETS
            
            $
            114,850,367
            
            
            $
            112,497,184




LIABILITIES
AND SHAREHOLDERS’ EQUITY
  DepositsNoninterest-bearing
      demand
                
                $
                20,260,372
                
                
                $
                17,658,241Interest-bearing
      demand accounts
                
                
                3,311,195
                
                
                
                3,951,566Money market and
      Savings accounts
                
                
                46,690,419
                
                
                
                36,210,745Time
      certificates of deposit of $100,000 or more
                
                
                3,937,109
                
                
                
                3,177,552Other time
      certificates of deposit
                
                
                28,207,634
                
                
                
                37,993,669TOTAL
    DEPOSITS
                
                
                102,406,729
                
                
                
                98,991,773Accrued interest and other
      liabilities
                
                
                758,144
                
                
                
                754,146TOTAL
      LIABILITIES
                
                
                103,164,873
                
                
                
                99,745,919Shareholders'
      equityCommon stock -
      $0.01 par value; 10,000,000 shares authorized;issued
      and outstanding: 2,281,700 shares at March 31,2008
      and December 31, 2007
                
                
                22,817
                
                
                
                22,817Additional
      paid-in capital
                
                
                25,655,741
                
                
                
                25,561,705Accumulated
      deficit
                
                
                ( 13,993,064
                )
                
                
                ( 12,833,257
                )TOTAL SHAREHOLDERS'
      EQUITY
                
                
                11,685,494
                
                
                
                12,751,265TOTAL LIABILITIES &
      SHAREHOLDERS' EQUITY
                
                $
                114,850,367
                
                
                $
                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 March 31,
      2008
              
              
              Three Months Ended March 31,
      2007Interest
    incomeInterest and fees on
      loans
              
              $
              1,926,776
              
              
              $
              764,334Federal funds
      sold
              
              
              74,329
              
              
              
              147,990Investment securities,
      taxable
              
              
              -
              
              
              
              87,442Other
              
              
              6,077
              
              
              
              16,000Total interest
      income
              
              
              2,007,182
              
              
              
              1,015,766Interest
      expenseTime certificates of
      depositof $100,000 or
      more
              
              
              44,073
              
              
              
              42,930Other
    deposits
              
              
              727,584
              
              
              
              264,148Total interest
      expense
              
              
              771,657
              
              
              
              307,078Net interest income before
      provision for loan losses
              
              
              1,235,525
              
              
              
              708,688Provision for loan
      losses
              
              
              648,650
              
              
              
              85,175Net interest income
      afterprovision for loan
      losses
              
              
              586,875
              
              
              
              623,513Noninterest
      incomeService charges and
      fees
              
              
              36,807
              
              
              
              12,396Gain on Sale of SBA
      loans
              
              
              142,642
              
              
              
              -Gain on sale of
      investmentsecurities
              
              
              -
              
              
              
              4,225179,449
              
              
              
              16,621Noninterest
      expenseSalaries and employee
      benefits
              
              
              1,114,661
              
              
              
              1,001,828Occupancy
              
              
              242,789
              
              
              
              217,991Professional
      services
              
              
              142,568
              
              
              
              100,142Other
              
              
              426,113
              
              
              
              336,8571,926,131
              
              
              
              1,656,818(Loss) before income
      taxes
              
              
              (1,159,807
              )
              
              
              (1,016,684
              )Provision for income
      taxes
              
              
              0
              
              
              
              0Net (loss)
              
              $
              (1,159,807
              )
              
              $
              (1,016,684
              )Comprehensive
      loss
              
              $
              (1,159,807
              )
              
              $
              (1,011,926
              )Per share
    dataWeighted-average shares
      outstanding
              
              
              2,281,700
              
              
              
              2,281,644Net (loss),
      basic and diluted
              
              $
              (0.51
              )
              
              $
              (0.45
              )




See
accompanying condensed notes to unaudited consolidated financial
statements.


4


PACIFIC
COAST NATIONAL BANCORP


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)


Three Months Ended March 31,
      2008
              
              
              Three Months Ended March 31,
      2007Cash flows from operating
      activities:Net loss
              
              $
              (1,159,807
              )
              
              $
              (1,016,684
              )Adjustments to reconcile net loss
      to net cashused in operating
      activities:Depreciation and
      amortization
              
              
              109,604
              
              
              
              104,141Provision for loan
      losses
              
              
              648,650
              
              
              
              85,175Provision for off balance sheet
      contingencies
              
              
              14,294
              
              
              
              7,842(Accretion) of investment
      securities
              
              
              -
              
              
              
              (4,890
              )Gain on sale of
      loans
              
              
              142,642
              
              
              
              -Stock-based
      compensation
              
              
              94,036
              
              
              
              279,123Increase in Other
      Assets
              
              
              (76,144
              )
              
              
              (22,513
              )Decrease in Other
      Liabilities
              
              
              (10,296
              )
              
              
              (36,549
              )Net cash  used in
      operating activities
              
              
              (237,021
              )
              
              
              (604,355
              )Cash flows from investing
      activities:Proceeds from maturity of time
      deposits in other financial institutions
              
              
              -
              
              
              
              1,000,000Proceeds from sale of investment
      securities
              
              
              -
              
              
              
              3,963,565Net redemption of Federal Reserve
      Bank stock
              
              
              -
              
              
              
              39,800Proceeds from sale of
      loans
              
              
              3,267,557
              
              
              
              -Net (increase) in
      Loans
              
              
              (12,767,933
              )
              
              
              (5,022,327
              )Purchases of premises and
      equipment
              
              
              (19,625
              )
              
              
              (21,301
              )Net cash used in investing
      activities
              
              
              (9,520,001
              )
              
              
              (40,263
              )Cash flows from financing
      activities:Net increase in demand deposits
      and savings accounts
              
              
              12,441,434
              
              
              
              5,053,635Net increase (decrease) in time
      deposits
              
              
              (9,026,478
              )
              
              
              914,537Proceeds from exercise of
      warrants
              
              
              -
              
              
              
              2,500Net cash provided by financing
      activities
              
              
              3,414,956
              
              
              
              5,970,672Net increase (decrease) in cash
      and cash equivalents
              
              
              (6,342,066
              )
              
              
              5,326,054Cash and cash equivalents at
      beginning of period
              
              
              14,473,892
              
              
              
              10,916,151Cash and cash equivalents at end
      of period
              
              $
              8,131,826
              
              
              $
              16,242,205Supplemental disclosure of cash
      flow information:Interest
    paid
              
              $
              716,296
              
              
              $
              316,261Income taxes
      paid
              
              $
              -
              
              
              $
              -Supplemental schedule of non-cash
      investing activities:Transfer of held to maturity
      securities to available for sale
              
              $
              -
              
              
              $
              7,943,507









See
accompanying condensed notes to unaudited consolidated financial
statements


5


PACIFIC
COAST NATIONAL BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)


FOR
THE THREE MONTHS ENDED MARCH 31, 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
              
              
              -
              
              
              
              -
              
              
              
              94,036
              
              
              
              -
              
              
              
              94,036Net Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,159,807
              )
              
              
              (1,159,807
              )Balance at March 31,
      2008
              
              
              2,281,700
              
              
              $
              22,817
              
              
              $
              25,655,741
              
              
              $
              ( 13,993,064
              )
              
              $
              11,685,494





























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 month period ended March 31,
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. For the three months ended March 31, 2008, the conversion of
approximately 2,000 common shares issuable upon exercise of the employee stock
options and common stock warrants have not been included in the 2008 loss per
diluted share computation because their inclusion would have been antidilutive
on loss per diluted share.




Note
3 – Stock-Based Compensation




In
accounting for stock-based compensation, the Company follows SFAS 123(R),
“Share-Based Payment” utilizing the modified prospective approach. Under 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
March 31, 2008, there was approximately $135 thousand of unrecognized
compensation cost related to unvested stock options. This cost is expected to be
recognized over a weighted average period of approximately 14
months.




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 March 31, 2008, we had three loans
that were considered impaired for a total of $2.6 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 debit to the allowance for
loan losses.





Note
5 – Loans and Subsequent Events




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




March 31,
    2008
              
              
              December 31,
      2007Real estate
              
              (Dollars in
      thousands)1-4 residential
      (1)
              
              $
              4,282
              
              
              
              4.0
              %
              
              $
              2,655
              
              
              
              2.7
              %Multi-Family
              
              
              719
              
              
              
              0.7
              %
              
              
              720
              
              
              
              0.7
              %Non-farm,
      non-residential
              
              
              40,312
              
              
              
              37.9
              %
              
              
              40,951
              
              
              
              41.9
              %Construction & Land
      Development
              
              
              32,573
              
              
              
              30.6
              %
              
              
              31,164
              
              
              
              31.9
              %Commercial
              
              
              28,228
              
              
              
              26.5
              %
              
              
              21,827
              
              
              
              22.4
              %Consumer
              
              
              277
              
              
              
              0.3
              %
              
              
              327
              
              
              
              0.3
              %106,391
              
              
              
              100
              %
              
              
              97,644
              
              
              
              100
              %Net deferred loan costs, premiums
      and discounts
              
              
              272
              
              
              
              
              
              
              
              230Allowance for loan
      losses
              
              
              ( 1,895
              )
              
              
              
              
              
              
              ( 1,815
              )$
              104,768
              
              
              
              
              
              
              $
              96,059(1) Comprised of second mortgage
      home loans under home equity lines of credit.




At March
31, 2008, and December 31, 2007, the Bank had total commitments to lend
outstanding of $34.2 million and $29.5 million respectively.




At March 31, 2008, the bank had three
construction loans which were considered impaired for a total outstanding
balance of $2.6 million. Of these, the accrual of interest had been discontinued
on one loan with an outstanding balance of $1.0 million, reduced from a balance
at December 31, 2007 of $1.5 million through a charge






8






off of
$475 thousand.  In addition, one loan with an outstanding balance of $954
thousand was classified as a restructured debt, and one loan with an outstanding
balance of $646 thousand after a charge off of $94 thousand, was being
renegotiated by the lead Bank. The first two loans were reported as non-accruing
loans with a total outstanding balance of $2.5 million as of December 31,
2007.




The
following table provides information on impaired loans:




March 31,
    2008
              
              
              December 31,
      2007(Dollars in
      thousands)Impaired loans with specific
      reserves
              
              $
              954
              
              
              $
              2,467Impaired loans without specific
      reserves
              
              
              1,671
              
              
              
              -Total impaired
      loans
              
              
              2,625
              
              
              
              2,467Related allowance for loan losses
      on impaired loans
              
              
              (286
              )
              
              
              (590
              )Net recorded investment in
      impaired loans
              
              $
              2,339
              
              
              $
              1,877Average balance during the year on
      impaired loans
              
              $
              3,206
              
              
              $
              2,456Interest income recognized on
      impaired loans
              
              $
              51
              
              
              $
              126




On April
22, 2008, a participation purchased construction loan in the amount of $996
thousand was placed on non-accrual, following the decision made by the lead bank
due to deterioration in other credits with the same borrower. At the same time,
we reversed $12 thousand in interest income accrued on this loan. This loan had
been classified as substandard at March 31, 2008.




The
following table sets forth the activity for 2008 and 2007 in our allowance for
loan losses account. The loans charged off in 2008 have all been related to
construction and land development loans.




2008
              
              
              2007($ in
      thousands)Balance at beginning of
      year
              
              $
              1,815
              
              
              $
              432Provision charged to
      expense
              
              
              649
              
              
              
              1,383Loans charged
      off
              
              
              ( 569
              )
              
              
              -Recoveries on loans previously
      charged off
              
              
              -
              
              
              
              -Balance at end of
      year
              
              $
              1,895
              
              
              $
              1,815






Note
6 – Other Expenses




A summary of other expenses for the
three months ended March 31, 2008 and 2007 is as follows:








9








Three Months Ended March 31,
      2008
              
              
              Three Months Ended March 31,
      2007Data
    Processing
              
              $
              138,221
              
              
              $
              101,171Office
    Expenses
              
              
              101,281
              
              
              
              76,355Marketing
              
              
              99,705
              
              
              
              61,610Regulatory
      Assessments
              
              
              30,340
              
              
              
              7,624Insurance
    Costs
              
              
              27,006
              
              
              
              30,162Loan-related costs
      (1)
              
              
              13,689
              
              
              
              6,146Recruiting
      Costs
              
              
              -
              
              
              
              32,689Director-related expenses
      (2)
              
              
              3,689
              
              
              
              16,422Other
              
              
              12,183
              
              
              
              4,678$
              426,113
              
              
              $
              336,857(1) Primarily consists of
      appraisal fees, environmental reports andthe provision for unfunded loan
      commitments.(2) Primarily consists of costs
      associated with training conferences anddirector 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.




The Company has two tax jurisdictions:
The U.S. Government and the State of California. As of March 31, 2008 and March
31, 2007, 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 condition 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.






10







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




The
following discussion and analysis addresses the Company’s consolidated financial
condition as of March 31, 2008, and results of operations for the three months
ended March 13, 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 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. In addition,
because the Bank has no loss history on which to build assumptions for future
loan losses, a comparison of peer group allowance to gross loans ratios is made
with the intention of maintaining similar levels during the Bank’s first few
years of operations.





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.






11








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.




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 March 31, 2008, the
Company had, on a consolidated basis, total assets of $114.9 million, net loans
of $104.8 million, total deposits of $102.4 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 thefirstquarter of 2008of $(1.2) millionor $(0.51)per share, as compared toa net loss of$(1.0) million, or $(0.45)per share,during the same period of
2007. Thechangein loss per share for the quarter was
primarily attributable to an increase in the provision for loan
losses of $563 thousand to $649 thousand due to the deterioration in the
value of certain real
estate construction loans and a 16% increase in non-interest expenses. This was
offset by a74% increase in net interest
income,a significant increase in non-interest
income and a reduction in non-cash expense related tothe Company’sstock based compensationto $94thousand as compared to $279 thousand
for the same period last year.




The
following discussion focuses on the Company’s financial condition as of March
31, 2008 and results of operations for the three months ended March 31, 2008 and
2007.




Results
of Operations




Net
Interest Income and Net Interest Margin




Net
interest income is the difference between interest income, principally from loan
and investment securities portfolios, 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.






12








Net
interest income for the three months ended March 31, 2008, before the provision
for loan losses was $1.2 million compared to $709 thousand for the same time
period 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 period.




During
the first quarter of 2008, loans accounted for 92% of average earning assets,
with a weighted average yield of 7.78%, compared to the first quarter of 2007
when 65% of the average earning assets were loans, with a weighted average yield
of 8.41%. The increase in loans as a percentage of average earning assets
occurred as a result of significantly increased loan originations in 2007. 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 several
months. Total loan interest income was $1.9 million, including net loan fees of
$71 thousand, for the first quarter of 2008 compared to $764 thousand in total
loan interest income, including $23 thousand in loan fees, in the first quarter
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 first quarter of 2008, fed funds sold averaged $8.7 million with an
average yield of 3.45% compared to the first quarter of 2007 with averaged fed
funds sold of $11.5 million with an average yield of 5.23%. The remaining
earning assets for the first quarter of 2008 consisted of stock in the Federal
Reserve Bank with an average yield of 6.02% compared to the first quarter 2007
with other earning assets consisting of investment securities, stock in the
Federal Reserve Bank and interest-earning balances dues from other financial
institutions averaging $8.5 million with an average yield of 4.94%.




Interest-bearing
liabilities, consisting entirely of deposits, averaged $80.5 million with an
average rate of 3.84% during the first quarter of 2008, compared with $30.0
million in interest-bearing deposits at a rate of 4.15% 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
Bank in recent months, offset by higher-yielding 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 March 31, 2008,
$14.7 million in brokered funds were on deposit with an average rate of 4.9%,
compared with $28.2 million in brokered funds on deposit as of December 31,
2007, also with an average rate of 4.9%.  This decrease was due to the
replacement of maturing brokered deposits with core deposits, primarily demand
accounts and money market accounts. The brokered deposits are included in other
time certificate of deposits. As of March 31, 2007, there were no brokered funds
on deposit.




The net
interest margin was 4.57% for the first quarter of 2008 compared to 5.06% for
the first quarter of 2007. Non-interest bearing demand account balances averaged
$19.6 million and $14.9 million for the three months ended March 31, 2008, and
2007, representing 20% and 33% of total deposits respectively. 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 brokered time deposits as they have
matured.




We earned
$1.2 million in net interest income on average interest-earning assets of $108.4
million for the first quarter of 2008 compared to $709 thousand in net interest
income on $56.9 million in average earning assets for the first quarter of 2007.
Net interest income before provision for loan losses increased by $665 thousand
due to the increase in volume of earning assets, and decreased by $139 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 month periods indicated.






13









Three
      Months Ended March 31, 2008
              
              
              Three
      Months Ended March 31, 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)
              
              $
              99,367
              
              
              $
              1,927
              
              
              
              7.78
              %
              
              $
              36,843
              
              
              $
              764
              
              
              
              8.41
              %Investment
      Securities
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              7,241
              
              
              
              88
              
              
              
              4.90
              %Investment
      in capital stock of Federal Reserve Bank
              
              
              405
              
              
              
              6
              
              
              
              6.02
              %
              
              
              476
              
              
              
              7
              
              
              
              6.05
              %Time
      Deposits in other financial institutions
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              822
              
              
              
              9
              
              
              
              4.39
              %Fed
      funds sold
              
              
              8,650
              
              
              
              74
              
              
              
              3.45
              %
              
              
              11,472
              
              
              
              148
              
              
              
              5.23
              %Total
      interest-earning assets
              
              
              108,422
              
              
              
              2,007
              
              
              
              7.43
              %
              
              
              56,854
              
              
              
              1,016
              
              
              
              7.25
              %Noninterest-earning
      assets
              
              
              4,510
              
              
              
              
              
              
              
              
              
              
              
              3,150Total
      Assets
              
              $
              112,932
              
              
              
              
              
              
              
              
              
              
              $
              60,004Liabilities
      and Shareholders' EquityMoney
      Market and Savings Deposits
              
              $
              40,123
              
              
              $
              313
              
              
              
              3.13
              %
              
              $
              21,338
              
              
              
              232
              
              
              
              4.41
              %Interest-bearing
      Checking
              
              
              3,332
              
              
              
              11
              
              
              
              1.32
              %
              
              
              2,980
              
              
              
              10
              
              
              
              1.35
              %Time
      Deposits of $100,000 or more
              
              
              3,791
              
              
              
              44
              
              
              
              4.66
              %
              
              
              3,530
              
              
              
              43
              
              
              
              4.93
              %Other
      Deposits
              
              
              33,289
              
              
              
              403
              
              
              
              4.86
              %
              
              
              2,191
              
              
              
              22
              
              
              
              4.10
              %Total
      Interest-bearing liabilities
              
              
              80,535
              
              
              
              772
              
              
              
              3.84
              %
              
              
              30,040
              
              
              
              307
              
              
              
              4.15
              %Non-interest
      bearing checking accounts
              
              
              19,640
              
              
              
              
              
              
              
              
              
              
              
              14,866Non-interest
      bearing liabilities
              
              
              723
              
              
              
              
              
              
              
              
              
              
              
              356Shareholders'
      Equity
              
              
              12,034
              
              
              
              
              
              
              
              
              
              
              
              14,742Total
      Liabilities andShareholders'
      Equity
              
              $
              112,932
              
              
              
              
              
              
              
              
              
              
              $
              60,004Net
      Interest Income
              
              
              
              
              
              $
              1,236
              
              
              
              
              
              
              
              
              
              
              $
              709Net
      Interest Spread(2)
              
              
              
              
              
              
              3.58
              %
              
              
              
              
              
              
              
              
              
              
              3.10
              %Net
      Interest Margin(3)
              
              
              
              
              
              
              4.57
              %
              
              
              
              
              
              
              
              
              
              
              5.06
              %(1)Loan
      fees are included in total interest income as follows: 2008 $71 thousand;
      2007 $23 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
months ended March 31, 2008 compared to the same period 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.








14







Three Months Ended March 31, 2008
      Compared to Three Months Ended March 31, 2007Increase/(Decrease)  in
      Net Interest IncomeDue ToRate
              
              
              Volume
              
              
              NetInterest-earning
      Assets:
              
              (Dollars in
      thousands)Net Loans
      Receivable
              
              $
              (58
              )
              
              $
              1,221
              
              
              $
              1,163Investment
      Securities
              
              
              (88
              )
              
              
              -
              
              
              
              (88
              )Investment in capital stock of
      Federal Reserve Bank
              
              
              -
              
              
              
              (1
              )
              
              
              (1
              )Time Deposits in other financial
      institutions
              
              
              (9
              )
              
              
              -
              
              
              
              (9
              )Cash, fed funds sold and
      other
              
              
              (50
              )
              
              
              (24
              )
              
              
              (74
              )Total
              
              
              (206
              )
              
              
              1,196
              
              
              
              990Interest-bearing
      Liabilities:Money Market and Savings
      Deposits
              
              
              (68
              )
              
              
              149
              
              
              
              81Interest-bearing
      Checking
              
              
              -
              
              
              
              1
              
              
              
              1Time Deposits of $100,000 or
      more
              
              
              (2
              )
              
              
              3
              
              
              
              1Other
    Deposits
              
              
              4
              
              
              
              378
              
              
              
              382Total
              
              
              (66
              )
              
              
              531
              
              
              
              464Net Change in Net Interest
      Income
              
              $
              (139
              )
              
              $
              665
              
              
              $
              526




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 months ended March 31, 2008 and 2007, the provision for loan losses was
$649 thousand and $85 thousand, respectively. 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 no loss 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.




There was
one $1.0 million loan on nonaccrual, one $954 thousand restructured loan, and
one additional loan for $646 thousand, all considered impaired as of March 31,
2008. There were partial charge-offs of $569 thousand on two construction loans
during the first three months of 2008, and no charge-offs or non-performing
loans during the first three months of 2007.




On
April 22, 2008, a participation purchased construction loan in the amount of
$996 thousand was placed on non-accrual, following the decision made by the lead
bank due to deterioration in other credits with the same borrower.  At the
same time, we reversed $12 thousand in interest income accrued on this
loan.  This loan had been classified as substandard at March 31,
2008.




Noninterest
Income




Non-interest income for the three months ended March 31, 2008 was $179 thousand
including $143 thousand from gain on sale of the guaranteed portion of SBA
loans, compared to $17 thousand for the three months ended March 31, 2007 which
included a gain on sale of investment securities of $4 thousand. Loan brokerage
fees were $17 thousand for the three months ended March 31, 2008. There were no
loan brokerage fees earned in the first quarter of 2007.  Fees on
deposit accounts and merchant transaction fees make up the remainder of the
noninterest income for all periods.




15




Noninterest
Expense




Total
noninterest expense was $1.9 million in the first quarter of 2008 compared to
$1.7 million for the same period 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 $1.1 million for the first quarter of 2008
compared to $1.0 million for the first quarter of 2007. Included in this
category for the three months ended March 31, 2008 was $90 thousand representing
a portion of the stock compensation expense for the employee stock options
granted from May 16, 2005, through March 31, 2008 compared $271 thousand for the
first quarter of 2007. Excluding the expense associated with stock-based
compensation, salaries and employee benefits increased by $293 thousand in the
three months ended March 31, 2008 compared with the same period in 2007. The
increase in expense was the direct result of hiring additional personnel to
accommodate the growth in our operations. Employee benefit costs, including
employer taxes and group insurance, accounted for approximately 19% of the
salary and employee benefits expense in the three months ended March 31, 2008,
compared to 14% in the same period in 2007. The increase in the ratio in 2008
was due to the lower amortization costs for the fair value of the stock options.
We employed 40 full-time equivalent (FTE) employees as of March 31, 2008
compared to 35 FTE as of March 31, 2007. We continue to improve our efficiency
as measured by the ratio of assets per employee.  The volume of assets
per employee as of the end of the first quarter of 2008 was $2.9 million
compared to $1.8 million at the end of March 2007.




Occupancy
and equipment expenses totaled $243 thousand for the three months ended March
31, 2008, compared to $218 thousand for the three month period ended March 31,
2007. The increase was primarily attributable to maintenance contracts on
equipment and increased depreciation expense. Depreciation expense of fixed
asset and tenant improvements for the three months ended March 31, 2008 was $94
thousand compared to $88 thousand for the same period in 2007.




Professional
fees for the three months ended March 31, 2008, were $143 thousand compared to
$100 thousand for the same time period in 2007. The increase in these costs in
2008 was attributable to increased external auditing costs and preparation for
compliance with Section 404 of Sarbanes-Oxley.  Data processing
expense was $138 thousand for the three months ended March 31, 2008 compared to
$101 thousand for the same time period in 2007. The increase in expenses in 2008
was primarily attributable to core processing costs, cash management products
including the introduction of remote deposit capture products, network
administration, and software license fees.




A summary
of other expenses for the three months ended March 31, 2008 and 2007 is as
follows:




16






Three Months Ended March 31,
      2008
              
              
              Three Months Ended March 31,
      2007Data
    Processing
              
              $
              138,221
              
              
              $
              101,171Office
    Expenses
              
              
              101,281
              
              
              
              76,355Marketing
              
              
              99,705
              
              
              
              61,610Regulatory
      Assessments
              
              
              30,340
              
              
              
              7,624Insurance
    Costs
              
              
              27,006
              
              
              
              30,162Loan-related costs
      (1)
              
              
              13,689
              
              
              
              6,146Recruiting
      Costs
              
              
              -
              
              
              
              32,689Director-related expenses
      (2)
              
              
              3,689
              
              
              
              16,422Other
              
              
              12,183
              
              
              
              4,678$
              426,113
              
              
              $
              336,857(1) Primarily consists of
      appraisal fees, environmental reports andthe provision for unfunded loan
      commitments.(2) Primarily consists of costs
      associated with training conferences anddirector stock option
      expense.






Income
Taxes




No
federal or state tax expense or federal or state tax benefit has been recorded
for the quarters ended March 31, 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 (i.e. more
likely than not that we will earn a profit).




Financial
Condition as of March 31, 2008




Total
assets as of March 31, 2008, were $114.9 million, consisting primarily of cash
and fed funds sold of $8.1 million and net loans of $104.8 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 March 31, 2008 were $102.4 million
compared with $99.0 million as of December 31, 2007, and shareholder’s equity as
of March 31, 2008 was $12.3 million compared with $12.8 million as of December
31, 2007.




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




At March
31, 2008, we had $5.3 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 decrease in fed funds was due to the
increase in outstanding loans.




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 March
31, 2008 and December 31, 2007, our securities consisted solely of $405 thousand
in Federal Reserve Bank Stock, having a book and estimated fair value of $405
thousand and a weighted average yield of 6.0%. At March 31, 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:






17




March 31,
    2008
              
              
              December 31,
      2007Real estate
              
              (Dollars in
      thousands)1-4 residential
      (1)
              
              $
              4,282
              
              
              
              4.0
              %
              
              $
              2,655
              
              
              
              2.7
              %Multi-Family
              
              
              719
              
              
              
              0.7
              %
              
              
              720
              
              
              
              0.7
              %Non-farm,
      non-residential
              
              
              40,312
              
              
              
              37.9
              %
              
              
              40,951
              
              
              
              41.9
              %Construction & Land
      Development
              
              
              32,573
              
              
              
              30.6
              %
              
              
              31,164
              
              
              
              31.9
              %Commercial
              
              
              28,228
              
              
              
              26.5
              %
              
              
              21,827
              
              
              
              22.4
              %Consumer
              
              
              277
              
              
              
              0.3
              %
              
              
              327
              
              
              
              0.3
              %106,391
              
              
              
              100
              %
              
              
              97,644
              
              
              
              100
              %Net deferred loan costs, premiums
      and discounts
              
              
              272
              
              
              
              
              
              
              
              230Allowance for loan
      losses
              
              
              ( 1,895
              )
              
              
              
              
              
              
              ( 1,815
              )$
              104,768
              
              
              
              
              
              
              $
              96,059(1) Comprised of second mortgage
      home loans under home equity lines of credit.








Net loans
as a percentage of total assets were 91.2% as of March 31, 2008, and 85.4% as of
December 31, 2007.




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 March
31, 2008, we held $41.0 million in commercial and multi-family real estate loans
outstanding, representing 38.6% of gross loans receivable, and undisbursed
commitments of $1.2 million. Of this total, $5.9 million were SBA loans with no
undisbursed commitments. The remaining real estate portfolio was comprised of
$32.6 million in construction loans representing 30.6% of gross loans receivable
with undisbursed commitments of $12.6 million, and $4.3 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 $3.6
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,
2008, we held $28.2 million in commercial loans outstanding, representing 26.5%
of gross loans receivable, and undisbursed commitments of $16.7 million. Of this
total, $6.7 million were SBA loans with $609 thousand 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 March 31, 2008, consumer loans totaled $277 thousand,
representing 0.3% of gross loans receivable and undisbursed commitments of $115
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.  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 March 31, 2008, real estate
loans comprised 73.2% 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.




18




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 March 31, 2008:




As of March 31,
      2008(Dollars in
      thousands)One Year
                or Less
              
              
              Over 1
      Year
                through 5
    Years
              
              
              Over 5
      Years
              
              
              TotalFixed Rate
              
              
              Floating or Adjustable
      Rate
              
              Fixed Rate
              
              
              Floating
      or
                Adjustable
      RateReal estate —
      secured
              
              $
              1,410
              
              
              $
              4,820
              
              
              $
              2,810
              
              
              $
              9,261
              
              
              $
              27,013
              
              
              $
              45,313Real estate —
      construction
              
              
              28,960
              
              
              
              -
              
              
              
              3,612
              
              
              
              -
              
              
              
              -
              
              
              
              32,573Commercial and
      industrial
              
              
              10,113
              
              
              
              5,548
              
              
              
              4,787
              
              
              
              3,313
              
              
              
              4,467
              
              
              
              28,228Consumer
              
              
              109
              
              
              
              45
              
              
              
              
              
              
              
              94
              
              
              
              29
              
              
              
              277Total
              
              $
              40,592
              
              
              $
              10,413
              
              
              $
              11,209
              
              
              $
              12,668
              
              
              $
              31,509
              
              
              $
              106,391


Nonperforming
Loans and Other Assets




Nonperforming
assets consist of loans 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, 2008, we had one $1.0 million non-accruing
loan and $954 thousand in restructured debt. The table below provides
information with respect to the components of the Bank’s non-performing assets
as of the dates indicated:




Nonaccrual, Past Due and
      Restructured Loans(Dollars in
      Thousands)March 31,
    2008
              
              
              December 31,
      2007NonaccrualReal estate
              
              $
              -
              
              
              $
              -Construction & Land
      Development
              
              
              1,025
              
              
              
              2,467Commercial
              
              
              -
              
              
              
              -Consumer
              
              
              -
              
              
              
              -Past Due 90 days or
      more
              
              
              -
              
              
              
              -Restructured
      Debt
              
              
              954
              
              
              
              -Total Non-Performing
      Loans
              
              $
              1,979
              
              
              $
              2,467Nonperforming loans as a percent
      of total gross loans
              
              
              1.86
              %
              
              
              2.53
              %Allowance for loan losses to
      nonperforming loans
              
              
              96
              %
              
              
              74
              %Allowance for loan losses to
      classified loans net of related allowance for impaired
      loans
              
              
              69
              %
              
              
              65
              %




Management’s
classification of a loan as nonaccrual is an indication that there is reasonable
doubt as to the full collectability of principal and/or interest on the loan.
Generally it is the Bank's policy that a loan that is past due 90 days or more
will be placed on non-accrual although a loan may be placed on non-accrual
before this if management has sufficient evidence that warrants it.  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.




Total
nonperforming assets decreased to $2.0 million at March 31, 2008 from $2.5
million at December 31, 2007, as a result of charge offs of $475 thousand to
bring one construction loan to the collateral fair value less cost of sale. The
other loan that was on nonaccrual at December 31, 2007, was renegotiated with
the borrower.




19




On April 22, 2008, a purchased
participation construction loan in the amount of $996 thousand was placed on
non-accrual, following the decision made by the lead bank due to deterioration
in other credits with the same borrower. At the same time, we reversed $12
thousand in interest income accrued on this loan. This loan was classified as
substandard at March 31, 2008.




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 collateral fair value if the loan is
collateralized, less costs to sell.




The
following table provides information on impaired loans:




March 31,
    2008
              
              
              December 31,
      2007(Dollars in
      thousands)Impaired loans with specific
      reserves
              
              $
              954
              
              
              $
              2,467Impaired loans without specific
      reserves
              
              
              1,671
              
              
              
              -Total impaired
      loans
              
              
              2,625
              
              
              
              2,467Related allowance for loan losses
      on impaired loans
              
              
              (286
              )
              
              
              (590
              )Net recorded investment in
      impaired loans
              
              $
              2,339
              
              
              $
              1,877Average balance during the year on
      impaired loans
              
              $
              3,206
              
              
              $
              2,456Interest income recognized on
      impaired loans
              
              $
              51
              
              
              $
              126




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 eight loans classified as
“substandard” at March 31, 2008, totaling $5.2 million, including the loans
shown in the table above.




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 remainingcollateral 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 ofMarch
31, 2008,was
adequate to absorb the known and inherent risksof
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 provenincorrect
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.




20




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, with the actual balance being
at or above the higher amount. The first method involves classifying the loans
by type and applying historical loss rates using an eight 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. 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. Our allowance
was $1.9 million, or 1.78% of outstanding principal as of March 31, 2008,
compared to $1.8 million or 1.86% at December 31, 2007.




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 March 31, 2008, this
allowance was $86 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 three months ended March 31, 2008, charge-offs
totaling $569 thousand were taken, all related to construction
loans.




Nonearning
Assets




Premises,
leasehold improvements and equipment totaled $798 thousand at March 31, 2008,
net of accumulated depreciation of $1.0 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 $22 thousand.




Deposits




Deposits
are our primary source of funds.  Demand, or non-interest bearing
checking, accounts as a percentage of total deposits were 19.8% at March 31,
2008, compared to 17.8% at December 31, 2007.




The
following table sets forth the amount and maturities of the time deposits as of
March 31, 2008:




21




At March 31,
      2008Time Deposits
      of
                $100,00 or
    more
              
              
              Other Time
                Deposits
              
              
              Total Time
                Deposits(Dollars in
      thousands)Three months or
      less
              
              $
              552
              
              
              
              12,895
              
              
              $
              13,447Over three months through six
      months
              
              
              1,119
              
              
              
              8,392
              
              
              
              9,511Over six months through 12
      months
              
              
              1,400
              
              
              
              4,528
              
              
              
              5,928Over 12
    months
              
              
              866
              
              
              
              2,393
              
              
              
              3,259Total
              
              $
              3,937
              
              
              $
              28,208
              
              
              $
              32,145




We had
$14.7 million of brokered certificates of deposit with the individual balances
of under $100,000 at March 31, 2008. Of this total, $1.9 million consisted of
public funds, none of which required collateralization. In the table above the
brokered funds are shown as part of Other Time Deposits with maturities of $8.4
million in Three months or less, $4.0 million  in Over six months
through twelve months, $2.0 million in Over six months through twelve, and $232
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 three months ended March 31, 2008:




At March 31,
      2008Return on
      assets
              
              
              -4.17
              %Return on
      equity
              
              
              -39.09
              %Dividend payout
      ratio
              
              
              0
              %Equity to assets
      ratio
              
              
              10.7
              %






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 March 31, 2008, commitments to extend credit
included approximately $265 thousand for letters of credit, $18.8 million for
revolving lines of credit arrangements including $3.6 million in real-estate
secured lines, and $11.8 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 March 31, 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 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.




22




As of
March 31, 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 March 31,
      2008:Total Capital
      (to Risk-Weighted Assets)
              
              $
              12,648
              
              
              
              10.8
              %
              
              $
              9,333
              
              
              
              8.0
              %
              
              $
              11,666
              
              
              
              10.0
              %Tier 1 Capital
      (to Risk-Weighted Assets)
              
              $
              11,183
              
              
              
              9.6
              %
              
              $
              4,666
              
              
              
              4.0
              %
              
              $
              7,000
              
              
              
              6.0
              %Tier 1 Capital
      (to Average Assets)
              
              $
              11,183
              
              
              
              9.9
              %
              
              $
              4,517
              
              
              
              4.0
              %
              
              $
              5,647
              
              
              
              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
change could increase the premiums that the Bank pays for the FDIC insurance and
could limit our ability to use brokered deposits to fund this growth. Possible
alternatives to remain or regain a well-capitalized status include adding
capital organically through net income, raising additional capital to allow for
growth, or restraining future growth. Management is currently assessing the
alternatives but expects to remain well capitalized through the second quarter
of 2008.




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 March 31,
      2008:Total Capital
      (to Risk-Weighted Assets)
              
              $
              13,150
              
              
              
              11.3
              %
              
              $
              9,333
              
              
              
              8.0
              %Tier 1 Capital
      (to Risk-Weighted Assets)
              
              $
              11,685
              
              
              
              10.0
              %
              
              $
              4,666
              
              
              
              4.0
              %Tier 1 Capital
      (to Average Assets)
              
              $
              11,685
              
              
              
              10.3
              %
              
              $
              4,517
              
              
              
              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
              %




Liquidity
Management




At March
31, 2008, the Company (excluding the Bank) had approximately $500 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 $8.1 million, or 7% of total Bank assets, at
March 31, 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.




23




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 March 31, 2008, the loan to
deposit ratio was 103% and brokered deposits represented 14% 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. A large change in
interest rates may significantly decrease the Bank’s net interest income and
eliminate the Company’s profitability. Most of the factors that cause changes in
market interest rates, including economic conditions, are beyond the Company’s
control. While the Bank takes measures to minimize the effect that changes in
interest rates has on its net interest income and profitability, these measures
may not be effective.  To lessen the impact of these fluctuations, the
Bank 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.





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.




24




At March
31, 2008, an analysis was performed using the Risk Monitor model provided by
Fidelity Regulatory Solutions and utilizing the Bank’s March 31, 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
              
              
              0.25
              %
              
              
              1.25
              %
              
              
              2.25
              %
              
              
              3.25
              %
              
              
              4.25
              %Net Interest Income
      Change
              
              
              (174
              )
              
              
              (79
              )
              
              
              -
              
              
              
              48
              
              
              
              89% Change
              
              
              -3.3
              %
              
              
              -1.5
              %
              
              
              -
              
              
              
              0.9
              %
              
              
              1.7
              %Equity Capital Change
      %
              
              
              -7.9
              %
              
              
              -3.5
              %
              
              
              -
              
              
              
              2.6
              %
              
              
              5.2
              %Net Interest
      Margin
              
              
              4.55
              %
              
              
              4.64
              %
              
              
              4.71
              %
              
              
              4.75
              %
              
              
              4.78
              %




Because
the Bank has more assets, primarily loans, that are rate-sensitive than
liabilities, when rates decrease net interest income decreases. Also, when rates
decrease, borrowers with fixed-rate loans are more likely to
refinance their loans at a lower rate. When rates rise, these same
borrowers generally maintain their fixed-rate loans while the deposit
costs generally increase. Therefore, the impact that an increase in rates has is
generally less than a decrease of the same amount, i.e. 100 basis
points.




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  periodand
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 netinterest
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 March
31, 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.




25






As
      of March 31, 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
            
            $
            5,300
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,832
            
            
            $
            8,132Investments
      and FRB Stock
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            405
            
            
            
            -
            
            
            
            405Loans  (1)
            
            
            -
            
            
            
            46,159
            
            
            
            9,989
            
            
            
            9,298
            
            
            
            39,921
            
            
            
            1,025
            
            
            
            106,392Fixed
      and other assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (79
            )
            
            
            (79
            )Total
      Assets
            
            $
            5,300
            
            
            $
            46,159
            
            
            $
            9,989
            
            
            $
            9,298
            
            
            $
            40,326
            
            
            $
            3,778
            
            
            $
            114,850Liabilities
      and Stockholders’ Equity:Interest-bearing
      checking, savings and money market accounts
            
            $
            50,002
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            20,260
            
            
            $
            70,262Certificates
      of deposit
            
            
            -
            
            
            
            13,447
            
            
            
            15,439
            
            
            
            3,173
            
            
            
            86
            
            
            
            -
            
            
            
            32,145Borrowed
      funds
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      liabilities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            757
            
            
            
            757Stockholders’
      equity
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,685
            
            
            
            11,685Total
      liabilities and stockholders’ equity
            
            $
            50,002
            
            
            $
            13,447
            
            
            $
            15,439
            
            
            $
            3,173
            
            
            $
            86
            
            
            $
            32,703
            
            
            $
            114,850Interest
      rate sensitivity gap
            
            $
            (44,702
            )
            
            $
            32,712
            
            
            $
            (5,450
            )
            
            $
            6,125
            
            
            $
            40,240Cumulative  interest
      rate sensitivity gap
            
            $
            (44,702
            )
            
            $
            (11,990
            )
            
            $
            (17,440
            )
            
            $
            (11,315
            )
            
            $
            28,926Cumulative
      gap to total assets
            
            
            -38.9
            %
            
            
            -10.4
            %
            
            
            -15.2
            %
            
            
            -9.9
            %
            
            
            25.2
            %Cumulative
      interest-earning assets to cumulative interest-bearing
      liabilities
            
            
            10.6
            %
            
            
            81.1
            %
            
            
            77.9
            %
            
            
            86.2
            %
            
            
            135.2
            %(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
March 31, 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 March 31, 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 March 31, 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.






26






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




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




Not
applicable.




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 reference31.1
            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.






27




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 BANCORP




Date:  May
15,
2008                                                                 By:/s/  Colin
M Forkner


Colin M.
Forkner


Chief
Executive Officer








Date:  May
15,
2008                                                                By:/s/  Terry
Stalk


Terry Stalk


Chief Financial Officer