**Table
            of Contents**





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10 - QSB**




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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the quarterly period ended September 30, 2006**




Commission
      File Number: 333-118859




**PACIFIC
      COAST NATIONAL BANCORP**


(Exact
      name of registrant as specified in its charter)




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


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


Yes x
      No o




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




Yes o
      No x




The
      number of shares outstanding of the issuer’s Common Stock as of November 10,
      2006, was 2,281,300 shares.





**Table
        of Contents**




**PACIFIC
      COAST NATIONAL BANCORP**




INDEX




PAGEPART
                  I - FINANCIAL INFORMATIONItem
                  1 -
              Financial
                  StatementsConsolidated
                  Balance Sheet at September 30, 2006 (unaudited) and December 31,
                  2005
              3Consolidated
                  Statements of Operations for the three months and nine months ended
                  September 30 2006 (unaudited) and 2005 (unaudited)
              4Consolidated
                  Statement of Cash Flows for the nine months ended September 30
                  2006
                  (unaudited) and 2005 (unaudited)
              5Condensed
                  Notes to Unaudited Consolidated Financial Statements
              6Item
                  2 -
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              7Item
                  3 -
              Controls
                  and Procedures
              21PART
                  II - OTHER INFORMATIONItem
                  1 -
              Legal
                  Proceedings
              22Item
                  2 -
              Changes
                  in Securities and Use of Proceeds
              22Item
                  3 -
              Defaults
                  upon Senior Securities
              22Item
                  4 -
              Submission
                  of Matters to a Vote of Security Holders
              22Item
                  5 -
              Other
                  Information
              22Item
                  6 -
              Exhibits
                  and Reports on Form 8-K
              22Signatures
              23





-2-
 **Table
          of Contents**




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




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




**PACIFIC
      COAST NATIONAL BANCORP**


**CONSOLDIATED
      BALANCE SHEETS**





**ASSETS**




September
                  30, 2006
              
              December
                  31,(unaudited)
              
              2005Cash
                  and due from banks
              
              $
              2,427,611
              
              $
              1,699,481Federal
                  funds sold
              
              
              13,640,000
              
              
              6,580,000**TOTAL
                  CASH AND CASH EQUIVALENTS**
              
              
              16,067,611
              
              
              8,279,481Time
                  deposits in other financial institutions
              
              
              —
              
              
              2,750,000Securities
                  held to maturity
              
              
              9,937,974
              
              
              7,997,943Loans,
                  net
              
              
              25,099,538
              
              
              10,230,122Premises
                  and equipment, net
              
              
              1,220,760
              
              
              1,154,066Federal
                  Reserve Bank stock, at cost
              
              
              493,800
              
              
              553,700Accrued
                  interest and other assets
              
              
              292,832
              
              
              244,853$
              53,112,515
              
              $
              31,210,165




**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**




DepositsNoninterest-bearing
                  demand
              
              $
              11,038,864
              
              $
              4,266,093Interest-bearing
                  demand and NOW accounts
              
              
              3,059,495
              
              
              788,633Money
                  market
              
              
              15,597,402
              
              
              3,332,615Savings
              
              
              108,797
              
              
              86,283Time
                  certificates of deposit of $100,000 or more
              
              
              4,136,354
              
              
              2,412,465Other
                  time certificates of deposit
              
              
              2,191,374
              
              
              1,467,341**TOTAL
                  DEPOSITS**
              
              
              36,132,286
              
              
              12,353,430Accrued
                  interest and other liabilities
              
              
              264,985
              
              
              146,509**TOTAL
                  LIABILITIES**
              
              
              36,397,271
              
              
              12,499,939Shareholders'
                  equityCommon
                  stock - $0.01 par value; 10,000,000 shares authorized;issued
                  and outstanding: 2,281,300 shares at September 30,2006
                  and 2,280,000 shares at December 31, 2005
              
              
              22,813
              
              
              22,800Additional
                  paid-in capital
              
              
              24,506,139
              
              
              23,271,720Accumulated
                  deficit
              
              
              (
                  7,813,708
              )
              
              (
                  4,584,294
              )**TOTAL
                  SHAREHOLDERS' EQUITY**
              
              
              16,715,244
              
              
              18,710,226$
              53,112,515
              
              $
              31,210,165
 See
      accompanying condensed notes to unaudited consolidated financial
      statements.


-3-
 **Table
          of Contents**




**PACIFIC
      COAST NATIONAL BANCORP**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS
      (UNAUDITED)**




Three
                  Months Ended
                September 30,
              
              Nine
                  Months Ended
                September 30,2006
              
              2005
              
              2006
              
              2005Interest
                  incomeInterest
                  and fees on loans
              
              $
              469,616
              
              $
              54,314
              
              $
              1,090,568
              
              $
              63,486Federal
                  funds sold
              
              
              210,010
              
              
              151,018
              
              
              381,630
              
              
              226,314Investment
                  securities
              
              
              87,967
              
              
              29,371
              
              
              259,883
              
              
              29,371Other
              
              
              17,431
              
              
              13,581
              
              
              57,423
              
              
              17,871785,024
              
              
              248,284
              
              
              1,789,504
              
              
              337,042Interest
                  expenseTime
                  certificates of $100,000 or more
              
              
              51,556
              
              
              7,406
              
              
              129,410
              
              
              8,420Other
                  deposits
              
              
              150,480
              
              
              22,136
              
              
              269,538
              
              
              23,552202,036
              
              
              29,542
              
              
              398,948
              
              
              31,972Net
                  interest income
              
              
              582,988
              
              
              218,742
              
              
              1,390,556
              
              
              305,070Provision
                  for loan losses
              
              
              72,462
              
              
              38,307
              
              
              226,264
              
              
              42,812Net
                  interest income afterprovision
                  for loan losses
              
              
              510,526
              
              
              180,435
              
              
              1,164,292
              
              
              262,258Noninterest
                  incomeService
                  charges and fees
              
              
              5,192
              
              
              385
              
              
              27,431
              
              
              607Other
                  income
              
              
              —
              
              
              1,521
              
              
              87,318
              
              
              1,5215,192
              
              
              1,906
              
              
              114,749
              
              
              2,128Noninterest
                  expenseSalaries
                  and employee benefits
              
              
              936,485
              
              
              441,367
              
              
              2,941,668
              
              
              606,867Occupancy
              
              
              203,622
              
              
              194,641
              
              
              576,300
              
              
              243,152Professional
                  services
              
              
              39,984
              
              
              30,154
              
              
              143,804
              
              
              43,283Data
                  processing
              
              
              99,062
              
              
              92,710
              
              
              311,369
              
              
              143,050Office
                  expenses
              
              
              95,754
              
              
              103,705
              
              
              280,963
              
              
              144,980Marketing
              
              
              55,312
              
              
              81,396
              
              
              159,869
              
              
              111,000Other
              
              
              36,185
              
              
              10,593
              
              
              92,882
              
              
              13,303Pre-Opening
                  Expenses
              
              
              —
              
              
              —
              
              
              —
              
              
              1,216,9501,466,404
              
              
              954,566
              
              
              4,506,855
              
              
              2,522,585Loss
                  before income taxes
              
              
              (
                  950,686
              )
              
              (
                  772,225
              )
              
              (
                  3,227,814
              )
              
              (
                  2,258,199
              )Provision
                  for income taxes
              
              
              —
              
              
              —
              
              
              1,600
              
              
              —Net
                  loss
              
              $
              (
                  950,686
              )
              $
              (
                  772,225
              )
              $
              (
                  3,229,414
              )
              $
              (
                  2,258,199
              )Per
                  share data:Weighted-average
                  shares outstanding
              
              
              2,281,300
              
              
              2,280,000
              
              
              2,280,952
              
              
              2,280,000Net
                  loss, basic
              
              $
              (
                  0.42
              )
              $
              (
                  0.34
              )
              $
              (
                  1.42
              )
              $
              (
                  0.99
              )
 See
      accompanying condensed notes to unaudited consolidated financial
      statements.


-4-
 **Table
          of Contents**




**PACIFIC
      COAST NATIONAL BANCORP**


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





Nine
                  Months Ended September 30, 2006
              
              Nine
                  Months Ended September 30, 2005Cash
                  flows from operating activities:Net
                  loss
              
              $
              (
                  3,229,414
              )
              $
              (
                  2,258,199
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              
              281,816
              
              
              62,671Provision
                  for loan losses
              
              
              226,264
              
              
              43,501Provision
                  for off balance sheet contingencies
              
              
              5,205
              
              
              5,067Amortization
                  (accretion) of investment securities
              
              
              (
                  1,311
              )
              
              248Gain
                  on Sale of Loans
              
              
              (
                  87,318
              )
              
              —Stock-based
                  compensation
              
              
              1,218,182
              
              
              —Noncash
                  expense for organizer warrants
              
              
              —
              
              
              494,520Other
                  items, net
              
              
              65,292
              
              
              (
                  276,882
              )Net
                  cash used by operating activities
              
              
              (
                  1,521,284
              )
              
              (
                  1,929,074
              )Cash
                  flows from investing activities:Purchase
                  or maturity of time deposits in other financial
                  institutions
              
              
              2,750,000
              
              
              (
                  750,000
              )Purchase
                  of investment securities held to maturity
              
              
              (
                  3,938,720
              )
              
              (
                  5,998,175
              )Maturity
                  of investment securities held to maturity
              
              
              2,000,000
              
              
              —Purchase
                  or redemption of FRB stock
              
              
              59,900
              
              
              (
                  585,000
              )Proceeds
                  from Sale of Loans
              
              
              1,558,650
              
              
              —Loan
                  Originations
              
              
              (
                  16,567,012
              )
              
              (
                  4,951,854
              )Purchases
                  of bank premises and equipment
              
              
              (
                  348,510
              )
              
              (
                  1,158,311
              )Net
                  cash used in investing activities
              
              
              (
                  14,485,692
              )
              
              (
                  13,443,340
              )Cash
                  flows from financing activities:Net
                  increase in demand deposits and savings accounts
              
              
              21,330,934
              
              
              6,642,679Net
                  increase in time deposits
              
              
              2,447,922
              
              
              1,975,034Net
                  change in borrowings
              
              
              —
              
              
              (
                  1,560,000
              )Proceeds
                  from sale of common stock
              
              
              16,250
              
              
              22,800,000Net
                  cash provided by financing activities
              
              
              23,795,106
              
              
              29,857,713Net
                  increase in cash and cash equivalents
              
              
              7,788,130
              
              
              14,485,299Cash
                  and cash equivalents at beginning of year
              
              
              8,279,481
              
              
              57,270Cash
                  and cash equivalents at end of year
              
              $
              16,067,611
              
              $
              14,542,569Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              280,012
              
              $
              21,675Income
                  taxes paid
              
              $
              1,600
              
              $
              —


See
      accompanying condensed notes to unaudited consolidated financial
      statements


-5-
 **Table
          of Contents**




**PACIFIC
      COAST NATIONAL BANCORP**


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





**Note
      1 - Basis of Presentation**




The
      consolidated financial statements include the amounts of Pacific Coast National
      Bancorp (the “Company”) and its wholly-owned subsidiary, Pacific Coast National
      Bank (the “Bank”). All significant inter-company accounts have been eliminated
      on consolidation. The Bank opened for business on May 16, 2005. Prior to May
      16,
      2005, the Company was a “Development-Stage Company” as defined by Statement on
      Financial Standards 7. The cumulative loss from operations through the Company’s
      development period (July 2, 2003 to May 16, 2005) was $2.2 million.




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




The
      consolidated interim financial statements included in this report are unaudited
      but reflect all adjustments which, in the opinion of management, are necessary
      for a fair presentation of the financial position and results of operations
      for
      the interim periods presented. All such adjustments are of a normal recurring
      nature. The results of operations for the period ended September 30, 2006,
      are
      not necessarily indicative of the results of a full year’s operations. For
      further information, refer to the financial statements and footnotes included
      in
      the Company’s annual report on Form 10-KSB for the year ended December 31,
      2005.




**Note
      2 - Loss Per Share**




Loss
      per
      common share is based on the weighted average number of common shares
      outstanding during the period. The effects of potential common shares
      outstanding during the period would be included in diluted loss per share;
      however, the effect of potential shares would be antidilutive during all periods
      presented.




**Note
      3 - Stock-Based Compensation**




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




The
      Company accounts for stock-based employee compensation as prescribed by SFAS
      No.
      123 (Revised), *Share-Based
      Payment* .
      This
      standard revises SFAS No. 123, APB Opinion No. 25 and related accounting
      interpretations, and eliminates the use of the intrinsic value method for
      employee stock-based compensation. SFAS No. 123 (R) requires compensation costs
      related to share-based payment transactions to be recognized in the financial
      statements over the period that an employee provides service in exchange for
      the
      award. Prior to January 1, 2006, the Company used the intrinsic value method
      of
      APB Opinion No. 25 to value share-based options granted to employees and board
      members. The new standard requires the expensing of all share-based
      compensation, including options, using the fair value-based method. The
      effective date of this standard for the Company was January 1, 2006.




During
      2005 and 2006, the Company granted options to employees from its 2005 Stock
      Incentive Plan that received shareholder approval on April 17, 2006. The Company
      began to record compensation expense in accordance with SFAS 123 (Revised)
      in
      the second quarter of 2006. The Company is unable to estimate the impact of
      this
      Statement on its financial condition and results of operations as the decision
      to grant option awards is made annually on a case-by-case basis. The actual
      amount of expense will be based on the fair value of the Company’s stock when
      the Plan was approved and will be increased for any additional grants that
      are
      made in the future. However, based on the current fair value of the Company’s
      stock, a risk-free rate between 3.95% and 5.05%, expected volatility of 25%,
      and
      an expected life of between 6.5 and 8.5 years, the amount of compensation
      expense in 2006 related to options granted to date is estimated to be
      approximately $1.5 million for 2006, $750 thousand for 2007, and $200 thousand
      for 2008. These amounts are reflected in the financial statements as a part
      of
      current operating expenses, however they are returned to shareholders’ equity in
      the form of additional paid-in capital, resulting in no impact on total
      capital.


-6-
 **Table
          of Contents**




**Note
      4 - Current Accounting Pronouncements**





As
      discussed in the preceding note, SFAS No.123 (R) became effective January 1,
      2006 and has been fully implemented by the Company.





In
      March
      2006, the FASB issued SFAS No. 156, *“Accounting
      for Servicing of Financial Assets, an amendment of FASB Statement No. 140.”* The
      statement amends SFAS No. 140 by  (1) requiring the separate accounting for
      servicing assets and servicing liabilities, which arise from the sale of
      financial assets; (2) requiring all separately recognized serving assets and
      servicing liabilities to be initially measured at fair value, if practicable;
      and (3) permitting an entity to choose between an amortization method or a
      fair
      value method for subsequent measurement for each class of separately recognized
      servicing assets and servicing liabilities.  The Company must adopt the
      statement no later than January 1, 2007.  Management does not expect that
      the adoption of this new standard will have a material impact on the Company’s
      financial position, results of operations or cash flows.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes* .” 
      This interpretation applies to all tax positions accounted for in accordance
      with SFAS No. 109, *“Accounting
      for Income Taxes.”* FIN
      48 clarifies the application of SFAS No. 109 by defining the criteria that
      an
      individual tax position must meet in order for the position to be recognized
      within the financial statements and provides guidance on measurement,
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition for tax positions.  The Company must
      adopt the interpretation by January 1, 2007.  Management does not expect
      that the adoption of this new interpretation will have a material impact on the
      Company’s financial position, results of operations or cash flows.




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




**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


**OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




The
      following discussion and analysis presents the Company’s consolidated financial
      condition as of September 30, 2006 and results of operations for the three
      and
      nine months ended September 30, 2006 and 2005. 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-QSB.




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




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




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


-7-
 **Table
          of Contents**




·
            the
                loss of senior management or operating personnel and the potential
                inability to hire qualified personnel at reasonable compensation
                levels;




·
            the
                failure of assumptions underlying the establishment of and provisions
                made
                to the allowance for credit losses;




·
            changes
                in various monetary and fiscal policies and regulations, including
                those
                determined by the Board of Governors of the Federal Reserve System
                (FRB),
                the Office of the Comptroller of the Currency (OCC) and the Federal
                Deposit Insurance Corporation
                (FDIC);




·
            changes
                in general economic conditions and economic conditions in the geographic
                regions and industries in which the Bank operates which may affect,
                among
                other things, the level of nonperforming assets, charge-offs and
                provision
                expense;




·
            adverse
                changes in the local real estate market, which is where most of the
                Bank’s
                loans are concentrated, the substantial majority of which have real
                estate
                as collateral;




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




·
            geopolitical
                conditions, including acts or threats of terrorism, actions taken
                by the
                United States or other governments in response to acts or threats
                of
                terrorism and/or military conflicts which could impact business and
                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;




·
            changes
                in the interest rate environment, which may reduce interest margins
                and
                impact funding sources;




·
            increased
                asset levels and changes in the composition of assets and the resulting
                impact on the capital levels and regulatory capital ratios of the
                Company
                or the Bank;




·
            competition
                with other banks, thrifts, credit unions and other nonbank financial
                institutions and the willingness of users to substitute competitors’
                products and services for the products and services offered by the
                Bank;




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




·
            the
                ability to grow the Bank’s core
                businesses;




·
            decisions
                to change or adopt new business
                strategies;




·
            changes
                in tax laws, rules and regulations as well as Internal Revenue Service
                (IRS) and other governmental agencies’ interpretations
                thereof;




·
            technological
                changes;




·
            changes
                in consumer spending and savings habits;
                and




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




These
      factors and the risk factors referred to in the Company’s Annual Report on Form
      10-KSB for the year ended December 31, 2005 could cause actual results or
      outcomes to differ materially from those expressed in any forward-looking
      statements made by 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 will arise. In addition, management cannot
      assess the impact of each factor on business of the Company or the Bank or
      the
      extent to which any factor, or combination of factors, may cause actual results
      to differ materially from those contained in any forward-looking
      statements.


-8-
 **Table
          of Contents**




**Critical
      Accounting Policies**





Our
      accounting policies are integral to understanding the results reported. In
      preparing its consolidated financial statements, the Company is required to
      make
      judgments and estimates that may have a significant impact upon its financial
      results. Certain accounting policies require the Company to make significant
      estimates and assumptions, which have a material impact on the carrying value
      of
      certain assets and liabilities, and are considered critical accounting policies.
      The estimates and assumptions used are based on the historical experiences
      and
      other factors, which are believed to be reasonable under the circumstances.
      Actual results could differ significantly from these estimates and assumptions,
      which could have a material impact on the carrying value of assets and
      liabilities at the balance sheet dates and results of operations for the
      reporting periods. For example, the Company’s determination of the adequacy of
      its allowance for loan losses is particularly susceptible to management’s
      judgment and estimates. The following is a brief description of 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 losses
      inherent in the existing loan portfolio. The allowance for loan losses is
      increased by the provision for loan losses charged to expense and reduced by
      loans charged off, net of recoveries. The allowance for loan losses is
      determined based on management’s assessment of several factors: reviews and
      evaluation of individual loans, changes in the nature and volume of the loan
      portfolio, current economic conditions and the related impact on specific
      borrowers and industry groups, historical loan loss experiences and the levels
      of classified and nonperforming loans.





Loans
      are
      considered impaired if, based on current information and events, it is probable
      that 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 and methodologies
      consistent with those that would be utilized by unrelated third
      parties.





Changes
      in the financial condition of individual borrowers, in economic conditions,
      in
      historical loss experience and in the condition of the various markets in which
      collateral may be sold may all affect the required level of the allowance for
      loan losses and the associated provision for loan losses.





*Stock-Based
      Compensation*





The
      Company accounts for stock-based employee compensation as prescribed by SFAS
      No.
      123 (Revised), *Share-Based
      Payment* .
      This
      standard revises SFAS No. 123, APB Opinion No. 25 and related accounting
      interpretations, and eliminates the use of the intrinsic value method for
      employee stock-based compensation. SFAS No. 123 (R) requires compensation costs
      related to share-based payment transactions to be recognized in the financial
      statements over the period that an employee provides service in exchange for
      the
      award.




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 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
      3 - Stock-Based Compensation** of the
      Condensed Notes to the Unaudited Consolidated Financial Statements.




*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.


-9-
 **Table
          of Contents**




**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. The Bank’s principal markets
      include the coastal regions of Southern Orange County and Northern San Diego
      County. As of September 30, 2006, the Company had, on a consolidated basis,
      total assets of $53.1 million, net loans of $25.1 million, total deposits of
      $36.1 million, and shareholders’ equity of $16.7 million. The Bank currently
      operates through a main 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 was incorporated under the laws of the State of California on July
      2,
      2003, to organize and serve as the holding company for the Bank. In 2005, 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
      following discussion focuses on the Company’s financial condition as of
      September 30, 2006 and results of operations for the three and nine months
      ended
      September 30, 2006 and 2005. The Company’s principal operations for this time
      period during 2006 consisted primarily of the operations of Pacific Coast
      National Bank. The Company’s principal operations for this time period during
      2005 included four and one half months of operations related to raising capital
      and organizing the Bank, and four and one half months of Bank operations.
      Comparisons made here will relate to Bank operations and not the organizational
      phase of the Company.




**Results
      of Operations**




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




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




Net
      interest income was $583 thousand for the three months ended September 30,
      2006
      compared to $219 thousand for the same time period in 2005. The net interest
      margin increased to 5.03% for the third quarter of 2006 from 3.60% for the
      third
      quarter of 2005. The Company earned 6.77% on its average interest-earning assets
      of $46.0 million for the third quarter of 2006 compared to 4.08% on $24.0
      million in average earning assets for the third quarter of 2005. The growth
      in
      the loan portfolio and the investment portfolio as well as the increase in
      the
      overnight fund’s rate accounted for the increase in interest income from $248
      thousand in 2005 to $785 thousand in 2006.




During
      the third quarter of 2006, loans accounted for 47% of earning assets, with
      an
      average yield of 8.63%, compared to the third quarter of 2005 when slightly
      more
      than 10% of the average earning assets were loans, with a yield of 8.59%. Total
      loan income, including loan fees of $42 thousand, was $470 thousand for the
      third quarter of 2006 compared to $54 thousand in total loan income, including
      $3 thousand in loan fees, in the third quarter of 2005.




Interest-bearing
      liabilities, consisting entirely of deposits, averaged $21.7 million with an
      average yield of 3.70% during the third quarter of 2006, compared with $5.1
      million in interest-bearing deposits at a yield of 2.27% for the same period
      in
      2005. The increase in yield on deposit products is the result of an increase
      in
      market rates and competitive pressures within the Bank’s market areas. Average
      non-interest bearing demand accounts increased as a percentage of average total
      deposits from 22% in the third quarter of 2005 to 31% in the third quarter
      of
      2006.




The
      following table sets forth the Company’s average balances of assets, liabilities
      and shareholders’ equity, in addition to the major components of net interest
      income and the net interest margin for the quarters indicated.


-10-
 **Table
          of Contents**


**Three
                  Months Ended September 30,****2006**
              
              **2005**ASSETS:
              
              Average
                Balance
              
              Income
                  /
                Expense
              
              Average
                  Rate
                or
                  Yield
              
              Average
                Balance
              
              Income
                  /
                Expense
              
              Average
                  Rate
                or
                  Yield(Dollars
                  in Thousands)
              
              (Dollars
                  in Thousands)Interest-earning
                  assets:Net
                  loans and leases
              
              $
              21,581
              
              $
              470
              
              
              8.63
              %
              $
              2,493
              
              $
              54
              
              
              8.59
              %Securities
                  of U.S. government agencies
              
              
              7,811
              
              
              88
              
              
              4.47
              %
              
              2,760
              
              
              29
              
              
              4.22
              %Other
                  investment securities
              
              
              501
              
              
              17
              
              
              13.46
              %
              
              1,107
              
              
              14
              
              
              4.87
              %Federal
                  funds sold
              
              
              16,101
              
              
              210
              
              
              5.17
              %
              
              17,640
              
              
              151
              
              
              3.37
              %Total
                  interest-earning assets
              
              
              45,994
              
              
              785
              
              
              6.77
              %
              
              24,000
              
              
              248
              
              
              4.08
              %Total
                  noninterest-earning assets
              
              
              2,857
              
              
              
              
              
              
              
              
              2,436TOTAL
                  ASSETS
              
              $
              48,851
              
              
              
              
              
              
              
              $
              26,436LIABILITIES
                  AND STOCKHOLDERS’ EQUITY:Interest-bearing
                  liabilities:NOW
                  deposits
              
              $
              2,479
              
              $
              9
              
              
              1.44
              %
              $
              659
              
              $
              1
              
              
              0.60
              %Money
                  market and Savings deposits
              
              
              12,337
              
              
              123
              
              
              3.96
              %
              
              3,070
              
              
              16
              
              
              0.91
              %Time
                  certificates of deposit in denominations of $100,000 or
                  more
              
              
              4,369
              
              
              52
              
              
              4.68
              %
              
              885
              
              
              7
              
              
              3.30
              %Other
                  time deposits
              
              
              2,466
              
              
              18
              
              
              2.97
              %
              
              505
              
              
              5
              
              
              3.58
              %Total
                  interest-bearing liabilities
              
              
              21,651
              
              
              202
              
              
              3.70
              %
              
              5,119
              
              
              29
              
              
              2.27
              %Noninterest-bearing
                  liabilities:Noninterest-bearing
                  deposits
              
              
              9,853
              
              
              202
              
              
              0
              
              
              1,449
              
              
              29
              
              
              0Other
                  liabilities
              
              
              280
              
              
              
              
              
              
              
              
              22Total
                  noninterest-bearing liabilities
              
              
              10,133
              
              
              
              
              
              
              
              
              1,471SHAREHOLDERS’
                  EQUITY
              
              
              17,067
              
              
              
              
              
              
              
              
              19,846TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              48,851
              
              
              
              
              
              
              
              $
              26,436Net
                  interest income
              
              
              
              
              $
              583
              
              
              
              
              
              
              
              $
              219Net
                  interest spread
              
              
              
              
              
              
              
              
              3.07
              %
              
              
              
              
              
              
              
              1.81
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              5.03
              %
              
              
              
              
              
              
              
              3.60
              %


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


-11-
 **Table
          of Contents**




**2006**
              
              **2005**ASSETS:
              
              Average
                Balance
              
              Income
                  /
                Expense
              
              Average
                  Rate
                or
                  Yield
              
              Average
                Balance
              
              Income
                  /
                Expense
              
              Average
                  Rate
                or
                  Yield(Dollars
                  in Thousands)
              
              (Dollars
                  in Thousands)Interest-earning
                  assets:Net
                  loans and leases
              
              $
              17,609
              
              $
              1,090
              
              
              8.27
              %
              $
              1,990
              
              $
              63
              
              
              8.44
              %Securities
                  of U.S. government agencies
              
              
              7,934
              
              
              260
              
              
              4.38
              %
              
              1,897
              
              
              29
              
              
              4.07
              %Other
                  investment securities
              
              
              1,700
              
              
              57
              
              
              4.52
              %
              
              578
              
              
              18
              
              
              8.30
              %Federal
                  funds sold
              
              
              10,214
              
              
              382
              
              
              5.00
              %
              
              17,117
              
              
              226
              
              
              3.52
              %Total
                  interest-earning assets
              
              
              37,457
              
              
              1,789
              
              
              6.38
              %
              
              21,581
              
              
              336
              
              
              4.15
              %Total
                  noninterest-earning assets
              
              
              2,731
              
              
              
              
              
              
              
              
              2,124TOTAL
                  ASSETS
              
              $
              40,188
              
              
              
              
              
              
              
              $
              23,705LIABILITIES
                  AND STOCKHOLDERS’ EQUITY:Interest-bearing
                  liabilities:NOW
                  deposits
              
              $
              1,676
              
              $
              17
              
              
              1.36
              %
              $
              515
              
              $
              1
              
              
              0.52
              %Money
                  market and Savings deposits
              
              
              7,621
              
              
              193
              
              
              3.39
              %
              
              2,470
              
              
              17
              
              
              1.83
              %Time
                  certificates of deposit in denominations of $100,000 or
                  more
              
              
              3,809
              
              
              60
              
              
              2.11
              %
              
              552
              
              
              9
              
              
              4.35
              %Other
                  time deposits
              
              
              2,360
              
              
              128
              
              
              7.25
              %
              
              637
              
              
              5
              
              
              2.09
              %Total
                  interest-bearing liabilities
              
              
              15,466
              
              
              399
              
              
              3.45
              %
              
              4,174
              
              
              32
              
              
              2.04
              %Noninterest-bearing
                  liabilities:Noninterest-bearing
                  deposits
              
              
              6,801
              
              
              399
              
              
              0
              
              
              1,175
              
              
              32
              
              
              0Other
                  liabilities
              
              
              227
              
              
              
              
              
              
              
              
              17Total
                  noninterest-bearing liabilities
              
              
              7,028
              
              
              
              
              
              
              
              
              1,192SHAREHOLDERS’
                  EQUITY
              
              
              17,694
              
              
              
              
              
              
              
              
              18,339TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              40,188
              
              
              
              
              
              
              
              $
              23,705Net
                  interest income
              
              
              
              
              $
              1,391
              
              
              
              
              
              
              
              $
              305Net
                  interest spread
              
              
              
              
              
              
              
              
              2.93
              %
              
              
              
              
              
              
              
              2.11
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              4.96
              %
              
              
              
              
              
              
              
              3.77
              %


The
      average balances shown for 2005 were calculated using only the days that the
      Bank was open for business. Therefore, the year-to-date averages for 2005
      include approximately 137 days’ average balances. Calculating the averages using
      the number of days in the year, while mathematically correct, would not produce
      a meaningful result.




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




***Provision
      for Loan Losses***




A
      provision for loan losses is determined that is considered sufficient to
      maintain an allowance to absorb probable losses inherent in the loan portfolio
      as of the balance sheet date. For additional information concerning this
      determination, see the section of this discussion and analysis captioned *“Allowance
      for Loan Losses.”*




In
      the
      three and nine months ended September 30, 2006, the provision for loan and
      lease
      losses was $72 thousand and $226 thousand respectively. Because the Bank has
      no
      loss history on which to build assumptions for future loan losses, a national
      bank peer group average was used. There were no charge-offs through September
      30, 2006. One non-performing loan was identified during the fourth quarter
      of
      2006, for $5 thousand, and has been subsequently charged off.


-12-
 **Table
          of Contents**




***Noninterest
      Income***




The
      non-interest income for the quarter ended September 30, 2006, was $5 thousand,
      related entirely service charges on deposit accounts and merchant discount
      income. For the nine months ended September 30, 2006, noninterest income was
      $115 thousand including $87 thousand on gain on sale of SBA loans. Fees on
      deposit accounts and merchant discount income make up the remainder of the
      noninterest income. For the period ended September 30, 2005, $2 thousand in
      fee
      income was collected in service charges.




***Noninterest
      Expense***




Total
      noninterest expense was $1.5 million in the third quarter of 2006 and $4.5
      million for the first three quarters of 2006. Included in this expense are
      $284
      thousand and $1.2 million representing a portion of the expense for the employee
      and director stock options granted from May 16, 2005 through September 30,
      2006.
      For additional information concerning this accounting treatment, see *Condensed
      Notes to the Unaudited Financials Statements, Note 3 - Stock-Based Compensation.* ****




For
      the
      same periods in 2005, noninterest expense was $955 thousand and $2.5 million
      respectively. Of that expense, $1.2 million was attributable to pre-opening
      costs for the nine months ended September 30, 2005. Therefore comparisons of
      the
      two years’ noninterest expenses are not meaningful.




The
      major
      components of the 2006 expense are discussed below. As the Bank grows,
      management is committed to controlling costs and expects to moderate noninterest
      expenses relative to revenue growth.




Salaries
      and employee benefits totaled $936 thousand for the third quarter and $2.9
      million for the first three quarters of 2006. Included in this category,
      representing a portion of the expense for the employee stock options granted
      from May 16, 2005, through September 30, 2006, is $276 thousand for the third
      quarter of 2006, and $1.2 million year to date. SFAS No. 123 (R) requires
      compensation costs related to share-based payment transactions to be recognized
      in the financial statements over the period that an employee provides service
      in
      exchange for the award.




Employee
      benefit costs including employer taxes and group insurance accounted for
      approximately 10% of this expense for the third quarter and first three quarters
      of 2006. The Bank employed 29 full-time equivalent (FTE) employees as of
      September 30, 2006 compared to 21 FTE as of September 30, 2005. The volume
      of
      assets per employee as of the end of the third quarter of 2006 was $1,831,000
      compared to $1,338,000 at the end of September 2005.




Occupancy
      and equipment expenses totaled $204 thousand and $576 thousand for the three
      and
      nine month periods ended September 30, 2006, attributable primarily to lease
      costs of $91 thousand and $259 thousand, and depreciation expense of fixed
      asset
      and tenant improvement of $81 thousand and $235 thousand respectively.




Professional
      fees of $40 thousand for the third quarter of 2006 were primarily attributable
      to internal and external auditing fees of $25 thousand, expenses related to
      the
      annual shareholders’ meeting of $6 thousand, and legal fees of $4 thousand. For
      the first three quarters of 2006, professional fees totaled $144 thousand,
      consisting of $45 thousand in legal fees, $56 thousand in accounting and audit
      fees, $17 thousand in compliance fees, and $26 thousand in expenses related
      to
      the preparation of the 10-KSB and the annual shareholders’ meeting.




Data
      processing expense was $99 thousand for the third quarter of 2006, attributable
      primarily to costs associated with the core processing system of $35 thousand,
      network maintenance and security of $21 thousand, software amortization of
      $16
      thousand, and website maintenance of $15 thousand. For the first three quarters
      of 2006, data processing expense was $311 thousand, attributable primarily
      to
      costs associated with the core processing system of $112 thousand, network
      maintenance and security of $68 thousand, software amortization of $47 thousand,
      and website maintenance of $40 thousand. Most of these expenses are routine
      in
      nature and are expected to be fairly consistent. Network administration and
      security expense can fluctuate as new employees and new products are
      added.




Office
      expenses of $96 thousand for the third quarter of 2006 included auto and mileage
      expense of $21 thousand; office supplies of $19 thousand; waived check printing
      charges of $11 thousand; fidelity bond and other insurance premiums of $10
      thousand; regulatory assessments of $7 thousand; armored car and courier expense
      of $6 thousand; recruiting expenses of $5 thousand; and workers compensation
      insurance premiums of $3 thousand. For the nine months ended September 30,
      2006,
      these same expenses were $281 thousand consisting of auto and mileage expense
      of
      $60 thousand; office supplies of $49 thousand; fidelity bond and other insurance
      premiums of $32 thousand; workers compensation insurance premiums of $33
      thousand; armored car and courier expense of $24 thousand; waived check printing
      charges of $24 thousand; recruiting expenses of $13 thousand; and regulatory
      assessments of $20 thousand.


-13-
 **Table
          of Contents**




Promotional
      expenses were $55 thousand for the third quarter of 2006. This included expenses
      related to direct mail campaigns to local businesses, sponsorship of key
      community events, and specific officer-calling programs in the bank’s target
      market. For the nine months ended September 30, 2006, promotional expenses
      were
      $160 thousand.




Other
      expenses for the third quarter of 2006 of $36 thousand consisted of $13 thousand
      in loan production costs, such as appraisals and credit reports, many of which
      will be reimbursed at the time the loans are funded, $8 thousand related to
      the
      annual meeting costs, $6 thousand related to director training, and $8 thousand
      related to the directors’ stock options as outlined in FAS 123(R). For the nine
      months ended September 30, 2006, other expenses totaled $93 thousand which
      included $5 thousand for contingent liabilities, $22 thousand in loan-related
      costs, and $36 thousand related to the annual meeting notification, $15 thousand
      related to director training, and $14 thousand related to director stock option
      expense.




***Income
      Taxes***




$2
      thousand in state taxes were paid during the second quarter of 2006. No federal
      tax expense or federal or state tax benefit has been recorded for the quarter
      ended September 30, 2006 based upon net operating losses. The Company will
      begin
      to recognize income tax benefit at the time it becomes profitable.




**Financial
      Condition as of September 30, 2006**




Total
      assets as of September 30, 2006, were $53.1 million, consisting primarily of
      cash and investments of $26.0 million and net loans of $25.1 million. Total
      deposits were $36.1 million and shareholder’s equity was $16.7
      million.




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




At
      September 30, 2006, the Bank had $13.6 million in federal funds (“fed funds”)
      sold. Federal funds sold allow the Bank to meet liquidity requirements and
      provide temporary holdings until the funds can be otherwise deployed or
      invested. At December 31, 2005, the Bank had an interest-bearing deposit of
      $2
      million with Union Bank of California pledged as collateral for a financial
      letter of credit issued on behalf of one of the Bank’s customers. This deposit
      had a term of 180 days and a rate of 4%. This time deposit matured on May 22,
      2006, and was moved into the Bank’s fed funds investment. Also at December 31,
      2005, the holding company had a time deposit of $750 thousand at The Independent
      BankersBank. This deposit matured on January 25, 2006 and was not renewed.




***Investment
      Securities***




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




At
      September 30, 2006, the Bank’s investment securities consisted of $10.0 million
      in U.S. government-sponsored agencies, with a book value of $9.9 million, an
      estimated fair value of $9.90 million and a weighted average yield of 4.7%,
      and
      $494 thousand in Federal Reserve Bank Stock, having a book value of $494
      thousand, an estimate fair value of $494 thousand, and a weighted average yield
      of 6.0%. At September 30, 2006, none of these investment securities were pledged
      as collateral for any purpose.




The
      table
      below sets forth the amounts and distribution of the investment securities
      and
      the weighted average yields as of the dates indicated.


-14-
 **Table
          of Contents**


**As
                  of September 30, 2006:**
              
              Book
                  Value
              
              Market
                  Value
              
              Weighted
                Average
                  Yield**Securities
                  held to maturity****U.S.
                  Government and Agency Securities:**Within
                  One Year
              
              $
              3,998,230
              
              $
              3,980,020
              
              
              4.26
              %One
                  to Five Years
              
              
              5,939,744
              
              
              5,939,744
              
              
              4.96
              %**Total
                  Securities held to maturity**
              
              $
              9,937,974
              
              $
              9,919,764
              
              
              4.68
              %**As
                  of December 31, 2005:**
              
              
              Book
                  Value
              
              
              Market
                  Value
              
              
              Weighted
                Average
                  Yield**Securities
                  held to maturity****U.S.
                  Government and Agency Securities:**Within
                  One Year
              
              $
              6,001,108
              
              $
              5,984,120
              
              
              4.17
              %One
                  to Five Years
              
              
              1,996,835
              
              
              1,983,760
              
              
              4.35
              %**Total
                  Securities held to maturity**
              
              $
              7,997,943
              
              $
              7,967,880
              
              
              4.22
              %


***Loan
      Portfolio***




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




September
                  30, 2006
              
              December
                  31, 2005Real
                  estateCommercial
              
              $
              13,499,960
              
              $
              7,249,730Construction
              
              
              2,210,514
              
              
              -1-4
                  Family - Revolving
              
              
              1,492,074
              
              
              541,382Commercial
              
              
              8,217,692
              
              
              2,483,127Consumer
              
              
              77,750
              
              
              72,259Gross
                  Loans
              
              
              25,497,990
              
              
              10,346,498Deferred
                  loan fees
              
              
              (
                  84,980
              )
              
              (
                  29,168
              )Allowance
                  for loan losses
              
              
              (
                  313,472
              )
              
              (
                  87,208
              )Net
                  Loans
              
              $
              25,099,538
              
              $
              10,230,122




Net
      loans
      as a percentage of total assets were 47.3% as of September 30, 2006, and 32.8%
      as of December 31, 2005.




The
      real
      estate loan portfolio is comprised of short-term mortgage loans secured
      typically by commercial properties, occupied by the borrower, have terms of
      three to seven years with both fixed and floating rates, and revolving lines
      of
      credit granted to consumers, secured by equity in residential properties, as
      well as construction loans. Construction loans consist primarily of
      single-family residential properties, have a term of less than one year and
      have
      floating rates and commitment fees. Construction loans are typically made to
      builders that have an established record of successful project completion and
      loan repayment. At September 30, 2006, the Bank held $13.5 million in commercial
      real estate loans outstanding, representing 52.9% of gross loans receivable,
      with undisbursed commitments of $1.3 million, $2.2 million in construction
      loans
      representing 8.7% of gross loans receivable with undisbursed commitments of
      $1.2
      million, and $1.5 million in revolving lines secured by 1-4 family residences
      representing 5.9% of gross loans receivable with undisbursed commitments of
      $2.1
      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 September 30, 2006, the Bank held $8.2 million in
      commercial loans outstanding, representing 32.2% of gross loans receivable,
      and
      undisbursed commitments of $3.6 million.


-15-
 **Table
          of Contents**




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
      September 30, 2006, consumer loans totaled $78 thousand, representing 0.3%
      of
      gross loans receivable and undisbursed commitments of $43 thousand.




Loan
      concentrations are considered to exist when there are amounts loaned to a
      multiple number of borrowers engaged in similar activities that would cause
      them
      to be similarly impacted by economic or other conditions. The Bank has
      established select concentrations percentages within the loan portfolio. It
      also
      includes families of credit considered of either higher risk or worthy of
      further review as part of its concentration reporting. While the framework
      has
      been set in place to evaluate the Bank’s potential risk in its portfolio, the
      overall concentration results are not yet meaningful.




Management
      may renew loans at maturity when requested by a customer whose financial
      strength appears to support such a renewal or when such a renewal appears to
      be
      in the best interest of the Bank. The Bank requires payment of accrued interest
      in such instances and may adjust the rate of interest, require a principal
      reduction, or modify other terms of the loan at the time of renewal. Loan terms
      vary according to loan type. The following table shows the maturity distribution
      of loans and leases as of September 30, 2006:




**As
                  of September 30, 2006****(Dollars
                  in thousands)****One
                  Year**
              
              **Over
                  1 Year****or
                  Less**
              
              **through
                  5 Years**
              
              **Over
                  5 Years**
              
              **Total****Fixed
                  Rate**
              
              **Floating
                  or Adjustable Rate**
              
              **Fixed
                  Rate**
              
              **Floating
                  or Adjustable Rate**Real
                  estate — construction
              
              $
              2,211
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              2,211Real
                  estate — secured
              
              
              4,695
              
              
              —
              
              
              10,297
              
              
              —
              
              
              —
              
              
              14,992Commercial
                  and industrial
              
              
              3,286
              
              
              3,932
              
              
              324
              
              
              675
              
              
              —
              
              
              8,217Consumer
              
              
              8
              
              
              70
              
              
              —
              
              
              —
              
              
              —
              
              
              78Total
              
              $
              10,200
              
              $
              4,002
              
              $
              10,621
              
              $
              675
              
              $
              —
              
              $
              25,498


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




Nonperforming
      assets consist of loans and leases on nonaccrual status, loans 90 days or more
      past due and still accruing interest, loans that have been restructured
      resulting in a reduction or deferral of interest or principal, OREO, and other
      repossessed assets. As of September 30, 2006, there were no nonperforming
      assets.




A
      potential problem loan is defined as a loan where information about possible
      credit problems of the borrower is known, causing management to have serious
      doubts as to the ability of the borrower to comply with the present loan payment
      terms and which may result in the inclusion of such loan in one of the
      nonperforming asset categories. An internally classified loan list is maintained
      that helps management assess the overall quality of the loan portfolio and
      the
      adequacy of the allowance for loan losses. Loans classified as “special mention”
are those that contain a weakness that, if left unattended, could develop into
      a
      problem affecting the ultimate collectibility of the loan. Loans classified
      as
“substandard” are those loans with clear and defined weaknesses, such as highly
      leveraged positions, unfavorable financial ratios, uncertain repayment resources
      or poor financial condition, which may jeopardize recoverability of the loan.
      Loans classified as “doubtful” are those loans that have characteristics similar
      to substandard loans, but also have an increased risk that loss may occur or
      at
      least a portion of the loan may require a charge-off if liquidated at present.
      Although loans classified as substandard do not duplicate loans classified
      as
      doubtful, both substandard and doubtful loans may include some loans that are
      past due at least 90 days, are on nonaccrual status or have been restructured.
      Loans classified as “loss” are those loans that are in the process of being
      charged-off. The Bank had no loans classified in these categories at September
      30, 2006.


-16-
 **Table
          of Contents**




***Allowance
      for Loan Losses***




Implicit
      in the Bank’s lending activities is the fact that loan losses will be
      experienced and that the risk of loss will vary with the type of loan being
      made
      and the creditworthiness of the borrower over the term of the loan. To reflect
      the currently perceived risk of loss associated with the loan portfolio,
      additions are made to the allowance for loan losses in the form of direct
      charges against income to ensure that the allowance is available to absorb
      possible loan losses. The factors that influence the amount include, among
      others, the remaining collateral and/or financial condition of the borrowers,
      historical loan loss, changes in the size and composition of the loan portfolio,
      and general economic conditions.




The
      amount of the allowance equals the cumulative total of the provisions made
      from
      time to time, reduced by loan charge-offs and increased by recoveries of loans
      previously charged-off. Beginning with the second quarter of 2006, the adequacy
      of the Bank’s allowance for loan losses has been determined through a comparison
      to the Bank’s peer group as defined by the OCC. The Bank will continue to
      maintain an equivalent allowance until management has adequate historical data
      upon which to base a different level. The peer group currently maintains an
      average allowance for loan losses of approximately 1.22% of the outstanding
      principal. The Bank’s allowance was $313 thousand, or 1.23% of outstanding
      principal as of September 30, 2006. The Bank had not incurred any loan losses
      as
      of September 30, 2006.




The
      following table sets forth information concerning the allocation of the
      allowance for loan losses, which is maintained on the Bank’s loan portfolio, by
      loan category at September 30, 2006.




Amount
              
              Percentage
                  of loans in
                each
                  category to total
                loans
              
              Percentage
                  of
                allowance
                  at
                September 30, 2006
              
              Percentage
                  of reserves to net
                loans
                  by categoryReal
                  estate
              
              $
              128,801
              
              
              67.5
              %
              
              41.1
              %
              
              0.7
              %Commercial
              
              
              51,203
              
              
              32.2
              %
              
              16.3
              %
              
              0.6
              %Consumer
              
              
              6,143
              
              
              0.3
              %
              
              2.0
              %
              
              7.9
              %Unallocated
              
              
              127,325
              
              
              
              
              
              40.6
              %Total
                  Allowance for Loan Losses
              
              $
              313,472
              
              
              100.0
              %
              
              100.0
              %
              
              1.23
              %


In
      addition, a separate allowance for credit losses on off-balance sheet credit
      exposures is maintained for the undisbursed portion of approved loans. Although
      the loss exposure to the Bank is reduced because the funds have not been
      released to the borrower, under certain circumstances the Bank may be required
      to continue to disburse funds on a troubled credit. As of September 30, 2006,
      this allowance was $21 thousand.




Credit
      and loan decisions are made by management and the Board of Directors in
      conformity with loan policies established by the board of directors. The Bank’s
      practice is to charge-off any loan or portion of a loan when the loan is
      determined by management to be uncollectible due to the borrower’s failure to
      meet repayment terms, the borrower’s deteriorating or deteriorated financial
      condition, the depreciation of the underlying collateral, the loan’s
      classification as a loss by regulatory examiners, or other reasons. During
      the
      third quarter of 2006, there were no charge-offs.




***Nonearning
      Assets***




Premises,
      leasehold improvements and equipment totaled $1.2 million at September 30,
      2006,
      net of accumulated depreciation of $405 thousand. There are no definitive
      agreements regarding acquisition or disposition of owned or leased
      facilities.


-17-
 **Table
          of Contents**




***Deposits***




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




**Three
                  Months Ended September 30, 2006****Average
                  Balance**
              
              **Percent
                  of Deposits**
              
              **Average
                  Rate****(Dollars
                  in thousands)**Noninterest-bearing
                  demand deposits
              
              $
              10,775
              
              
              33
              %
              
              0
              %Money
                  market deposits
              
              
              12,228
              
              
              38
              %
              
              #REF!NOW
                  deposits
              
              
              2,479
              
              
              8
              %
              
              1.44
              %Savings
                  deposits
              
              
              109
              
              
              0
              %
              
              3.96
              %Time
                  certificates of deposit in denominations of $100,000 or more
              
              
              4,369
              
              
              13
              %
              
              4.68
              %Other
                  time deposits
              
              
              2,466
              
              
              8
              %
              
              3.70
              %Total
                  deposits
              
              $
              32,426
              
              
              100
              %
              
              2.54
              %


The
      following table sets forth the amount and maturities of the time deposits as
      of
      September 30, 2006:




**At
                  September 30, 2006****Time
                  Deposits of**
                **$100,000
                  or more**
              
              **Other
                  Time Deposits**
              
              **Total
                  Time Deposits****(Dollars
                  in thousands)**Three
                  months or less
              
              $
              2,501
              
              
              727
              
              $
              3,228Over
                  three months through six months
              
              
              801
              
              
              619
              
              
              1,420Over
                  six months through 12 months
              
              
              834
              
              
              733
              
              
              1,567Over
                  12 months
              
              
              —
              
              
              112
              
              
              112Total
              
              $
              4,136
              
              $
              2,191
              
              $
              6,327


**Return
      on Equity and Assets**




The
      following table sets forth certain information regarding the Company’s return on
      equity and assets for the nine months ended September 30, 2006:




Return
                  on average assets
              
              
              -10.74
              %Return
                  on average equity
              
              
              -24.40
              %Dividend
                  payout ratio
              
              
              0
              %Equity
                  to assets ratio
              
              
              32.1
              %


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




In
      the
      ordinary course of business, the Bank enters into various off-balance sheet
      commitments and other arrangements to extend credit that are not reflected
      in
      the consolidated balance sheets of the Company. The business purpose of these
      off-balance sheet commitments is the routine extension of credit. As of
      September 30, 2006, commitments to extend credit included approximately $10
      thousand for letters of credit, $5.2 million for revolving lines of credit
      arrangements including $2.1 million in real-estate secured lines, and $3.0
      million in unused commitments for commercial and real estate secured loans.
      The
      Bank faces the risk of deteriorating credit quality of borrowers to whom a
      commitment to extend credit has been made; however, no significant credit losses
      are expected from these commitments and arrangements.




***Borrowings***




The
      Company has access to a variety of borrowing sources including federal funds
      purchased. As of September 30, 2006, there were no borrowings
      outstanding.


-18-
 **Table
          of Contents**




***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 financial statements.




As
      of
      September 30, 2006, the Bank was categorized as well-capitalized. A
      well-capitalized institution must maintain a minimum ratio of total capital
      to
      risk-weighted assets of at least 10.00%, a minimum ratio of Tier 1 capital
      to
      risk weighted assets of at least 6.00%, and a minimum ratio of Tier 1 capital
      to
      total assets of at least 5.00% and must not be subject to any written order,
      agreement, or directive requiring it to meet or maintain a specific capital
      level.




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)
              
              Ratio**As
                  of September 30, 2006:**Total
                  Capital (to Risk-Weighted Assets)
              
              $
              16,141
              
              
              62.6
              %
              $
              2,064
              
              
              8.0
              %
              $
              2,580
              
              
              10.0
              %Tier
                  1 Capital (to Risk-Weighted Assets)
              
              $
              15,809
              
              
              61.3
              %
              $
              1,032
              
              
              4.0
              %
              $
              1,548
              
              
              6.0
              %Tier
                  1 Capital (to Average Assets)
              
              $
              15,809
              
              
              32.4
              %
              $
              1,954
              
              
              4.0
              %
              $
              2,443
              
              
              5.0
              %**As
                  of December 31, 2005:**Total
                  Capital (to Risk-Weighted Assets)
              
              $
              17,841
              
              
              101.7
              %
              $
              1,403
              
              
              8.0
              %
              $
              1,754
              
              
              10.0
              %Tier
                  1 Capital (to Risk-Weighted Assets)
              
              $
              17,738
              
              
              101.2
              %
              $
              701
              
              
              4.0
              %
              $
              1,052
              
              
              6.0
              %Tier
                  1 Capital (to Average Assets)
              
              $
              17,738
              
              
              64.1
              %
              $
              1,108
              
              
              4.0
              %
              $
              1,385
              
              
              5.0
              %


***Liquidity
      Management***




At
      September 30, 2006, the Company (excluding the Bank) had approximately $907
      thousand in cash. These funds can be used for Company operations, investment
      and
      for later infusion into the Bank and other corporate activities. The primary
      source of liquidity for the Company will be dividends paid by the Bank. The
      Bank
      is currently restricted from paying dividends without regulatory approval that
      will not be granted until the accumulated deficit has been
      eliminated.




The
      Bank’s liquidity is monitored by its staff, the Investment/Asset-Liability
      Committee and the Board of Directors, who review historical funding
      requirements, current liquidity position, sources and stability of funding,
      marketability of assets, options for attracting additional funds, and
      anticipated future funding needs, including the level of unfunded commitments.




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




As
      loan
      demand increases, greater pressure will be exerted on the Bank’s liquidity.
      However, it is management’s intention to maintain a conservative loan to deposit
      ratio in the range of 80% - 85% over time. Given this goal, the Bank will not
      aggressively pursue lending opportunities if sufficient funding sources
      ( *i.e.* ,
      deposits, Fed Funds, etc.) are not available, nor will the Bank seek to attract
      transient volatile, non-local deposits with above market interest rates. As
      of
      September 30, 2006, the loan to deposit ratio was 71%.


-19-
 **Table
          of Contents**




The
      Bank
      had cash and cash equivalents of $16.1 million, or 30% of total Bank assets,
      at
      September 30, 2006. Management feels that the Bank has adequate liquidity to
      meet anticipated future funding needs.




The
      Bank
      is subject to various regulatory capital requirements administered by federal
      and state banking agencies, which could affect its ability to pay dividends
      to
      the Company. Failure to meet minimum capital requirements can initiate certain
      mandatory and discretionary actions by regulators that, if undertaken, could
      have a direct material adverse effect on our financial statements. The minimum
      ratios required for the Bank to be considered “well capitalized” for regulatory
      purposes, and therefore eligible to consider the payment of dividends to the
      Company, will be 10% total capital to risk weighted assets, 6% tier 1 capital
      to
      risk weighted assets and 5% tier 1 capital to average assets. At September
      30,
      2006, the Bank was considered “well capitalized” by regulatory standards.




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




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




The
      primary measurement of interest rate risk is earnings at risk, which is
      determined through computerized simulation modeling. The primary simulation
      model assumes a static balance sheet, using the balances, rates, maturities
      and
      repricing characteristics of all of the Bank’s existing assets and liabilities.
      Net interest income is computed by the model assuming market rates remaining
      unchanged and comparing those results to other interest rate scenarios with
      changes in the magnitude, timing and relationship between various interest
      rates. At September 30, 2006, an analysis was performed using the ALXpert model
      provided through ALX Consulting, Inc. and utilizing the Bank’s quarterly 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”. Because the Bank is
      asset-sensitive, the net interest margin improves as rates rise and declines
      as
      rates decline.




Interest
                  Rate ShockShock
              
              -2%
              
              -1%
              
              Annualized*
              
              +1%
              
              +2%Fed
                  Funds Rate
              
              3.25%
              
              4.25%
              
              5.25%
              
              6.25%
              
              7.25%Net
                  Interest Income Change
              
              
              (289
              )
              
              (144
              )
              
              —
              
              
              144
              
              
              289%
                  Change
              
              
              -12.5
              %
              
              -6.3
              %
              
              —
              
              
              6.3
              %
              
              12.5
              %Equity
                  Capital Change %
              
              
              -2.2
              %
              
              
              
              
              —
              
              
              
              
              
              2.2
              %Net
                  Interest Margin
              
              
              4.4
              %
              
              4.7
              %
              
              5.0
              %
              
              5.4
              %
              
              5.7
              %


The
      following table sets forth, on a stand-alone basis, the Bank’s amounts of
      interest-earning assets and interest-bearing liabilities outstanding at
      September 30, 2006, which are anticipated, based upon certain assumptions,
      to
      reprice or mature in each of the future time periods shown. The projected
      repricing of assets and liabilities anticipates prepayments and scheduled rate
      adjustments, as well as contractual maturities under an interest rate unchanged
      scenario within the selected time intervals. While it is believed that such
      assumptions are reasonable, there can be no assurance that assumed repricing
      rates will approximate actual future deposit activity.


-20-
 **Table
          of Contents**




**As
                  of September 30, 2006****Volumes
                  Subject to Repricing Within****0-1**
                **Days**
              
              **2-90**
                **Days**
              
              **91-365**
                **Days**
              
              **1-3**
                **Years**
              
              **Over
                  3**
                **Years**
              
              **Non-Interest**
                **Sensitive**
              
              **Total****Assets:**
              
              **(Dollars
                  in thousands)**Cash,
                  fed funds and other
              
              $
              13,640
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              2,428
              
              $
              16,068Investments
                  and FRB Stock (1)
              
              
              —
              
              
              4,000
              
              
              1,998
              
              
              1,980
              
              
              2,455
              
              
              —
              
              
              10,433Loans
                  (2)
              
              
              —
              
              
              8,033
              
              
              2,168
              
              
              5,429
              
              
              9,868
              
              
              —
              
              
              25,498Fixed
                  and other assets
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,113
              
              
              1,113Total
                  Assets
              
              $
              13,640
              
              $
              12,033
              
              $
              4,166
              
              $
              7,409
              
              $
              12,323
              
              $
              3,541
              
              $
              53,113**Liabilities
                  and Stockholders’ Equity:**Interest-bearing
                  checking, savings and money market accounts
              
              $
              18,767
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              11,039
              
              $
              29,806Certificates
                  of deposit
              
              
              —
              
              
              3,228
              
              
              2,987
              
              
              32
              
              
              80
              
              
              —
              
              
              6,327Borrowed
                  funds
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Other
                  liabilities
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              265
              
              
              265Stockholders’
                  equity
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              16,715
              
              
              16,715Total
                  liabilities and stockholders’ equity
              
              $
              18,767
              
              $
              3,228
              
              $
              2,987
              
              $
              32
              
              $
              80
              
              $
              28,019
              
              $
              53,113Interest
                  rate sensitivity gap
              
              $
              (5,127
              )
              $
              8,805
              
              $
              1,179
              
              $
              7,377
              
              $
              12,243Cumulative
                  interest rate sensitivity gap
              
              $
              (5,127
              )
              $
              3,678
              
              $
              4,857
              
              $
              12,234
              
              $
              24,477Cumulative
                  gap to total assets
              
              
              -9.7
              %
              
              6.9
              %
              
              9.1
              %
              
              23.0
              %
              
              46.1
              %Cumulative
                  interest-earning assets to cumulative interest-bearing liabilities
              
              
              72.7
              %
              
              116.7
              %
              
              119.4
              %
              
              148.9
              %
              
              197.5
              %


(1)
        Excludes investments' mark-to-market adjustments


(2)
        Excludes deferred fees and allowance for loan losses


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




**ITEM
      3.****Controls
      and Procedures**




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




During
      the period covered by this report, the Company revised its internal controls
      and
      procedures as they relate to the implementation of new accounting
      pronouncements, in light of the error resulting from an incorrect interpretation
      of Statement of Financial Accounting Standards No. 123 (revised), *“Share-Based
      Payments”* in
      connection with the preparation of the its Form 10-QSB for the quarter ended
      June 30, 2006. Accordingly, the Company will monitor all new accounting
      pronouncements and make a determination whether sufficient expertise exists
      within the company to evaluate and apply the standards set forth in such new
      accounting pronouncements. In the event that management determines that
      additional resources are necessary to evaluate the impact of the new accounting
      pronouncements on the company's financial statements, management will engage
      a
      qualified accounting firm to assist management in the implementation of the
      new
      accounting pronouncements.


-21-
 **Table
          of Contents**




Except
      as
      described above, there have been no significant changes in the Company’s
      internal controls for financial reporting or in other factors that could
      significantly affect these controls, including any significant deficiencies
      or
      material weaknesses of internal controls that would require corrective action.
      However, the Company periodically reviews and documents its disclosure controls
      and procedures, including its internal accounting controls, and may from time
      to
      time make changes aimed at enhancing their effectiveness and ensuring that
      the
      Company’s systems evolve with its business.




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




On
      October 30, 2006, Pacific Coast National Bancorp filed an amended Quarterly
      Report on Form 10-QSB for the quarter ended June 30, 2006 to restate it’s
      previously issued unaudited financial statements at and for the quarter and
      six
      months ended June 30, 2006 to correct errors related to accounting for
      stock-based compensation expenses. The error did not affect the financial
      statements for any prior periods.




In
      light
      of the restatement of the company's consolidated financial statements, the
      company has concluded that as of June 30, 2006 effective disclosure controls
      and
      procedures were not maintained over the amounts to be expensed attributable
      to
      employee stock options in its consolidated statements of operations.
      Accordingly, management determined that this control deficiency constitutes
      a
      material weakness. A material weakness is a control deficiency, or a combination
      of control deficiencies, that result in more than a remote likelihood that
      a
      material misstatement of the annual or interim financial statements will not
      be
      prevented or detected.





As
      of the
      date of this press release, the company has fully remediated this material
      weakness. The company will monitor all new accounting pronouncements and make
      a
      determination whether sufficient expertise exists within the company to evaluate
      and apply the standards set forth in such new accounting pronouncements. In
      the
      event that management determines that additional resources are necessary to
      evaluate the impact of the new accounting pronouncements on the company's
      financial statements, management will engage a qualified accounting firm to
      assist management in the implementation of the new accounting
      pronouncements.




**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
      2.****Changes
      in 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****and Reports on Form 8-K**




(a)
            Exhibits




**Exhibit
                Number**
            
            **Description
                of Exhibit**31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.




-22-
 **Table
          of Contents**




SIGNATURES




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






PACIFIC
      COAST NATIONAL BANCORP




Date:
      November 13, 2006


By: /s/
      Colin
      M. Forkner


Colin
      M.
      Forkner


Chief
      Executive Officer


Date:
      November 13, 2006


By: /s/
      Terry
      Stalk


Terry
      Stalk


Chief
      Financial Officer


-23-