##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2005


Commission File Number 0-33501


Northrim BanCorp, Inc.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Alaska                                                             |  | 92-0175752                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)

3111 C Street


Anchorage, Alaska 99503


(Address of principal executive offices) (Zip Code)


Registrants Telephone Number, Including Area Code:


(907) 562-0062


Securities Registered Pursuant to Section 12(b) of the
Act:


None


Securities Registered Pursuant to Section 12(g) of the
Act:


Common Stock, $1.00 Par Value


(Title of Class)


o þ


o þ


þ o


S-K 10-K 10-K. o þ


12b-2




| |                            |                      |                          | 
| | -------------------------- | -------------------- | ------------------------ | 
| | Large accelerated filer  o | Accelerated filer  þ | Non-Accelerated filer  o | 

12b-2 o þ






10-K 10-K










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##### 










Northrim BanCorp, Inc.


Table of Contents


|                                                                                          |  |      |    | 
|----------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                          |  | Page |   
|                                                                                          |  |      |   
|Northrim BanCorp, Inc.                                                                    |  |      |    | 
|About the Company                                                                         |  |      | 1  | 
|Financial Section                                                                         |  |      |    | 
|Selected Financial Data                                                                   |  |      | 5  | 
|Managements Discussion and Analysis
    of Financial Condition and Results of Operations |  |      | 6  | 
|Report of Independent Registered Public
    Accounting Firm                               |  |      | 25 | 
|Consolidated Financial Statements                                                         |  |      | 27 | 
|Notes to Consolidated Financial
    Statements                                            |  |      | 31 | 
|Annual Report on Form 10-K                                                                |  |      | 53 | 
|EXHIBIT 4.3                                                                              
|EXHIBIT 4.4                                                                              
|EXHIBIT 10.12                                                                            
|EXHIBIT 10.13                                                                            
|EXHIBIT 23                                                                               
|EXHIBIT 24                                                                               
|EXHIBIT 31.1                                                                             
|EXHIBIT 31.2                                                                             
|EXHIBIT 32.1                                                                             
|EXHIBIT 32.2                                                                             



Note Regarding Forward-Looking Statements


This report includes forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements describe
Northrims managements expectations about future
events and developments such as future operating results, growth
in loans and deposits, continued success of Northrims
style of banking, and the strength of the local economy. All
statements other than statements of historical fact, including
statements regarding industry prospects and future results of
operations or financial position, made in this report are
forward-looking. We use words such as anticipates,
believes, expects, intends
and similar expressions in part to help identify forward-looking
statements. Forward-looking statements reflect managements
current expectations and are inherently uncertain. Our actual
results may differ significantly from managements
expectations, and those variations may be both material and
adverse. Forward-looking statements are subject to various risks
and uncertainties that may cause our actual results to differ
materially and adversely from our expectations as indicated in
the forward-looking statements. These risks and uncertainties
include: the general condition of, and changes in, the Alaska
economy; factors that impact our net interest margins; and our
ability to maintain asset quality. Further, actual results may
be affected by our ability to compete on price and other factors
with other financial institutions; customer acceptance of new
products and services; the regulatory environment in which we
operate; and general trends in the local, regional and national
banking industry and economy. Many of these risks, as well as
other risks that may have a material adverse impact on our
operations and business, are identified in Northrim Banks
filings with the FDIC and those identified from time to time in
our filings with the SEC. However, you should be aware that
these factors are not an exhaustive list, and you should not
assume these are the only factors that may cause our actual
results to differ from our expectations. In addition, you should
note that we do not intend to update any of the forward-looking
statements or the uncertainties that may adversely impact those
statements.


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Northrim BanCorp, Inc.


About the Company


Overview
















| |   |                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Anchorage: We have two major financial
    centers in Anchorage, three smaller branches, and two
    supermarket branches.                                                                                                                                                                                                                                      
|
| |  | Fairbanks: We opened our financial center in
    Fairbanks, Alaskas second largest city, in mid-1996. This
    branch has given us a strong foothold in Interior Alaska, and
    management believes that there is significant potential to
    increase our share of that market. We are currently analyzing
    additional market opportunities in this area.
|
| |  | Eagle River: We also serve Eagle River, a
    community outside of Anchorage. In January of 2002, we moved
    from a supermarket branch into a full-service branch to provide
    a higher level of service to this growing market.                                                                                                                            
|
| |  | Wasilla: Wasilla is a rapidly growing market
    in the Matanuska Valley outside of Anchorage where we completed
    construction of a new financial center in December of 2002 and
    moved from our supermarket branch and loan production office
    into this new facility.                                                                                

1



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Elliott Cove Capital Management LLC


start-up




Northrim Funding Services




High Performance Checking




Business Strategies






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Providing Customer First Service: We provide
    a high level of customer service. Our guiding principle is to
    serve our market areas by operating with a Customer First
    Service philosophy, affording our customers the highest
    priority in all aspects of our operations. To achieve this
    objective, our management emphasizes the hiring and retention of
    competent and highly motivated employees at all levels of the
    organization. Management believes that a well-trained and highly
    motivated core of employees allows maximum personal contact with
    customers in order to understand and fulfill customer needs and
    preferences. This Customer First Service philosophy
    is combined with our emphasis on personalized, local decision
    making.
|
| |  | Emphasizing Business and Professional
    Lending: We endeavor to provide commercial lending
    products and services, and to emphasize relationship banking
    with businesses and professional individuals. Management
    believes that our focus on providing financial services to
    businesses and professional individuals has and may continue to
    increase lending and core deposit volumes.                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Providing Competitive and Responsive Real Estate
    Lending: We are a major land development and
    residential construction lender and an active lender in the
    commercial real estate market. Management believes that our
    willingness to provide these services in a professional and
    responsive manner has contributed significantly to our growth.
    Because of                                                                                                                                                                                                                                                                                                                                                                                                                   

2



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | our relatively small size, our experienced senior management can
    be more involved with serving customers and making credit
    decisions, allowing us to compete more favorably for lending
    relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Pursuing Strategic Opportunities for Additional
    Growth: Management believes that the Bank of
    America branch acquisition in 1999 significantly strengthened
    our local market position and enabled us to further capitalize
    on expansion opportunities resulting from the demand for a
    locally based banking institution providing a high level of
    service. Not only did the acquisition increase our size, number
    of branch offices and lending capacity, but it also expanded our
    consumer lending, further diversifying our loan portfolio. We
    expect to continue seeking similar opportunities to further our
    growth while maintaining a high level of credit quality. We plan
    to affect our growth strategy through a combination of growth at
    existing branch locations, new branch openings, primarily in
    Anchorage, Wasilla and Fairbanks, and strategic banking and
    non-banking acquisitions.
|
| |  | Developing a Sales Culture: In 2003, we
    conducted extensive sales training throughout the company and
    developed a comprehensive approach to sales. In 2004 and 2005,
    we continued with this sales training in all of our major
    customer contact areas. Our goal throughout this process is to
    increase and broaden the relationships that we have with new and
    existing customers and to continue to increase our market share
    within our existing markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Services




Deposit Services:






| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An indexed money market deposit account;                                                                                                                                     
|
| |  | A Jump-Up certificate of deposit (CD)
    that allows additional deposits with the opportunity to increase
    the rate to the current market rate for a similar term CD;
|
| |  | An indexed CD that allows additional deposits, quarterly
    withdrawals without penalty, and tailored maturity
    dates; and                                               
|
| |  | Arrangements to courier non-cash deposits from our customers to
    their branch.                                                                                            

Lending Services:


Other Customer Services: 24-hour drive-up


Directors and Executive Officers:


|                            |  |                                                                                                          
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------
|Executive Officers/Age      |  | Occupation                                                                                               
|*R. Marc Langland, 64       |  | Chairman, President, & CEO of the Company and the Bank,
    and Director, Alaska Air Group               
|*Christopher N. Knudson, 52 |  | Executive Vice President and Chief Operating Officer of the
    Company and the Bank                     
|Joseph M. Schierhorn, 48    |  | Executive Vice President, Chief Financial Officer, and
    Compliance Manager of the Company and the Bank
|Victor P. Mollozzi, 56      |  | Senior Vice President, Senior Credit Officer of the Bank                                                 
|Robert L. Shake, 47         |  | Senior Vice President, Executive Loan Manager of the Bank                                                



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|                       |  |                                                                                                                                                                                   
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Directors/Age          |  | Occupation                                                                                                                                                                        
|Larry S. Cash, 54      |  | President and CEO, RIM Architects (Alaska), Inc.; CEO, RIM
    Architects (Guam), Inc.                                                                                            
|                      
|Mark G. Copeland, 63   |  | Owner and sole member of Strategic Analysis, LLC, a management
    consulting firm                                                                                                
|                      
|Frank A. Danner, 72    |  | Secretary/Treasurer, IMEX, Ltd. dba Dynamic Properties
    (real estate firm)                                                                                                     
|                      
|Ronald A. Davis, 73    |  | Former Vice President, Acordia of Alaska Insurance (full service
    insurance agency)                                                                                            
|                      
|Anthony Drabek, 58     |  | President and CEO, Natives of Kodiak, Inc. (Alaska Native
    Corporation), Chairman and President, Koncor Forest Products
    Co.; Secretary/Director, Atikon Forest Products Co.
|                      
|Richard L. Lowell, 65  |  | Former Chairman, Ribelin Lowell Alaska USA Insurance Brokers,
    Inc. (insurance brokerage firm)                                                                                 
|                      
|Irene Sparks Rowan, 64 |  | Former Chairman and Director, Klukwan, Inc. (Alaska Native
    Corporation) and its subsidiaries                                                                                  
|                      
|John C. Swalling, 56   |  | President, Swalling & Associates, P.C. (accounting
    firm)                                                                                                                      

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Selected Financial Data


|                                          |                            |                                      |        |          |        |          |        |          |        |          |       
|----------------------------------------- | -------------------------- | ------------------------------------ | ------ | -------- | ------ | -------- | ------ | -------- | ------ | -------- | ------
|                                         
|                                          |                            | 2005                                 |        | 2004     |        | 2003     |        | 2002     |        | 2001    
|                                         
|Unaudited                                 |                            |                                     
|                                          |                            | (In Thousands Except Per Share Data)
|Net interest income                       |                            | $43,908                              |        | $41,271  |        | $39,267  |        | $34,670  |        | $31,349 
|Provision for loan losses                 |                            | 1,170                                |        | 1,601    |        | 3,567    |        | 3,095    |        | 2,300   
|Other operating income                    |                            | 4,833                                |        | 3,792    |        | 6,089    |        | 5,199    |        | 4,766   
|Other operating expense                   |                            | 29,477                               |        | 26,535   |        | 24,728   |        | 23,061   |        | 22,569  
|                                         
|                                          | Income before income taxes |                                      | 18,094 |          | 16,927 |          | 17,061 |          | 13,713 |          | 11,246
|Income taxes                              |                            | 6,924                                |        | 6,227    |        | 6,516    |        | 5,171    |        | 4,138   
|                                         
|Net income                                |                            | $11,170                              |        | $10,700  |        | $10,545  |        | $8,542   |        | $7,108  
|                                         
|                                         
|Earnings per share:                       |                            |                                      |        |          |        |          |        |          |        |         
|                                          | Basic                      |                                      | $1.87  |          | $1.76  |          | $1.76  |          | $1.40  |          | $1.17 
|                                          | Diluted                    |                                      | 1.81   |          | 1.71   |          | 1.69   |          | 1.35   |          | 1.13  
|Cash dividends per share                  |                            | 0.43                                 |        | 0.38     |        | 0.33     |        | 0.20     |        | 0.20    
|                                         
|Assets                                    |                            | $895,022                             |        | $800,726 |        | $738,569 |        | $704,249 |        | $620,518
|Loans                                     |                            | 705,059                              |        | 678,269  |        | 601,119  |        | 534,990  |        | 482,562 
|Deposits                                  |                            | 779,866                              |        | 699,061  |        | 646,197  |        | 626,415  |        | 550,607 
|Long-term debt                            |                            | 2,574                                |        | 2,974    |        | 3,374    |        | 3,774    |        | 1,500   
|Junior subordinated debentures            |                            | 18,000                               |        | 8,000    |        | 8,000    |        |         |        |        
|Shareholders equity                      |                            | 84,474                               |        | 83,358   |        | 75,285   |        | 68,373   |        | 60,791  
|                                         
|Book value                                |                            | $14.56                               |        | $13.69   |        | $12.44   |        | $11.22   |        | $9.95   
|Tangible book value                       |                            | $13.48                               |        | $12.60   |        | $11.29   |        | $10.01   |        | $8.69   
|Net interest margin (tax equivalent)      |                            | 5.66%                                |        | 5.88%    |        | 6.04%    |        | 5.82%    |        | 5.88%   
|Efficiency ratio
    (cash)(1)            |                            | 59.72%                               |        | 58.07%   |        | 53.71%   |        | 56.92%   |        | 60.19%  
|Return on assets                          |                            | 1.33%                                |        | 1.41%    |        | 1.50%    |        | 1.33%    |        | 1.23%   
|Return on equity                          |                            | 13.17%                               |        | 13.50%   |        | 14.89%   |        | 13.32%   |        | 12.34%  
|Equity/assets                             |                            | 9.44%                                |        | 10.41%   |        | 10.19%   |        | 9.71%    |        | 9.80%   
|Dividend payout ratio                     |                            | 22.92%                               |        | 21.57%   |        | 19.04%   |        | 14.29%   |        | 17.09%  
|Nonperforming loans/portfolio loans       |                            | 0.86%                                |        | 0.97%    |        | 1.72%    |        | 1.09%    |        | 0.77%   
|Net charge-offs/average loans             |                            | 0.18%                                |        | 0.16%    |        | 0.33%    |        | 0.36%    |        | 0.29%   
|Allowance for loan losses/portfolio loans |                            | 1.52%                                |        | 1.59%    |        | 1.70%    |        | 1.61%    |        | 1.55%   
|Nonperforming assets/assets               |                            | 0.69%                                |        | 0.82%    |        | 1.40%    |        | 0.81%    |        | 0.58%   
|                                         
|Number of banking offices                 |                            | 10                                   |        | 10       |        | 10       |        | 10       |        | 10      
|Number of employees (FTE)                 |                            | 272                                  |        | 272      |        | 268      |        | 246      |        | 234     
|                                         



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The efficiency ratio measures the proportion of the
    Companys net interest income and non-interest income that
    is absorbed by its other operating expenses. For the purposes of
    this calculation, other operating expenses do not include
    intangible asset amortization expense. In 2005, the efficiency
    ratio was 59.72%, which was calculated by dividing other
    operating expense of $29.1 million (exclusive of intangible
    asset amortization) by $48.7 million, which is the total of
    net interest income of $43.9 million and other operating
    income of $4.8 million.

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Managements Discussion and Analysis of Financial
Condition and


Results of Operation


Overview














Results of Operations


Net Income




Net Interest Income






6



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|                                      |                                                           |                                  |                                            |          |          |        |        |             |          |          |          |        |        |             |          |          |          |        |        |       |      
|------------------------------------- | --------------------------------------------------------- | -------------------------------- | ------------------------------------------ | -------- | -------- | ------ | ------ | ----------- | -------- | -------- | -------- | ------ | ------ | ----------- | -------- | -------- | -------- | ------ | ------ | ----- | -----
|                                     
|Years Ended December 31,              |                                                           | 2005                             |                                            | 2004     |          | 2003  
|                                     
|                                      |                                                           | Average                          |                                            | Interest |          |        |        | Average     |          | Interest |          |        |        | Average     |          | Interest |          |       
|                                      |                                                           | outstanding                      |                                            | earned/  |          | Yield/ |        | outstanding |          | earned/  |          | Yield/ |        | outstanding |          | earned/  |          | Yield/
|                                      |                                                           | balance                          |                                            | paid(1)  |          | Rate   |        | balance     |          | paid(1)  |          | Rate   |        | balance     |          | paid(1)  |          | Rate  
|                                     
|                                      |                                                           | (In Thousands)                  
|Assets:                               |                                                           |                                  |                                            |          |          |        |        |             |          |          |          |        |        |             |          |          |          |       
|                                      | Loans(2)                                                  |                                  | $698,240                                   |          | $55,870  |        | 8.00%  |             | $628,830 |          | $45,898  |        | 7.30%  |             | $569,532 |          | $42,945  |        | 7.54% 
|                                      | Securities                                                |                                  | 61,125                                     |          | 2,202    |        | 3.60%  |             | 64,008   |          | 2,492    |        | 3.89%  |             | 69,972   |          | 2,867    |        | 4.10% 
|                                      | Overnight investments                                     |                                  | 19,232                                     |          | 709      |        | 3.69%  |             | 11,633   |          | 164      |        | 1.41%  |             | 13,987   |          | 136      |        | 0.97% 
|                                     
|                                      |                                                           |                                  | Total interest-earning assets              |          | 778,597  |        | 58,781 |             | 7.55%    |          | 704,471  |        | 48,554 |             | 6.89%    |          | 653,491  |        | 45,948 |       | 7.03%
|                                      | Noninterest-earning assets                                |                                  | 63,810                                     |          |          |        |        |             | 54,788   |          |          |        |        |             | 51,194   |          |          |        |       
|                                     
|                                      |                                                           |                                  | Total assets                               |          | $842,407 |        |        |             |          |          | $759,259 |        |        |             |          |          | $704,685 |        |        |       |      
|                                     
|                                     
|Liabilities and Shareholders Equity:
|                                      | Deposits:                                                 |                                  |                                            |          |          |        |        |             |          |          |          |        |        |             |          |          |          |        |       
|                                      |                                                           | Interest-bearing demand accounts |                                            | $65,890  |          | $369   |        | 0.56%       |          | $57,373  |          | $221   |        | 0.39%       |          | $52,955  |          | $205   |        | 0.39%
|                                      |                                                           | Money market accounts            |                                            | 139,331  |          | 3,876  |        | 2.78%       |          | 126,567  |          | 1,527  |        | 1.21%       |          | 134,582  |          | 1,293  |        | 0.96%
|                                      |                                                           | Savings accounts                 |                                            | 207,277  |          | 6,263  |        | 3.02%       |          | 139,876  |          | 2,290  |        | 1.64%       |          | 104,158  |          | 1,182  |        | 1.13%
|                                      |                                                           | Certificates of deposit          |                                            | 138,284  |          | 3,482  |        | 2.52%       |          | 155,134  |          | 2,671  |        | 1.72%       |          | 164,847  |          | 3,523  |        | 2.14%
|                                     
|                                      |                                                           |                                  | Total interest-bearing deposits            |          | 550,782  |        | 13,990 |             | 2.54%    |          | 478,950  |        | 6,709  |             | 1.40%    |          | 456,542  |        | 6,203  |       | 1.36%
|                                      | Borrowings                                                |                                  | 18,792                                     |          | 883      |        | 4.70%  |             | 14,525   |          | 574      |        | 3.95%  |             | 13,235   |          | 478      |        | 3.61% 
|                                     
|                                      |                                                           |                                  | Total interest-bearing liabilities         |          | 569,574  |        | 14,873 |             | 2.61%    |          | 493,475  |        | 7,283  |             | 1.48%    |          | 469,777  |        | 6,681  |       | 1.42%
|                                      | Demand deposits and other noninterest-bearing liabilities |                                  | 188,000                                    |          |          |        |        |             | 186,506  |          |          |        |        |             | 164,091  |          |          |        |       
|                                     
|                                      |                                                           |                                  | Total liabilities                          |          | 757,574  |        |        |             |          |          | 679,981  |        |        |             |          |          | 633,868  |        |        |       |      
|                                      | Shareholders equity                                      |                                  | 84,833                                     |          |          |        |        |             | 79,278   |          |          |        |        |             | 70,817   |          |          |        |       
|                                     
|                                      |                                                           |                                  | Total liabilities and shareholders equity |          | $842,407 |        |        |             |          |          | $759,259 |        |        |             |          |          | $704,685 |        |        |       |      
|                                     
|Net interest income                   |                                                           |                                  |                                            | $43,908  |          |        |        |             |          | $41,271  |          |        |        |             |          | $39,267  |          |       
|                                     
|Net interest
    margin(3)            |                                                           |                                  |                                            |          |          | 5.64%  |        |             |          |          |          | 5.86%  |        |             |          |          |          | 6.01% 
|                                     



|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Interest income included loan fees.                       
|(2) | Nonaccrual loans are included with a zero effective yield.

|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | The net interest margin on a tax equivalent basis was 5.66%,
    5.88%, 6.04%, 5.82%, and 5.88%, respectively, for 2005, 2004,
    2003, 2002, and 2001.

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|                  |                       |                                  |                            |                            |        |       |        |        |         |       |          |       |          |       |       
|----------------- | --------------------- | -------------------------------- | -------------------------- | -------------------------- | ------ | ----- | ------ | ------ | ------- | ----- | -------- | ----- | -------- | ----- | ------
|                 
|                  |                       | 2005 compared to 2004            |                            | 2004 compared to 2003     
|                 
|                  |                       | Increase (decrease) due to       |                            | Increase (decrease) due to
|                  |                       | Volume                           |                            | Rate                       |        | Total |        | Volume |         | Rate  |          | Total
|                 
|Interest Income:  |                       |                                  |                            |                            |        |       |        |        |         |       |          |      
|                  | Loans                 |                                  | $5,327                     |                            | $4,645 |       | $9,972 |        | $4,265  |       | ($1,312) |       | $2,953  
|                  | Securities            |                                  | (109)                      |                            | (181)  |       | (290)  |        | (237)   |       | (138)    |       | (375)   
|                  | Overnight investments |                                  | 157                        |                            | 388    |       | 545    |        | (17)    |       | 45       |       | 28      
|                 
|                  |                       |                                  | Total interest income      |                            | $5,375 |       | $4,852 |        | $10,227 |       | $4,011   |       | ($1,405) |       | $2,606
|                 
|Interest Expense: |                       |                                  |                            |                            |        |       |        |        |         |       |          |      
|                  | Deposits:             |                                  |                            |                            |        |       |        |        |         |       |          |       |         
|                  |                       | Interest-bearing demand accounts |                            | $37                        |        | $112  |        | $148   |         | $17   |          | ($1)  |          | $16  
|                  |                       | Money market accounts            |                            | 168                        |        | 2,181 |        | 2,349  |         | (71)  |          | 305   |          | 234  
|                  |                       | Savings accounts                 |                            | 1,441                      |        | 2,532 |        | 3,973  |         | 483   |          | 625   |          | 1,108
|                  |                       | Certificates of deposit          |                            | (250)                      |        | 1,061 |        | 811    |         | (199) |          | (653) |          | (852)
|                 
|                  |                       |                                  | Total interest on deposits |                            | 1,396  |       | 5,885  |        | 7,281   |       | 230      |       | 276      |       | 506   
|                  | Borrowings            |                                  | 188                        |                            | 121    |       | 309    |        | 49      |       | 47       |       | 96      
|                 
|                  |                       |                                  | Total interest expense     |                            | $1,584 |       | $6,006 |        | $7,590  |       | $279     |       | $323     |       | $602  
|                 

Other Operating Income




|                         |                                                    |                                       |   |        |     |        |     |        |     |        |    |       
|------------------------ | -------------------------------------------------- | ------------------------------------- | - | ------ | --- | ------ | --- | ------ | --- | ------ | -- | ------
|                        
|Years Ended December 31, |                                                    | 2005                                  |   | 2004   |     | 2003   |     | 2002   |     | 2001  
|                        
|                         |                                                    | (In Thousands)                       
|Other Operating Income   |                                                    |                                       |   |        |     |        |     |        |     |       
|                         |                                                    | Deposit service charges               |   | $1,800 |     | $1,718 |     | $1,805 |     | $1,687 |    | $1,606
|                         |                                                    | Purchased receivable income           |   | 993    |     | 201    |     | 35     |     |       |    |      
|                         |                                                    | Electronic banking fees               |   | 632    |     | 608    |     | 563    |     | 654    |    | 652   
|                         |                                                    | Equity in earnings from RML           |   | 493    |     | 438    |     | 2,785  |     | 1,917  |    | 1,208 
|                         |                                                    | Merchant credit card transaction fees |   | 444    |     | 414    |     | 363    |     | 423    |    | 400   
|                         |                                                    | Other transaction fees                |   | 214    |     | 204    |     | 247    |     | 283    |    | 324   
|                         |                                                    | Loan service fees                     |   | 374    |     | 379    |     | 416    |     | 350    |    | 467   
|                         |                                                    | Equity in loss from Elliott Cove      |   | (424)  |     | (457)  |     | (554)  |     | (239)  |    |      
|                         |                                                    | Other income                          |   | 298    |     | 136    |     | 74     |     | 11     |    | 24    
|                        
|                         |                                                    | Operating sources                     |   | 4,824  |     | 3,641  |     | 5,734  |     | 5,086  |    | 4,681 
|                         | Gain on sale of securities available for sale, net |                                       | 9 |        | 151 |        | 310 |        | 113 |        | 47
|                         | Gain on sale of ORE                                |                                       |  |        |    |        | 45  |        |    |        | 38
|                        
|                         |                                                    | Other sources                         |   | 9      |     | 151    |     | 355    |     | 113    |    | 85    
|                        
|                         |                                                    | Total other operating income          |   | $4,833 |     | $3,792 |     | $6,089 |     | $5,199 |    | $4,766
|                        



8



---



##### Table of Contents



®






start-up




Expenses


Provision for Loan Losses:


9



---



##### Table of Contents



Other Operating Expense:


|                         |                                      |                               |         |         |         |         |         |         |         |         |         |        
|------------------------ | ------------------------------------ | ----------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -------
|                        
|Years Ended December 31, |                                      | 2005                          |         | 2004    |         | 2003    |         | 2002    |         | 2001   
|                        
|                         |                                      | (In Thousands)               
|Other Operating Expense  |                                      |                               |         |         |         |         |         |         |         |        
|                         | Salaries and other personnel expense |                               | $17,656 |         | $15,708 |         | $14,180 |         | $13,023 |         | $12,135
|                         | Occupancy, net                       |                               | 2,417   |         | 2,130   |         | 2,000   |         | 2,040   |         | 1,963  
|                         | Equipment, net                       |                               | 1,371   |         | 1,372   |         | 1,504   |         | 1,405   |         | 1,508  
|                         | Marketing                            |                               | 1,657   |         | 1,201   |         | 1,205   |         | 1,136   |         | 1,153  
|                         | Software amortization                |                               | 544     |         | 558     |         | 451     |         | 400     |         | 440    
|                         | Intangible asset amortization        |                               | 368     |         | 368     |         | 368     |         | 368     |         | 832    
|                         | Supply expense                       |                               | 275     |         | 244     |         | 314     |         | 492     |         | 443    
|                         | Legal expense                        |                               | 111     |         | 230     |         | 193     |         | 197     |         | 302    
|                         | Cash handling costs                  |                               | 109     |         | 171     |         | 230     |         | 269     |         | 327    
|                         | Loan collection and ORE costs        |                               | 155     |         | 156     |         | 161     |         | 68      |         | 49     
|                         | Consulting expense                   |                               | 151     |         | 89      |         | 144     |         | 78      |         | 104    
|                         | Other expenses                       |                               | 4,663   |         | 4,308   |         | 3,978   |         | 3,585   |         | 3,313  
|                        
|                         |                                      | Total other operating expense |         | $29,477 |         | $26,535 |         | $24,728 |         | $23,061 |         | $22,569
|                        













out-of




10



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##### Table of Contents







Income Taxes:


Financial Condition


Assets


Loans and Lending Activities





General:






Nonperforming Loans; Real Estate
Owned:


|                                                 |                                         |                            |        |        |        |        |        |         |        |        |        |       
|------------------------------------------------ | --------------------------------------- | -------------------------- | ------ | ------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------
|                                                
|December 31,                                     |                                         | 2005                       |        | 2004   |        | 2003   |        | 2002    |        | 2001  
|                                                
|                                                 |                                         | (In Thousands)            
|Nonperforming loans                              |                                         |                            |        |        |        |        |        |         |        |       
|                                                 | Nonaccrual loans                        |                            | $5,090 |        | $5,876 |        | $7,426 |         | $4,717 |        | $2,615
|                                                 | Accruing loans past due 90 days or more |                            | 981    |        | 290    |        | 2,283  |         | 1,019  |        | 965   
|                                                 | Restructured loans                      |                            |       |        | 424    |        | 597    |         |       |        |      
|                                                
|                                                 |                                         | Total nonperforming loans  |        | 6,071  |        | 6,590  |        | 10,306  |        | 5,736  |        | 3,580 
|Real estate owned                                |                                         | 105                        |        |       |        |       |        |        |        |      
|                                                
|                                                 |                                         | Total nonperforming assets |        | $6,176 |        | $6,590 |        | $10,306 |        | $5,736 |        | $3,580
|                                                
|Allowance for loan losses to portfolio loans     |                                         | 1.52%                      |        | 1.59%  |        | 1.70%  |        | 1.61%   |        | 1.55% 
|Allowance for loan losses to nonperforming loans |                                         | 176%                       |        | 163%   |        | 99%    |        | 148%    |        | 201%  
|Nonperforming loans to portfolio loans           |                                         | 0.86%                      |        | 0.97%  |        | 1.72%  |        | 1.09%   |        | 0.77% 
|Nonperforming assets to total assets             |                                         | 0.69%                      |        | 0.82%  |        | 1.40%  |        | 0.81%   |        | 0.58% 
|                                                

Nonaccrual, Accruing Loans 90 Days or More Past Due, and
Restructured Loans:


11



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##### Table of Contents









Potential Problem Loans:


Analysis of Allowance for Loan Losses:






|                 |       |                          |         |          |      |            |         |          |      |            |         |          |      |            |        |          |      |            |        |          |     
|---------------- | ----- | ------------------------ | ------- | -------- | ---- | ---------- | ------- | -------- | ---- | ---------- | ------- | -------- | ---- | ---------- | ------ | -------- | ---- | ---------- | ------ | -------- | ----
|                
|December 31,     |       | 2005 2004 2003 2002 2001
|                
|Balance          |       | % of Total               |         |          |      | % of Total |         |          |      | % of Total |         |          |      | % of Total |        |          |      | % of Total
|applicable       |       | Amount                   |         | Loans(1) |      | Amount     |         | Loans(1) |      | Amount     |         | Loans(1) |      | Amount     |        | Loans(1) |      | Amount     |        | Loans(1)
|                
|                 |       | (Dollars in Thousands)  
|Commercial       |       | $6,913                   |         | 41%      |      | $5,130     |         | 39%      |      | $5,610     |         | 37%      |      | $4,285     |        | 35%      |      | $4,086     |        | 34%     
|Construction     |       | 246                      |         | 19%      |      | 276        |         | 18%      |      | 282        |         | 17%      |      | 1,327      |        | 15%      |      | 336        |        | 14%     
|Real estate term |       | 1,214                    |         | 35%      |      | 1,634      |         | 37%      |      | 413        |         | 40%      |      | 275        |        | 40%      |      | 410        |        | 37%     
|Loans for sale   |       |                         |         | 0%       |      |           |         | 0%       |      |           |         | 0%       |      |           |        | 1%       |      |           |        | 4%      
|Consumer         |       | 37                       |         | 5%       |      |           |         | 6%       |      | 3          |         | 6%       |      | 22         |        | 9%       |      | 5          |        | 11%     
|Unallocated      |       | 2,296                    |         | 0%       |      | 3,724      |         |          |      | 3,878      |         |          |      | 2,567      |        |          |      | 2,363      |        |         
|                
|                 | Total |                          | $10,706 |          | 100% |            | $10,764 |          | 100% |            | $10,186 |          | 100% |            | $8,476 |          | 100% |            | $7,200 |          | 100%
|                



|    |                                                                
|--- | ---------------------------------------------------------------
|(1) | Represents percentage of this category of loans to total loans.

12



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##### Table of Contents





|                                                                            |                    |                               |                   |         |         |         |         |         |         |         |         |         |        
|--------------------------------------------------------------------------- | ------------------ | ----------------------------- | ----------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -------
|                                                                           
|December 31,                                                                |                    | 2005                          |                   | 2004    |         | 2003    |         | 2002    |         | 2001   
|                                                                           
|                                                                            |                    | (In Thousands)               
|Balance at beginning of period                                              |                    | $10,764                       |                   | $10,186 |         | $8,476  |         | $7,200  |         | $6,208 
|Charge-offs:                                                                |                    |                               |                   |         |         |         |         |         |         |        
|                                                                            | Commercial loans   |                               | (1,552)           |         | (1,387) |         | (2,067) |         | (1,791) |         | (687)  
|                                                                            | Construction loans |                               | (100)             |         |        |         |        |         |        |         |       
|                                                                            | Real estate loans  |                               |                  |         |        |         | (127)   |         | (67)    |         | (748)  
|                                                                            | Consumer loans     |                               | (63)              |         | (84)    |         | (91)    |         | (257)   |         | (118)  
|                                                                           
|                                                                            |                    |                               | Total charge-offs |         | (1,715) |         | (1,471) |         | (2,285) |         | (2,115) |         | (1,553)
|                                                                           
|Recoveries:                                                                 |                    |                               |                   |         |         |         |         |         |         |        
|                                                                            | Commercial loans   |                               | 418               |         | 200     |         | 279     |         | 168     |         | 234    
|                                                                            | Construction loans |                               | 15                |         | 185     |         |        |         |        |         |       
|                                                                            | Real estate loans  |                               | 15                |         |        |         | 111     |         | 48      |         |       
|                                                                            | Consumer loans     |                               | 39                |         | 63      |         | 38      |         | 80      |         | 11     
|                                                                           
|                                                                            |                    |                               | Total recoveries  |         | 487     |         | 448     |         | 428     |         | 296     |         | 245    
|                                                                           
|                                                                            |                    | Charge-offs net of recoveries |                   | (1,228) |         | (1,023) |         | (1,857) |         | (1,819) |         | (1,308)
|                                                                           
|Provision for loan losses                                                   |                    | 1,170                         |                   | 1,601   |         | 3,567   |         | 3,095   |         | 2,300  
|                                                                           
|Balance at end of period                                                    |                    | $10,706                       |                   | $10,764 |         | $10,186 |         | $8,476  |         | $7,200 
|                                                                           
|Ratio of net charge-offs to average loans outstanding during the
    period |                    | 0.18%                         |                   | 0.16%   |         | 0.33%   |         | 0.36%   |         | 0.29%  
|                                                                           

Credit Authority and Loan Limits:


loan-to


Loan Policy:


Loans Receivable:


13



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##### Table of Contents



Loan Portfolio Composition:


|               |                                             |                          |          |         |          |         |        |          |          |         |        |          |          |         |        |          |          |         |        |          |          |         |        |        
|-------------- | ------------------------------------------- | ------------------------ | -------- | ------- | -------- | ------- | ------ | -------- | -------- | ------- | ------ | -------- | -------- | ------- | ------ | -------- | -------- | ------- | ------ | -------- | -------- | ------- | ------ | -------
|              
|December 31,   |                                             | 2005 2004 2003 2002 2001
|              
|               |                                             | Percent                  |          |         |          | Percent |        |          |          | Percent |        |          |          | Percent |        |          |          | Percent
|               |                                             | Amount                   |          |         | of Total |         | Amount |          | of Total |         | Amount |          | of Total |         | Amount |          | of Total |         | Amount |          | of Total
|              
|               |                                             | (Dollars in Thousands)  
|Commercial     |                                             |                          | $287,617 |         |          | 40.79%  |        | $267,737 |          | 39.47%  |        | $220,774 |          | 36.73%  |        | $187,312 |          | 35.01%  |        | $166,845 |          | 34.57% 
|               | Real estate loans:                          |                          |          |         |          |         |        |          |          |         |        |          |          |         |        |          |          |         |        |          |          |         |       
|               | Construction                                |                          |          | 131,532 |          |         | 18.66% |          | 122,873  |         | 18.12% |          | 102,311  |         | 17.02% |          | 82,739   |         | 15.47% |          | 68,952   |         | 14.29%
|               | Real estate term                            |                          |          | 252,395 |          |         | 35.80% |          | 252,358  |         | 37.21% |          | 239,545  |         | 39.85% |          | 212,740  |         | 39.77% |          | 177,493  |         | 36.78%
|               | Real estate loans for sale                  |                          |          |        |          |         | 0.00%  |          |         |         | 0.00%  |          | 1,395    |         | 0.23%  |          | 7,437    |         | 1.39%  |          | 19,496   |         | 4.04% 
|Consumer loans |                                             |                          | 36,519   |         |          | 5.18%   |        | 38,166   |          | 5.63%   |        | 39,796   |          | 6.62%   |        | 47,415   |          | 8.86%   |        | 52,236   |          | 10.82% 
|              
|               |                                             | Total                    |          |         | 708,063  |         |        | 100.43%  |          | 681,134 |        | 100.42%  |          | 603,821 |        | 100.45%  |          | 537,643 |        | 100.50%  |          | 485,022 |        | 100.51%
|Less:          |                                             |                          |          |         |          |         |        |          |          |         |        |          |          |         |        |          |          |         |        |          |          |        
|               | Unearned purchase discount                  |                          |          |        |          |         | 0.00%  |          | (44)     |         | -0.01% |          | (44)     |         | -0.01% |          | (44)     |         | -0.01% |          | (271)    |         | -0.06%
|               | Unearned loan fees net of origination costs |                          |          | (3,004) |          |         | -0.43% |          | (2,821)  |         | -0.42% |          | (2,658)  |         | -0.44% |          | (2,609)  |         | -0.49% |          | (2,189)  |         | -0.45%
|              
|Net loans      |                                             |                          | $705,059 |         |          | 100.00% |        | $678,269 |          | 100.00% |        | $601,119 |          | 100.00% |        | $534,990 |          | 100.00% |        | $482,562 |          | 100.00%
|              



|                               |       |                |          |         |          |         |          |          |         
|------------------------------ | ----- | -------------- | -------- | ------- | -------- | ------- | -------- | -------- | --------
|                              
|                               |       | Maturity      
|                              
|                               |       | Within         |          | 1-5     |          | Over 5  |          |         
|                               |       | 1 Year         |          | Years   |          | Years   |          | Total   
|                              
|                               |       | (In Thousands)
|Commercial                     |       | $152,253       |          | $79,929 |          | $55,435 |          | $287,617
|Construction                   |       | 121,748        |          | 6,094   |          | 3,690   |          | 131,532 
|Real estate term               |       | 62,547         |          | 56,850  |          | 132,998 |          | 252,395 
|Installment and other consumer |       | 1,423          |          | 6,271   |          | 28,825  |          | 36,519  
|                              
|                               | Total |                | $337,971 |         | $149,144 |         | $220,948 |          | $708,063
|                              
|Fixed interest rate            |       | $131,649       |          | $55,680 |          | $49,921 |          | $237,250
|Floating interest rate         |       | 206,322        |          | 93,464  |          | 171,027 |          | 470,813 
|                              
|                               | Total |                | $337,971 |         | $149,144 |         | $220,948 |          | $708,063
|                              

Commercial Loans:


Construction Loans:


Land Development:


One-to one-to one-to


14



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##### Table of Contents



Commercial Construction:


Real Estate Loans for Sale:




Commercial Real Estate:


long-term


Consumer Loans:


Off-Balance Sheet Arrangements  Commitments and
Contingent Liabilities:


Investments and Investment Activities


General:




Investment Portfolio Composition:


Securities Available For Sale:


Securities Held To Maturity:


15



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##### Table of Contents





|                               |                            |                |         |         |         |        
|------------------------------ | -------------------------- | -------------- | ------- | ------- | ------- | -------
|                              
|                               |                            | Amortized      |         | Market 
|December 31,                   |                            | Cost           |         | Value  
|                              
|                               |                            | (In Thousands)
|Securities Available for Sale: |                            |                |         |        
|2005:                          |                            |                |         |        
|                               | U.S. Treasury              |                | $15,930 |         | $15,761
|                               | U.S. Agency                |                | 37,140  |         | 36,482 
|                               | Mortgage-backed Securities |                | 242     |         | 240    
|                              
|                               |                            | Total          |         | $53,312 |         | $52,483
|                              
|2004:                          |                            |                |         |        
|                               | U.S. Treasury              |                | $5,503  |         | $5,481 
|                               | U.S. Agency                |                | 53,628  |         | 53,656 
|                               | Mortgage-backed Securities |                | 311     |         | 312    
|                              
|                               |                            | Total          |         | $59,442 |         | $59,449
|                              
|2003:                          |                            |                |         |        
|                               | U.S. Treasury              |                | $498    |         | $500   
|                               | U.S. Agency                |                | 68,742  |         | 69,797 
|                               | Mortgage-backed Securities |                | 418     |         | 420    
|                              
|                               |                            | Total          |         | $69,658 |         | $70,717
|                              
|Securities Held to Maturity:   |                            |                |         |        
|2005:                          |                            |                |         |        
|                               | Municipal securities       |                | $936    |         | $957   
|                              
|                               |                            | Total          |         | $936    |         | $957   
|                              
|2004:                          |                            |                |         |        
|                               | Municipal securities       |                | $724    |         | $771   
|                              
|                               |                            | Total          |         | $724    |         | $771   
|                              
|2003:                          |                            |                |         |        
|                               | Municipal securities       |                | $945    |         | $1,011 
|                              
|                               |                            | Total          |         | $945    |         | $1,011 
|                              



16



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##### Table of Contents



Market Value, Maturities and Weighted Average
Yields:


|                               |                            |                        |  |         |  |         |  |         |  |       |  |        
|------------------------------ | -------------------------- | ---------------------- |  | ------- |  | ------- |  | ------- |  | ----- |  | -------
|                              
|                               |                            | Maturity              
|                              
|                               |                            | Within                 |  | 1-5     |  | 5-10    |  | Over 10 |  |      
|                               |                            | 1 year                 |  | years   |  | years   |  | years   |  | Total
|                              
|                               |                            | (Dollars In Thousands)
|Securities Available for Sale: |                            |                        |  |         |  |         |  |         |  |      
|                               | U.S. Treasury              |                        |  |         |  |         |  |         |  |       | 
|                               |                            | Balance                |  | $10,878 |  | $4,883  |  | $      |  | $    |  | $15,761
|                               |                            | Weighted Average Yield |  | 2.92%   |  | 3.42%   |  | 0.00%   |  | 0.00% |  | 3.08%  
|                              
|                               | U.S. Agency                |                        |  |         |  |         |  |         |  |       | 
|                               |                            | Balance                |  | $1,524  |  | $34,958 |  | $      |  | $    |  | $36,482
|                               |                            | Weighted Average Yield |  | 3.00%   |  | 3.87%   |  | 0.00%   |  | 0.00% |  | 3.83%  
|                              
|                               | Mortgage-Backed Securities |                        |  |         |  |         |  |         |  |       | 
|                               |                            | Balance                |  | $      |  | $      |  | $      |  | $240  |  | $240   
|                               |                            | Weighted Average Yield |  | 0.00%   |  | 0.00%   |  | 0.00%   |  | 4.52% |  | 4.52%  
|                              
|                               | Total                      |                        |  |         |  |         |  |         |  |       | 
|                               |                            | Balance                |  | $12,402 |  | $39,841 |  | $      |  | $240  |  | $52,483
|                               |                            | Weighted Average Yield |  | 2.93%   |  | 3.81%   |  | 0.00%   |  | 4.52% |  | 3.61%  
|                              
|Securities Held to Maturity:   |                            |                        |  |         |  |         |  |         |  |      
|Municipal Securities           |                            |                        |  |         |  |         |  |         |  |      
|                               |                            | Balance                |  | $65     |  | $310    |  | $444    |  | $138  |  | $957   
|                               |                            | Weighted Average Yield |  | 3.84%   |  | 4.35%   |  | 3.88%   |  | 5.11% |  | 4.20%  
|                              



Purchased Receivables


General: ®




Policy and Authority Limits:


Liabilities


Deposits





General:


17



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##### Table of Contents



Average Balances and Rates:


|                                    |                                 |                        |          |           |       |         |          |           |       |         |          |           |       |         |          |           |       |         |          |           |      
|----------------------------------- | ------------------------------- | ---------------------- | -------- | --------- | ----- | ------- | -------- | --------- | ----- | ------- | -------- | --------- | ----- | ------- | -------- | --------- | ----- | ------- | -------- | --------- | -----
|                                   
|December 31,                        |                                 | 2005                   |          | 2004      |       | 2003    |          | 2002      |       | 2001   
|                                   
|                                    |                                 | Average                |          | Average   |       | Average |          | Average   |       | Average |          | Average   |       | Average |          | Average   |       | Average |          | Average  
|                                    |                                 | balance                |          | rate paid |       | balance |          | rate paid |       | balance |          | rate paid |       | balance |          | rate paid |       | balance |          | rate paid
|                                   
|                                    |                                 | (Dollars in Thousands)
|Interest-bearing demand accounts    |                                 | $65,890                |          | 0.56%     |       | $57,373 |          | 0.39%     |       | $52,955 |          | 0.39%     |       | $49,198 |          | 0.72%     |       | $45,334 |          | 1.86%    
|Money market accounts               |                                 | 139,331                |          | 2.78%     |       | 126,567 |          | 1.21%     |       | 134,582 |          | 0.96%     |       | 131,227 |          | 1.57%     |       | 132,950 |          | 3.44%    
|Savings accounts                    |                                 | 207,277                |          | 3.02%     |       | 139,876 |          | 1.64%     |       | 104,158 |          | 1.13%     |       | 82,061  |          | 1.84%     |       | 34,731  |          | 2.50%    
|Certificates of deposit             |                                 | 138,284                |          | 2.52%     |       | 155,134 |          | 1.72%     |       | 164,847 |          | 2.14%     |       | 172,531 |          | 3.50%     |       | 190,693 |          | 5.37%    
|                                   
|                                    | Total interest-bearing accounts |                        | 550,782  |           | 2.54% |         | 478,950  |           | 1.40% |         | 456,542  |           | 1.36% |         | 435,017  |           | 2.29% |         | 403,708  |           | 4.09%
|Noninterest-bearing demand accounts |                                 | 182,535                |          |           |       | 181,731 |          |           |       | 159,858 |          |           |       | 135,181 |          |           |       | 109,748 |          |          
|                                   
|                                    | Total average deposits          |                        | $733,317 |           |       |         | $660,681 |           |       |         | $616,400 |           |       |         | $570,198 |           |       |         | $513,456 |           |      
|                                   

Certificates of Deposit:


|                    |                               |                |         |         |         |         |         |         |         |         |         |        
|------------------- | ----------------------------- | -------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -------
|                   
|December 31,        |                               | 2005           |         | 2004    |         | 2003    |         | 2002    |         | 2001   
|                   
|                    |                               | (In Thousands)
|Remaining maturity: |                               |                |         |         |         |         |         |         |         |        
|                    | Three months or less          |                | $32,296 |         | $20,427 |         | $47,480 |         | $29,828 |         | $20,739
|                    | Over three through six months |                | 4,830   |         | 24,673  |         | 9,017   |         | 21,505  |         | 27,531 
|                    | Over six through 12 months    |                | 9,226   |         | 25,976  |         | 19,966  |         | 15,535  |         | 30,549 
|                    | Over 12 months                |                | 4,897   |         | 11,411  |         | 19,651  |         | 20,549  |         | 19,167 
|                   
|                    |                               | Total          |         | $51,249 |         | $82,487 |         | $96,114 |         | $87,417 |         | $97,986
|                   

Alaska Certificates of Deposit:


Alaska Permanent Fund:


Borrowings





FHLB:


Other Short-term Borrowing:


18



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##### Table of Contents



Contractual Obligations







|                            |       |                        |       |        |       |  |       |        |  |  |         |        |  |       |         |         |  |  |         |         | 
|--------------------------- | ----- | ---------------------- | ----- | ------ | ----- |  | ----- | ------ |  |  | ------- | ------ |  | ----- | ------- | ------- |  |  | ------- | ------- | 
|                            |      
|                            |       | Payments Due by Period |      
|                            |      
|                            |       | Within                 |       |        | 1-3   |  |       | 3-5    |  |  | Over    |        |  |      
|December 31, 2005           |       | 1 Year                 |       |        | Years |  |       | Years  |  |  | 5 Years |        |  | Total |        
|                            |      
|                            |       | (In Thousands)         |      
|Long-term debt obligations  |       |                        | $400  |        |       |  | $800  |        |  |  | $800    |        |  |       | $18,574 |         |  |  | $20,574 |        
|Operating lease obligations |       |                        | 1,338 |        |       |  | 2,420 |        |  |  | 225     |        |  |       | 1,544   |         |  |  | 5,527   |        
|Other long-term liabilities |       |                        |      |        |       |  |      |        |  |  |        |        |  |       |        |         |  |  |        |        
|                           
|                            | Total |                        |       | $1,738 |       |  |       | $3,220 |  |  |         | $1,025 |  |       |         | $20,118 |  |  |         | $26,101 | 
|                           

|                            |       |                        |       |        |       |  |       |        |  |  |         |        |  |       |        |         |  |  |         |         | 
|--------------------------- | ----- | ---------------------- | ----- | ------ | ----- |  | ----- | ------ |  |  | ------- | ------ |  | ----- | ------ | ------- |  |  | ------- | ------- | 
|                            |      
|                            |       | Payments Due by Period |      
|                            |      
|                            |       | Within                 |       |        | 1-3   |  |       | 3-5    |  |  | Over    |        |  |      
|December 31, 2004           |       | 1 Year                 |       |        | Years |  |       | Years  |  |  | 5 Years |        |  | Total |       
|                            |      
|                            |       | (In Thousands)         |      
|Long-term debt obligations  |       |                        | $400  |        |       |  | $800  |        |  |  | $800    |        |  |       | $8,974 |         |  |  | $10,974 |        
|Operating lease obligations |       |                        | 1,407 |        |       |  | 2,432 |        |  |  | 1,295   |        |  |       | 1,612  |         |  |  | 6,746   |        
|Other long-term liabilities |       |                        | 507   |        |       |  |      |        |  |  |        |        |  |       |       |         |  |  | 507     |        
|                           
|                            | Total |                        |       | $2,314 |       |  |       | $3,232 |  |  |         | $2,095 |  |       |        | $10,586 |  |  |         | $18,227 | 
|                           



Liquidity and Capital Resources








19



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##### Table of Contents







|              |  |             |  |                 
|------------- |  | ----------- |  | ----------------
|             
|              |  | Diluted    
|              |  | Diluted EPS |  | EPS without     
|Years Ending: |  | as Reported |  | Stock Repurchase
|             
|2005          |  | $1.81       |  | $1.71           
|2004          |  | $1.71       |  | $1.65           
|2003          |  | $1.69       |  | $1.64           
|2002          |  | $1.35       |  | $1.35           
|             











|                          |  |              |  |             |  |              |  |             
|------------------------- |  | ------------ |  | ----------- |  | ------------ |  | ------------
|                         
|December 31, 2005         |  | Adequately - |  | Well -      |  | Actual Ratio |  | Actual Ratio
|                          |  | Capitalized  |  | Capitalized |  | BHC          |  | Bank        
|                         
|Tier 1 risk-based capital |  | 4.00%        |  | 6.00%       |  | 12.10%       |  | 10.32%      
|Total risk-based capital  |  | 8.00%        |  | 10.00%      |  | 13.35%       |  | 11.57%      
|Leverage ratio            |  | 4.00%        |  | 5.00%       |  | 10.81%       |  | 9.24%       
|                         



20



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##### Table of Contents



Effects of Inflation and Changing Prices




Market for Common Stock








|     |      |         |  |        |         |  |  |         |  |  |         |        |  |  |  |        | 
|---- | ---- | ------- |  | ------ | ------- |  |  | ------- |  |  | ------- | ------ |  |  |  | ------ | 
|     |     
|     |      | First   |  |        | Second  |  |  | Third   |  |  | Fourth  |       
|     |      | Quarter |  |        | Quarter |  |  | Quarter |  |  | Quarter |       
|     |     
|2005 |      |         |  |        |         |  |  |         |  |  |         |        |  |  |  |       
|     | High |         |  | $25.18 |         |  |  | $25.00  |  |  |         | $25.10 |  |  |  | $25.50 | 
|     | Low  |         |  | $23.20 |         |  |  | $22.07  |  |  |         | $23.38 |  |  |  | $23.25 | 
|2004 |      |         |  |        |         |  |  |         |  |  |         |        |  |  |  |       
|     | High |         |  | $25.64 |         |  |  | $25.56  |  |  |         | $21.85 |  |  |  | $23.84 | 
|     | Low  |         |  | $22.64 |         |  |  | $18.65  |  |  |         | $20.01 |  |  |  | $21.83 | 
|    

Repurchase of Securities







|                   |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |        | 
|------------------ | ----- | ----------------- | ------ | ------ | ----------------------------- |  | ------ | -------------------- |  |  | ------------------- | ------ |  |  | ------- | ------ | 
|                   |      
|                   |       | Maximum number(1) |       
|                   |       | Total number of   |        |        | (or approximate dollar value) | 
|                   |       | shares (or units) |        |        | of shares (or units)          | 
|                   |       | Total number of   |        |        | Average price                 |  |        | purchased as part of |  |  | that may yet be     |       
|                   |       | shares (or units) |        |        | paid per share                |  |        | publicly announced   |  |  | purchased under the |       
|                   |       | purchased         |        |        | (or unit)                     |  |        | plans or programs    |  |  | plans or programs   |       
|Period             |       | (a)               |        |        | (b)                           |  |        | (c)                  |  |  | (d)                 |       
|                   |      
|Month #1           |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |       
|October 1, 2005   |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |       
|October 31, 2005   |       |                   |       |        |                               |  | $     |                      |  |  |                    |        |  |  | 117,213 |       
|                  
|Month #2           |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |       
|November 1, 2005  |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |       
|November 30, 2005  |       |                   | 35,000 |        |                               |  | $23.44 |                      |  |  | 35,000              |        |  |  | 82,213  |       
|                  
|Month #3           |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |       
|December 1, 2005  |       |                   |        |        |                               |  |        |                      |  |  |                     |        |  |  |         |       
|December 31, 2005  |       |                   | 5,000  |        |                               |  | $24.39 |                      |  |  | 5,000               |        |  |  | 77,213  |       
|                  
|                   | Total |                   |        | 40,000 |                               |  |        | $23.56               |  |  |                     | 40,000 |  |  |         | 77,213 | 
|                  

21



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In September 2002, the Company publicly announced Board of
    Director authorization to, from time to time, repurchase up to
    5%, or 306,372, shares of common stock in the open market. In
    August 2004, the Company publicly announced the Boards
    authorization to increase the stock in its repurchase program by
    an additional 304,283, or 5%, of total shares outstanding. As a
    result, the total shares available under the Plan at that time
    increased to 385,855 shares. In the three-month period
    ending December 31, 2005, the Company repurchased
    40,000 shares, which brought the total shares available
    under the Plan to 77,213 shares.

Equity Compensation Plan Information





|                                                       |       |                      |         |                      |        |                           |        
|------------------------------------------------------ | ----- | -------------------- | ------- | -------------------- | ------ | ------------------------- | -------
|                                                      
|                                                       |       | Number of securities
|                                                       |       | Number of securities |         |                      |        | remaining available for  
|                                                       |       | to be issued         |         | Weighted-average     |        | future issuance under    
|                                                       |       | upon exercise of     |         | exercise price of    |        | equity compensation plans
|                                                       |       | outstanding options, |         | outstanding options, |        | (excluding securities    
|                                                       |       | warrants and rights  |         | warrants and rights  |        | reflected in column      
|Plan Category                                          |       | (a)                  |         | (b)                  |        | (a))                     
|                                                      
|Equity compensation plans approved by security holders |       | 424,003              |         | $13.07               |        | 205,606                  
|                                                      
|                                                       | Total |                      | 424,003 |                      | $13.07 |                           | 205,606
|                                                      

Recent Accounting Pronouncements


Inventory Costs Accounting for Real Estate Time-Sharing Transactions Exchanges of Nonmonetary Assets Accounting Changes and Error
Corrections.


Share-Based Payment Accounting for Stock-Based
Compensation. Accounting for Stock Issued to Employees


Quantitative and Qualitative Disclosure About Market Risk




12-month






22



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##### Table of Contents









|                              |                                                                         |                                                      |                                               |           |           |          |          |         |          |        |          |         |         
|----------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------- | --------- | --------- | -------- | -------- | ------- | -------- | ------ | -------- | ------- | --------
|                             
|                              |                                                                         | Estimated maturity or repricing at December 31, 2005
|                              |                                                                         | Within 1 year                                        |                                               |           | 1-5 years |          | 35 years |         | Total   
|                             
|                              |                                                                         | (In Thousands)                                      
|Interest-Earning Assets:      |                                                                         |                                                      |                                               |           |           |          |          |         |          |       
|                              | Money market investments                                                |                                                      |                                               | $60,836   |           |          | $       |         | $       |        | $60,836 
|                              | Investment securities                                                   |                                                      |                                               | 12,467    |           |          | 40,141   |         | 2,367    |        | 54,975  
|                              | Loans:                                                                  |                                                      |                                               |           |           |          |          |         |          |        |         
|                              |                                                                         | Commercial                                           |                                               |           | 213,379   |          |          | 65,145  |          | 4,949  |          | 283,473
|                              |                                                                         | Real estate construction                             |                                               |           | 126,504   |          |          | 4,894   |          |       |          | 131,398
|                              |                                                                         | Real estate term                                     |                                               |           | 138,720   |          |          | 110,862 |          | 2,003  |          | 251,585
|                              |                                                                         | Installment and other consumer                       |                                               |           | 14,038    |          |          | 10,386  |          | 12,093 |          | 36,517 
|                             
|                              |                                                                         |                                                      | Total interest-earning assets                 |           |           | $565,944 |          |         | $231,428 |        | $21,412  |         | $818,784
|                              |                                                                         |                                                      | Percent of total interest-earning assets      |           |           | 69%      |          |         | 28%      |        | 3%       |         | 100%    
|                             
|Interest-Bearing Liabilities: |                                                                         |                                                      |                                               |           |           |          |          |         |          |       
|                              | Interest-bearing demand accounts                                        |                                                      |                                               | $75,988   |           |          | $       |         | $       |        | $75,988 
|                              | Money market accounts                                                   |                                                      |                                               | 151,903   |           |          |         |         |         |        | 151,903 
|                              | Savings accounts                                                        |                                                      |                                               | 244,779   |           |          |         |         |         |        | 244,779 
|                              | Certificates of deposit                                                 |                                                      |                                               | 92,111    |           |          | 18,449   |         | 20       |        | 110,580 
|                              | FHLB advances                                                           |                                                      |                                               |          |           |          |         |         | 2,574    |        | 2,574   
|                              | Other borrowings                                                        |                                                      |                                               | 5,841     |           |          |         |         |         |        | 5,841   
|                              | Junior subordinated debentures                                          |                                                      |                                               | 18,000    |           |          |         |         |         |        | 18,000  
|                             
|                              |                                                                         |                                                      | Total interest-bearing liabilities            |           |           | $588,622 |          |         | $18,449  |        | $2,594   |         | $609,665
|                              |                                                                         |                                                      | Percent of total interest-bearing liabilities |           |           | 97%      |          |         | 3%       |        | 0%       |         | 100%    
|                             
|                              | Interest sensitivity gap                                                |                                                      |                                               | ($22,678) |           |          | $212,979 |         | $18,818  |        | $209,119
|                              | Cumulative interest sensitivity gap                                     |                                                      |                                               | ($22,678) |           |          | $190,301 |         | $209,119 |        |         
|                              | Cumulative interest sensitivity gap as a percentage of total
    assets |                                                      |                                               | -3%       |           |          | 21%      |         | 23%      |        |         
|                             



23



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##### Table of Contents





12-month


Critical Accounting Estimates






Controls and Procedures


Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures




Managements Report on Internal Control Over Financial
Reporting


13a-15(f)




Internal
Control  Integrated Framework.






24



---



##### Table of Contents






Report of Independent Registered Public Accounting Firm




























25



---



##### Table of Contents






Report of Independent Registered Public Accounting Firm























26



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##### Table of Contents






Consolidated Financial Statements








|                                      |                                                                                                                                                                         |                                                        |                                            |          |          |          |         
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | -------- | -------- | -------- | --------
|                                     
|                                      |                                                                                                                                                                         | 2005                                                   |                                            | 2004    
|                                     
|                                      |                                                                                                                                                                         | (In Thousands Except Share Amounts)                   
|Assets                                |                                                                                                                                                                         |                                                        |                                            |         
|                                      | Cash and due from banks (Note 2)                                                                                                                                        |                                                        | $28,854                                    |          | $18,936 
|                                      | Money market investments (Note 3)                                                                                                                                       |                                                        | 60,836                                     |          | 12,157  
|                                      | Investment securities held to maturity (Note 4)                                                                                                                         |                                                        | 936                                        |          | 724     
|                                      | Investment securities available for sale (Note 4)                                                                                                                       |                                                        | 52,483                                     |          | 59,449  
|                                      | Investment in Federal Home Loan Bank stock (Note 4)                                                                                                                     |                                                        | 1,556                                      |          | 1,302   
|                                     
|                                      |                                                                                                                                                                         |                                                        | Total Portfolio Investments                |          | 54,975   |          | 61,475  
|                                      | Loans (Note 5)                                                                                                                                                          |                                                        | 705,059                                    |          | 678,269 
|                                      | Allowance for loan losses (Note 6)                                                                                                                                      |                                                        | (10,706)                                   |          | (10,764)
|                                     
|                                      |                                                                                                                                                                         |                                                        | Net Loans                                  |          | 694,353  |          | 667,505 
|                                      | Purchased receivables                                                                                                                                                   |                                                        | 12,198                                     |          | 2,191   
|                                      | Accrued interest receivable                                                                                                                                             |                                                        | 4,397                                      |          | 3,678   
|                                      | Premises and equipment, net (Note 7)                                                                                                                                    |                                                        | 10,603                                     |          | 10,583  
|                                      | Intangible assets (Notes 1 and 8)                                                                                                                                       |                                                        | 7,385                                      |          | 6,634   
|                                      | Other assets (Notes 1 and 8)                                                                                                                                            |                                                        | 21,421                                     |          | 17,567  
|                                     
|                                      |                                                                                                                                                                         |                                                        | Total Assets                               |          | $895,022 |          | $800,726
|                                     
|Liabilities                           |                                                                                                                                                                         |                                                        |                                            |         
|                                      | Deposits:                                                                                                                                                               |                                                        |                                            |          |         
|                                      |                                                                                                                                                                         | Demand                                                 |                                            | $196,616 |          | $183,959
|                                      |                                                                                                                                                                         | Interest-bearing demand                                |                                            | 75,988   |          | 59,933  
|                                      |                                                                                                                                                                         | Savings                                                |                                            | 46,790   |          | 47,406  
|                                      |                                                                                                                                                                         | Alaska CDs                                             |                                            | 197,989  |          | 123,223 
|                                      |                                                                                                                                                                         | Money market                                           |                                            | 151,903  |          | 142,181 
|                                      |                                                                                                                                                                         | Certificates of deposit less than $100,000 (Note 9)    |                                            | 59,331   |          | 59,872  
|                                      |                                                                                                                                                                         | Certificates of deposit greater than $100,000 (Note 9) |                                            | 51,249   |          | 82,487  
|                                     
|                                      |                                                                                                                                                                         |                                                        | Total Deposits                             |          | 779,866  |          | 699,061 
|                                      | Borrowings (Note 10)                                                                                                                                                    |                                                        | 8,415                                      |          | 6,478   
|                                      | Junior subordinated debentures (Note 11)                                                                                                                                |                                                        | 18,000                                     |          | 8,000   
|                                      | Other liabilities                                                                                                                                                       |                                                        | 4,267                                      |          | 3,829   
|                                     
|                                      |                                                                                                                                                                         |                                                        | Total Liabilities                          |          | 810,548  |          | 717,368 
|                                     
|Shareholders Equity (Note 16 and 17) |                                                                                                                                                                         |                                                        |                                            |         
|                                      | Common stock, $1 par value, 10,000,000 shares
    authorized,
    5,803,487 and 6,089,120 shares issued and outstanding
    at December 31, 2005 and 2004, respectively |                                                        | 5,803                                      |          | 6,089   
|                                      | Additional paid-in capital                                                                                                                                              |                                                        | 39,161                                     |          | 45,876  
|                                      | Retained earnings                                                                                                                                                       |                                                        | 39,999                                     |          | 31,389  
|                                      | Accumulated other comprehensive income-
    net unrealized gains/losses on available for sale on investment
    securities                                              |                                                        | (489)                                      |          | 4       
|                                     
|                                      |                                                                                                                                                                         |                                                        | Total Shareholders Equity                 |          | 84,474   |          | 83,358  
|                                     
|                                      | Commitments and contingencies (Notes 2, 4,
    10, 15, 18, 19, and 22)                                                                                                  |                                                        |                                            |          |         
|                                     
|                                      |                                                                                                                                                                         |                                                        | Total Liabilities and Shareholders Equity |          | $895,022 |          | $800,726
|                                     



27



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##### Table of Contents









|                                     |                                                                   |                                                     |         |           |         |           |         |          
|------------------------------------ | ----------------------------------------------------------------- | --------------------------------------------------- | ------- | --------- | ------- | --------- | ------- | ---------
|                                    
|                                     |                                                                   | 2005                                                |         | 2004      |         | 2003     
|                                    
|                                     |                                                                   | (In Thousands Except Per Share Amounts)            
|Interest Income                      |                                                                   |                                                     |         |           |         |          
|                                     | Interest and fees on loans                                        |                                                     | $55,870 |           | $45,898 |           | $42,945
|                                     | Interest on investment securities-available for sale
    (Note 4) |                                                     | 2,171   |           | 2,400   |           | 2,724  
|                                     | Interest on investment securities-held to maturity (Note 4)       |                                                     | 31      |           | 92      |           | 143    
|                                     | Interest on money market investments                              |                                                     | 709     |           | 164     |           | 136    
|                                    
|                                     |                                                                   | Total Interest Income                               |         | 58,781    |         | 48,554    |         | 45,948   
|                                    
|Interest Expense                     |                                                                   |                                                     |         |           |         |          
|                                     | Interest expense on deposits and borrowings (Note 12)             |                                                     | 14,873  |           | 7,283   |           | 6,681  
|                                    
|                                     |                                                                   | Net Interest Income                                 |         | 43,908    |         | 41,271    |         | 39,267   
|                                    
|Provision for loan losses (Note 6)   |                                                                   | 1,170                                               |         | 1,601     |         | 3,567    
|                                    
|                                     |                                                                   | Net Interest Income After Provision for Loan Losses |         | 42,738    |         | 39,670    |         | 35,700   
|                                    
|Other Operating Income               |                                                                   |                                                     |         |           |         |          
|                                     | Service charges on deposit accounts                               |                                                     | 1,800   |           | 1,718   |           | 1,805  
|                                     | Purchased receivable income                                       |                                                     | 993     |           | 201     |           | 35     
|                                     | Equity in earnings from RML Holding Company                       |                                                     | 493     |           | 438     |           | 2,785  
|                                     | Equity in loss from Elliott Cove                                  |                                                     | (424)   |           | (457)   |           | (554)  
|                                     | Other income                                                      |                                                     | 1,971   |           | 1,892   |           | 2,018  
|                                    
|                                     |                                                                   | Total Other Operating Income                        |         | 4,833     |         | 3,792     |         | 6,089    
|                                    
|                                    
|Other Operating Expense              |                                                                   |                                                     |         |           |         |          
|                                     | Salaries and other personnel expense                              |                                                     | 17,656  |           | 15,708  |           | 14,180 
|                                     | Occupancy, net                                                    |                                                     | 2,417   |           | 2,130   |           | 2,000  
|                                     | Equipment expense                                                 |                                                     | 1,371   |           | 1,372   |           | 1,504  
|                                     | Marketing expense                                                 |                                                     | 1,657   |           | 1,201   |           | 1,205  
|                                     | Intangible asset amortization expense                             |                                                     | 368     |           | 368     |           | 368    
|                                     | Other expense                                                     |                                                     | 6,008   |           | 5,756   |           | 5,471  
|                                    
|                                     |                                                                   | Total Other Operating Expense                       |         | 29,477    |         | 26,535    |         | 24,728   
|                                    
|                                     |                                                                   | Income Before Income Taxes                          |         | 18,094    |         | 16,927    |         | 17,061   
|                                    
|Provision for income taxes (Note 13) |                                                                   | 6,924                                               |         | 6,227     |         | 6,516    
|                                    
|                                     |                                                                   | Net Income                                          |         | $11,170   |         | $10,700   |         | $10,545  
|                                    
|                                     |                                                                   | Earnings Per Share, Basic                           |         | $1.87     |         | $1.76     |         | $1.76    
|                                    
|                                     |                                                                   | Earnings Per Share, Diluted                         |         | $1.81     |         | $1.71     |         | $1.69    
|                                    
|                                     |                                                                   | Weighted Average Shares Outstanding, Basic          |         | 5,987,404 |         | 6,079,315 |         | 6,000,273
|                                    
|                                     |                                                                   | Weighted Average Shares Outstanding, Diluted        |         | 6,173,137 |         | 6,270,615 |         | 6,225,889
|                                    



28



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|                                |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |       |        | 
|------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----- | - | ---------- |  | ----------- | ------- |  | ----- | -------- | - |  | ------------- | ------- | - | ----- |  | ------ | ----- |  |  | ------- | ----- | ------ | 
|                                |                                                                                                                                         
|                                |                                                                                                                                          | Common Stock               |       |   |            |  | Accumulated |         |  |      
|                                |                                                                                                                                          |                            |       |   | Additional |  |             |         |  | other |          |   | 
|                                |                                                                                                                                          | Number                     |       |   | Par        |  |             | paid-in |  |       | Retained |   |  | comprehensive |         |   |      
|                                |                                                                                                                                          | of shares                  |       |   | value      |  |             | capital |  |       | earnings |   |  | income        |         |   | Total | 
|                                |                                                                                                                                         
|                                |                                                                                                                                          | (In Thousands)             |      
|Balance as of January 1, 2003   |                                                                                                                                          |                            | 6,095 |   |            |  | $6,095      |         |  | $     | 46,614   |   |  |               | $14,460 |   |       |  | $1,204 |       |  |  | $68,373 |      
|Cash dividend                   |                                                                                                                                          |                            |      |   |            |  |            |         |  |       |         |   |  |               | (2,008) |   |       |  |       |       |  |  | (2,008) |      
|Exercise of Stock Options       |                                                                                                                                          |                            | 111   |   |            |  | 111         |         |  |       | 1,064    |   |  |               |        |   |       |  |       |       |  |  | 1,175   |      
|Treasury stock buy-back         |                                                                                                                                          |                            | (156) |   |            |  | (156)       |         |  |       | (2,063)  |   |  |               |        |   |       |  |       |       |  |  | (2,219) |      
|Comprehensive income:           |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |      
|                                | Change in unrealized holding (gain/loss) on available for sale
    investment securities, net of related income tax effect
    (Note 14) |                            |       |  |            |  |             |        |  |       |          |  |  |               |         |  |       |  |        | (581) |  |  |         | (581) |       
|Net Income                      |                                                                                                                                          |                            |      |   |            |  |            |         |  |       |         |   |  |               | 10,545  |   |       |  |       |       |  |  | 10,545  |      
|                                |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       | 
|                                |                                                                                                                                          | Total Comprehensive Income |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |       | 9,964  | 
|                               
|Balance as of December 31, 2003 |                                                                                                                                          |                            | 6,050 |   |            |  | $6,050      |         |  | $     | 45,615   |   |  |               | $22,997 |   |       |  | $623   |       |  |  | $75,285 |      
|Cash dividend                   |                                                                                                                                          |                            |      |   |            |  |            |         |  |       |         |   |  |               | (2,308) |   |       |  |       |       |  |  | (2,308) |      
|Exercise of Stock Options       |                                                                                                                                          |                            | 39    |   |            |  | 39          |         |  |       | 261      |   |  |               |        |   |       |  |       |       |  |  | 300     |      
|Comprehensive income:           |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |      
|                                | Change in unrealized holding (gain/loss) on available for sale
    investment securities, net of related income tax effect
    (Note 14) |                            |       |  |            |  |             |        |  |       |          |  |  |               |         |  |       |  |        | (619) |  |  |         | (619) |       
|Net Income                      |                                                                                                                                          |                            |      |   |            |  |            |         |  |       |         |   |  |               | 10,700  |   |       |  |       |       |  |  | 10,700  |      
|                                |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       | 
|                                |                                                                                                                                          | Total Comprehensive Income |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |       | 10,081 | 
|                               
|Balance as of December 31, 2004 |                                                                                                                                          |                            | 6,089 |   |            |  | $6,089      |         |  | $     | 45,876   |   |  |               | $31,389 |   |       |  | $4     |       |  |  | $83,358 |      
|Cash dividend                   |                                                                                                                                          |                            |      |   |            |  |            |         |  |       |         |   |  |               | (2,560) |   |       |  |       |       |  |  | (2,560) |      
|Exercise of Stock Options       |                                                                                                                                          |                            | 23    |   |            |  | 23          |         |  |       | 314      |   |  |               |        |   |       |  |       |       |  |  | 337     |      
|Treasury stock buy-back         |                                                                                                                                          |                            | (309) |   |            |  | (309)       |         |  |       | (7,029)  |   |  |               |        |   |       |  |       |       |  |  | (7,338) |      
|Comprehensive income:           |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |      
|                                | Change in unrealized holding (gain/loss) on available for sale
    investment securities, net of related income tax effect
    (Note 14) |                            |       |  |            |  |             |        |  |       |          |  |  |               |         |  |       |  |        | (493) |  |  |         | (493) |       
|Net Income                      |                                                                                                                                          |                            |      |   |            |  |            |         |  |       |         |   |  |               | 11,170  |   |       |  |       |       |  |  | 11,170  |      
|                                |                                                                                                                                          |                            |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       | 
|                                |                                                                                                                                          | Total Comprehensive Income |       |   |            |  |             |         |  |       |          |   |  |               |         |   |       |  |        |       |  |  |         |       | 10,677 | 
|                               
|Balance as of December 31, 2005 |                                                                                                                                          |                            | 5,803 |   |            |  | $5,803      |         |  | $     | 39,161   |   |  |               | $39,999 |   |       |  | ($489) |       |  |  | $84,474 |      
|                               



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|                                                                                      |                                                                            |                                                                       |                                                      |          |          |          |          |           |         
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------------------- | -------- | -------- | -------- | -------- | --------- | --------
|                                                                                     
|                                                                                      |                                                                            | 2005                                                                  |                                                      | 2004     |          | 2003    
|                                                                                     
|                                                                                      |                                                                            | (In Thousands)                                                       
|Operating Activities:                                                                 |                                                                            |                                                                       |                                                      |          |          |         
|                                                                                      |                                                                            | Net income                                                            |                                                      | $11,170  |          | $10,700  |          | $10,545  
|Adjustments to Reconcile Net Income to Net Cash Provided by
    Operating Activities: |                                                                            |                                                                       |                                                      |          |          |         
|                                                                                      | Security (gains), net                                                      |                                                                       | (9)                                                  |          | (151)    |          | (310)   
|                                                                                      | Depreciation and amortization of premises and equipment                    |                                                                       | 1,244                                                |          | 1,142    |          | 1,220   
|                                                                                      | Amortization of software                                                   |                                                                       | 544                                                  |          | 558      |          | 451     
|                                                                                      | Intangible asset amortization                                              |                                                                       | 368                                                  |          | 368      |          | 368     
|                                                                                      | Amortization of investment security premium, net of discount
    accretion |                                                                       |                                                     |          | 151      |          | 266     
|                                                                                      | Deferred tax (benefit)                                                     |                                                                       | (821)                                                |          | (1,260)  |          | (1,738) 
|                                                                                      | Deferral of loan fees and costs, net                                       |                                                                       | 183                                                  |          | 163      |          | 49      
|                                                                                      | Gain on sale of building                                                   |                                                                       |                                                     |          |         |          | (12)    
|                                                                                      | Provision for loan losses                                                  |                                                                       | 1,170                                                |          | 1,601    |          | 3,567   
|                                                                                      | Equity in earnings from RML                                                |                                                                       | (493)                                                |          | (438)    |          | (2,785) 
|                                                                                      | Equity in loss from Elliott Cove                                           |                                                                       | 424                                                  |          | 457      |          | 554     
|                                                                                      | (Increase) in accrued interest receivable                                  |                                                                       | (719)                                                |          | (378)    |          | (108)   
|                                                                                      | (Increase) in other assets                                                 |                                                                       | (494)                                                |          | (656)    |          | (63)    
|                                                                                      | Increase (decrease) of other liabilities                                   |                                                                       | 438                                                  |          | (115)    |          | 848     
|                                                                                     
|                                                                                      |                                                                            |                                                                       | Net Cash Provided by Operating Activities            |          | 13,005   |          | 12,142   |           | 12,852  
|                                                                                     
|Investing Activities:                                                                 |                                                                            |                                                                       |                                                      |          |          |         
|                                                                                      | Investment in securities:                                                  |                                                                       |                                                      |          |          |          |         
|                                                                                      |                                                                            | Purchases of investment securities  Available-for-sale               |                                                      | (10,874) |          | (28,341) |          | (52,966) 
|                                                                                      |                                                                            | Purchases of investment securities  Held-to-maturity                 |                                                      | (277)    |          |         |          |         
|                                                                                      |                                                                            | Proceeds from sales/maturities of securities 
    Available-for-sale |                                                      | 17,012   |          | 38,559   |          | 59,532   
|                                                                                      |                                                                            | Proceeds from maturities of securities 
    Held-to-maturity         |                                                      | 65       |          | 220      |          | 335      
|                                                                                      | Investment in Federal Home Loan Bank stock, net                            |                                                                       | (254)                                                |          | 244      |          | 228     
|                                                                                      | Investment in purchased receivables, net                                   |                                                                       | (10,007)                                             |          | (1,729)  |          | (462)   
|                                                                                      | Investments in loans:                                                      |                                                                       |                                                      |          |          |          |         
|                                                                                      |                                                                            | Sales of loans and loan participations                                |                                                      | 25,116   |          | 20,036   |          | 148,376  
|                                                                                      |                                                                            | Loans made, net of repayments                                         |                                                      | (53,317) |          | (98,373) |          | (216,411)
|                                                                                      | Investment in Elliott Cove                                                 |                                                                       | (150)                                                |          | (250)    |          | (375)   
|                                                                                      | Dividends received from RML                                                |                                                                       | 482                                                  |          | 367      |          | 1,850   
|                                                                                      | Investment in NBG                                                          |                                                                       | (1,146)                                              |          |         |          |        
|                                                                                      | Subscription in PWA                                                        |                                                                       | (2,015)                                              |          |         |          |        
|                                                                                      | Investment in Related Corporate Partners                                   |                                                                       |                                                     |          |         |          | (2,956) 
|                                                                                      | Purchases of premises and equipment                                        |                                                                       | (1,264)                                              |          | (618)    |          | (1,846) 
|                                                                                     
|                                                                                      |                                                                            |                                                                       | Net Cash Used by Investing Activities                |          | (36,629) |          | (69,885) |           | (64,695)
|                                                                                     
|Financing Activities:                                                                 |                                                                            |                                                                       |                                                      |          |          |         
|                                                                                      | Increase in deposits                                                       |                                                                       | 80,805                                               |          | 52,864   |          | 19,782  
|                                                                                      | Increase (decrease) in borrowings                                          |                                                                       | 1,937                                                |          | 1,335    |          | (1,222) 
|                                                                                      | Loan to Elliott Cove                                                       |                                                                       | (575)                                                |          | (250)    |          | (350)   
|                                                                                      | Loan to PWA                                                                |                                                                       | (385)                                                |          |         |          |        
|                                                                                      | Proceeds from issuance of common stock                                     |                                                                       | 337                                                  |          | 300      |          | 1,175   
|                                                                                      | Proceeds from issuance of junior subordinated debentures                   |                                                                       | 10,000                                               |          |         |          | 8,000   
|                                                                                      | Repurchase of common stock                                                 |                                                                       | (7,338)                                              |          |         |          | (2,219) 
|                                                                                      | Cash dividends paid                                                        |                                                                       | (2,560)                                              |          | (2,308)  |          | (2,008) 
|                                                                                     
|                                                                                      |                                                                            |                                                                       | Net Cash Provided by Financing Activities            |          | 82,221   |          | 51,941   |           | 23,158  
|                                                                                     
|                                                                                      |                                                                            |                                                                       | Net Increase (Decrease) by Cash and Cash Equivalents |          | 58,597   |          | (5,802)  |           | (28,685)
|                                                                                      | Cash and cash equivalents at beginning of period                           |                                                                       | 31,093                                               |          | 36,895   |          | 65,580  
|                                                                                     
|                                                                                      | Cash and Cash Equivalents at End of Year                                   |                                                                       | $89,690                                              |          | $31,093  |          | $36,895 
|                                                                                     
|Supplemental Information:                                                             |                                                                            |                                                                       |                                                      |          |          |         
|                                                                                      | Income taxes paid                                                          |                                                                       | $7,550                                               |          | $6,825   |          | $7,900  
|                                                                                      | Interest paid                                                              |                                                                       | $14,741                                              |          | $7,766   |          | $6,851  
|                                                                                      | Conversion of Elliott Cove loan to equity                                  |                                                                       | $                                                   |          | $625     |          | $      
|                                                                                     



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Notes to Consolidated Financial Statements


NOTE 1  Organization and Summary of
Significant Accounting Policies








Estimates and Assumptions:


Cash and Cash Equivalents:


Investment Securities:




Held-to


Loans and Loan Fees:


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Allowance for Loan Losses:




Purchased Receivables:


Premises and Equipment:


Intangible Assets:


Other Assets:


Other Real Estate:


Advertising:


Income Taxes:


Earnings Per Share:


Stock Option Plans:


32



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|                                       |            |             |           |         |         |         |         |         |        
|-------------------------------------- | ---------- | ----------- | --------- | ------- | ------- | ------- | ------- | ------- | -------
|                                      
|                                       |            | 2005        |           | 2004    |         | 2003   
|                                      
|Net income (in thousands)              |            | As reported |           | $11,170 |         | $10,700 |         | $10,545
|Less stock-based employee compensation |            |             |           | (173)   |         | (163)   |         | (198)  
|                                      
|                                       | Net income |             | Pro forma |         | $10,997 |         | $10,537 |         | $10,347
|                                      
|Earnings per share, basic              |            | As reported |           | $1.87   |         | $1.76   |         | $1.76  
|                                       |            | Pro forma   |           | $1.84   |         | $1.73   |         | $1.72  
|Earnings per share, diluted            |            | As reported |           | $1.81   |         | $1.71   |         | $1.69  
|                                       |            | Pro forma   |           | $1.78   |         | $1.68   |         | $1.66  
|                                      

Comprehensive Income:


Reclassifications:


Segments:


Geographic Concentration and Alaska
Economy:


Consolidation Policy:


NOTE 2  Cash and Due from Banks




NOTE 3  Money Market Investments




|                                                           |       |                |         |         |        
|---------------------------------------------------------- | ----- | -------------- | ------- | ------- | -------
|                                                          
|December 31,                                               |       | 2005           |         | 2004   
|                                                          
|                                                           |       | (In Thousands)
|Interest bearing deposits at Federal Home Loan Bank (FHLB) |       | $54,036        |         | $12,157
|Fed funds sold                                             |       | 6,800          |         |       
|                                                          
|                                                           | Total |                | $60,836 |         | $12,157
|                                                          



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NOTE 4  Investment Securities




|                              |                            |                |         |            |     |            |      |        |         |        
|----------------------------- | -------------------------- | -------------- | ------- | ---------- | --- | ---------- | ---- | ------ | ------- | -------
|                             
|                              |                            | Gross          |         | Gross      |     |           
|                              |                            | Amortized      |         | Unrealized |     | Unrealized |      | Market
|December 31,                  |                            | Cost           |         | Gains      |     | Losses     |      | Value 
|                             
|                              |                            | (In Thousands)
|2005:                         |                            |                |         |            |     |            |      |       
|Securities Available for Sale |                            |                |         |            |     |            |      |       
|                              | U.S. Treasury              |                | $15,930 |            | $  |            | $169 |        | $15,761
|                              | U.S. Agency                |                | 37,140  |            |    |            | 659  |        | 36,482 
|                              | Mortgage-backed Securities |                | 242     |            |    |            | 2    |        | 240    
|                             
|                              |                            | Total          |         | $53,312    |     | $         |      | $830   |         | $52,483
|                             
|Securities Held to Maturity   |                            |                |         |            |     |            |      |       
|                              | Municipal Securities       |                | $936    |            | $28 |            | $7   |        | $957   
|                             
|Federal Home Loan Bank Stock  |                            | $1,556         |         | $         |     | $         |      | $1,556
|                             
|2004:                         |                            |                |         |            |     |            |      |       
|Securities Available for Sale |                            |                |         |            |     |            |      |       
|                              | U.S. Treasury              |                | $5,503  |            | $  |            | $22  |        | $5,481 
|                              | U.S. Agency                |                | 53,628  |            | 180 |            | 152  |        | 53,656 
|                              | Mortgage-backed Securities |                | 311     |            | 1   |            |     |        | 312    
|                             
|                              |                            | Total          |         | $59,442    |     | $181       |      | $174   |         | $59,449
|                             
|Securities Held to Maturity   |                            |                |         |            |     |            |      |       
|                              | Municipal Securities       |                | $724    |            | $47 |            | $   |        | $771   
|                             
|Federal Home Loan Bank Stock  |                            | $1,302         |         | $         |     | $         |      | $1,302
|                             



|                           |       |                     |         |                     |      |            |         |        |      |            |         |        |     
|-------------------------- | ----- | ------------------- | ------- | ------------------- | ---- | ---------- | ------- | ------ | ---- | ---------- | ------- | ------ | ----
|                          
|                           |       | Less Than 12 Months |         | More Than 12 Months |      | Total     
|                          
|                           |       | Unrealized          |         |                     |      | Unrealized |         |        |      | Unrealized
|                           |       | Fair Value          |         | Losses              |      | Fair Value |         | Losses |      | Fair Value |         | Losses
|                          
|                           |       | (In Thousands)     
|U.S. Treasury              |       | $4,883              |         | $53                 |      | $10,878    |         | $116   |      | $15,761    |         | $169  
|U.S. Agency                |       | 10,519              |         | 176                 |      | 25,963     |         | 483    |      | 36,482     |         | 659   
|Mortgage-backed Securities |       | 240                 |         | 2                   |      |           |         |       |      | 240        |         | 2     
|                          
|                          
|                           | Total |                     | $15,642 |                     | $231 |            | $36,841 |        | $599 |            | $52,483 |        | $830
|                          





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|                              |                            |                        |         |         |        |         |      |          |      |           |         |         |         |        
|----------------------------- | -------------------------- | ---------------------- | ------- | ------- | ------ | ------- | ---- | -------- | ---- | --------- | ------- | ------- | ------- | -------
|                             
|                              |                            | Within                 |         | 1-5     |        | 5-10    |      | Over     |      | Amortized |         | Market 
|                              |                            | 1 Year                 |         | Years   |        | Years   |      | 10 Years |      | Cost      |         | Value  
|                             
|                              |                            | (In Thousands)        
|Securities Available for Sale |                            |                        |         |         |        |         |      |          |      |           |         |        
|                              | U.S. Treasury              |                        | $10,994 |         | $4,936 |         | $   |          | $   |           | $15,930 |         | $15,761
|                              | U.S. Agency                |                        | 1,550   |         | 35,590 |         |     |          |     |           | 37,140  |         | 36,482 
|                              | Mortgage-backed Securities |                        |        |         |       |         |     |          | 242  |           | 242     |         | 240    
|                             
|                              |                            | Total                  |         | $12,544 |        | $40,526 |      | $       |      | $242      |         | $53,312 |         | $52,483
|                             
|                              |                            | Weighted Average Yield |         | 2.93%   |        | 3.81%   |      | 0.00%    |      | 4.52%     |         | 3.61%   |         |       
|                             
|Securities Held to Maturity   |                            |                        |         |         |        |         |      |          |      |           |         |        
|                              | Municipal Securities       |                        | $65     |         | $300   |         | $442 |          | $129 |           | $936    |         | $957   
|                             
|                              |                            | Weighted Average Yield |         | 3.84%   |        | 4.35%   |      | 3.88%    |      | 5.11%     |         | 4.20%   |         |       
|                             



|                                   |                             |                |    |       |    |        |   
|---------------------------------- | --------------------------- | -------------- | -- | ----- | -- | ------ | --
|                                  
|                                   |                             | Gross          |    | Gross
|December 31,                       |                             | Proceeds       |    | Gains |    | Losses
|                                  
|                                   |                             | (In Thousands)
|2005 Available-for-Sale Securities |                             | $6,148         |    | $44   |    | $35   
|                                   | Held-to-Maturity Securities |                | $ |       | $ |        | $
|2004 Available-for-Sale Securities |                             | $3,789         |    | $151  |    | $    
|                                   | Held-to-Maturity Securities |                | $ |       | $ |        | $
|2003 Available-for-Sale Securities |                             | $17,379        |    | $310  |    | $    
|                                   | Held-to-Maturity Securities |                | $ |       | $ |        | $
|                                  





|              |       |                |        |       |        |       |       
|------------- | ----- | -------------- | ------ | ----- | ------ | ----- | ------
|             
|December 31,  |       | 2005           |        | 2004  |        | 2003 
|             
|              |       | (In Thousands)
|U.S. Treasury |       | $472           |        | $67   |        | $37  
|U.S. Agency   |       | 1,688          |        | 2,319 |        | 2,666
|Other         |       | 42             |        | 14    |        | 21   
|             
|              | Total |                | $2,202 |       | $2,400 |       | $2,724
|             



35



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NOTE 5  Loans




|                                 |             |                                                     |          |          |          |        
|-------------------------------- | ----------- | --------------------------------------------------- | -------- | -------- | -------- | -------
|                                
|December 31,                     |             | 2005                                                |          | 2004    
|                                
|                                 |             | (In Thousands)                                     
|Commercial                       |             | $287,617                                            |          | $267,737
|Real estate construction         |             | 131,532                                             |          | 122,873 
|Real estate term                 |             | 252,395                                             |          | 252,358 
|Installment and other consumer   |             | 36,519                                              |          | 38,166  
|                                
|                                 | Sub-total   |                                                     | 708,063  |          | 681,134 
|Less: Unearned purchase discount |             |                                                    |          | (44)    
|                                 |             | Unearned origination fees, net of origination costs |          | (3,004)  |          | (2,821)
|                                
|                                 | Total loans |                                                     | 705,059  |          | 678,269 
|Allowance for loan losses        |             | (10,706)                                            |          | (10,764)
|                                
|                                 | Net Loans   |                                                     | $694,353 |          | $667,505
|                                











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|                               |       |                |          |           |          |         |          |          |         
|------------------------------ | ----- | -------------- | -------- | --------- | -------- | ------- | -------- | -------- | --------
|                              
|                               |       | Maturity      
|                              
|                               |       | Within         |          |           |          | Over    |          |         
|                               |       | 1Year          |          | 1-5 Years |          | 5Years  |          | Total   
|                              
|                               |       | (In Thousands)
|Commercial                     |       | $150,434       |          | $79,633   |          | $53,406 |          | $283,473
|Construction                   |       | 121,615        |          | 6,094     |          | 3,689   |          | 131,398 
|Real estate term               |       | 62,547         |          | 56,850    |          | 132,188 |          | 251,585 
|Installment and other consumer |       | 1,423          |          | 6,271     |          | 28,823  |          | 36,517  
|                              
|                               | Total |                | $336,019 |           | $148,848 |         | $218,106 |          | $702,973
|                              
|Fixed interest rate            |       | $129,958       |          | $55,391   |          | $47,246 |          | $232,595
|Floating interest rate         |       | 206,061        |          | 93,457    |          | 170,860 |          | 470,378 
|                              
|                               | Total |                | $336,019 |           | $148,848 |         | $218,106 |          | $702,973
|                              



|                                           |  |                |  |       
|------------------------------------------ |  | -------------- |  | ------
|                                          
|December 31,                               |  | 2005           |  | 2004  
|                                          
|                                           |  | (In Thousands)
|Balance, beginning of the year             |  | $3,132         |  | $4,025
|Loans made                                 |  | 16,848         |  | 10,349
|Repayments or change to nondirector status |  | 16,985         |  | 11,242
|                                          
|Balance, end of year                       |  | $2,995         |  | $3,132
|                                          



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NOTE 6  Allowance for Loan Losses




|                                |              |                   |         |         |         |         |         |        
|------------------------------- | ------------ | ----------------- | ------- | ------- | ------- | ------- | ------- | -------
|                               
|December 31,                    |              | 2005              |         | 2004    |         | 2003   
|                               
|                                |              | (In Thousands)   
|Balance, beginning of the year  |              | $10,764           |         | $10,186 |         | $8,476 
|Provision charged to operations |              | 1,170             |         | 1,601   |         | 3,567  
|Charge-offs:                    |              |                   |         |         |         |        
|                                | Commercial   |                   | (1,552) |         | (1,387) |         | (2,067)
|                                | Construction |                   | (100)   |         |        |         |       
|                                | Real estate  |                   |        |         |        |         | (127)  
|                                | Consumer     |                   | (63)    |         | (84)    |         | (91)   
|                               
|                                |              | Total Charge-offs |         | (1,715) |         | (1,471) |         | (2,285)
|                               
|Recoveries:                     |              |                   |         |         |         |        
|                                | Commercial   |                   | 418     |         | 200     |         | 279    
|                                | Construction |                   | 15      |         | 185     |         |       
|                                | Real estate  |                   | 15      |         |        |         | 111    
|                                | Consumer     |                   | 39      |         | 63      |         | 38     
|                               
|                                |              | Total Recoveries  |         | 487     |         | 448     |         | 428    
|                               
|Charge-offs net of recoveries   |              | (1,228)           |         | (1,023) |         | (1,857)
|                               
|Balance, End of Year            |              | $10,706           |         | $10,764 |         | $10,186
|                               

NOTE 7  Premises and Equipment




|                                          |                                   |                |  |          |         |          |        
|----------------------------------------- | --------------------------------- | -------------- |  | -------- | ------- | -------- | -------
|                                         
|December 31,                              |                                   | Useful Life    |  | 2005     |         | 2004    
|                                         
|                                          |                                   | (In Thousands)
|Land                                      |                                   |                |  | $1,443   |         | $1,443  
|Vehicle                                   |                                   | 3 years        |  | 61       |         | 61      
|Furniture and equipment                   |                                   | 5-7 years      |  | 8,915    |         | 8,660   
|Tenant improvements                       |                                   | 2-11 years     |  | 4,839    |         | 4,025   
|Buildings                                 |                                   | 30 years       |  | 6,848    |         | 6,848   
|                                         
|                                          | Total Premises and Equipment      |                |  |          | 22,106  |          | 21,037 
|Accumulated depreciation and amortization |                                   |                |  | (11,503) |         | (10,454)
|                                         
|                                          | Total Premises and Equipment, Net |                |  |          | $10,603 |          | $10,583
|                                         



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NOTE 8  Other Assets




|                                         |                            |                |         |       |        
|---------------------------------------- | -------------------------- | -------------- | ------- | ----- | -------
|                                        
|December 31,                             |                            | 2005           |         | 2004 
|                                        
|                                         |                            | (In Thousands)
|Intangible assets                        |                            |                |         |      
|                                         | Goodwill                   |                | $5,735  |       | $5,735 
|                                         | Core deposits intangible   |                | 531     |       | 899    
|                                         | NBG customer relationships |                | 1,119   |       |       
|                                        
|                                         | Total                      |                | $7,385  |       | $6,634 
|                                        
|Prepaid expenses                         |                            | $572           |         | $543 
|Software                                 |                            | 466            |         | 816  
|Deferred taxes, net                      |                            | 8,838          |         | 7,673
|Note receivables                         |                            | 1,060          |         | 100  
|Investment in Elliott Cove               |                            | 101            |         | 375  
|Subscription in PWA                      |                            | 2,015          |         |     
|Investment in RML Holding Company        |                            | 4,203          |         | 4,191
|Investment in Related Corporate Partners |                            | 2,440          |         | 2,720
|Other assets                             |                            | 1,726          |         | 1,149
|                                        
|                                         | Total                      |                | $21,421 |       | $17,567
|                                        







|                         |       |      |       
|------------------------ | ----- | ---- | ------
|                        
|Year Ending December 31:
|                        
|(In Thousands)          
|2006                     |       | $483
|2007                     |       | 276 
|2008                     |       | 115 
|2009                     |       | 115 
|2010                     |       | 115 
|Thereafter               |       | 546 
|                        
|                         | Total |      | $1,650
|                        

start-up


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|                     |                           |                                            |         |         |         |        
|-------------------- | ------------------------- | ------------------------------------------ | ------- | ------- | ------- | -------
|                    
|December 31,         |                           | 2005                                       |         | 2004   
|                    
|                     |                           | (In Thousands)                            
|Assets               |                           |                                            |         |        
|                     | Current assets            |                                            | $70,315 |         | $50,854
|                     | Long-term assets          |                                            | 5,958   |         | 2,960  
|                    
|                     |                           | Total Assets                               |         | $76,273 |         | $53,814
|                    
|                    
|Liabilities          |                           |                                            |         |        
|                     | Current liabilities       |                                            | $58,285 |         | $37,872
|                     | Long-term liabilities     |                                            | 1,906   |         | 0      
|                    
|                     |                           | Total Liabilities                          |         | 60,191  |         | 37,872 
|                    
|Shareholders Equity |                           | 16,082                                     |         | 15,942 
|                    
|                     |                           | Total Liabilities and Shareholders Equity |         | $76,273 |         | $53,814
|                    
|                    
|Income/expense       |                           |                                            |         |        
|                     | Gross income              |                                            | $15,819 |         | $13,177
|                     | Total expense             |                                            | 13,107  |         | 11,466 
|                     | Joint venture allocations |                                            | (522)   |         | (596)  
|                    
|                     |                           | Net Income                                 |         | $2,190  |         | $1,115 
|                    





|         |         
|-------- | --------
|NOTE 9  | Deposits



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|                         |       |         |         
|------------------------ | ----- | ------- | --------
|                        
|Year Ending December 31:
|                        
|(In Thousands)          
|2006                     |       | $92,111
|2007                     |       | 14,819 
|2008                     |       | 3,418  
|2009                     |       | 91     
|2010                     |       | 121    
|Thereafter               |       | 20     
|                        
|                         | Total |         | $110,580
|                        





|          |           
|--------- | ----------
|NOTE 10  | Borrowings











|          |                               
|--------- | ------------------------------
|NOTE 11  | Junior Subordinated Debentures

90-day


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90-day




|          |                 
|--------- | ----------------
|NOTE 12  | Interest Expense



|                                              |       |                |         |       |        |       |       
|--------------------------------------------- | ----- | -------------- | ------- | ----- | ------ | ----- | ------
|                                             
|December 31,                                  |       | 2005           |         | 2004  |        | 2003 
|                                             
|                                              |       | (In Thousands)
|Interest-bearing demand accounts              |       | $369           |         | $221  |        | $205 
|Money market accounts                         |       | 3,876          |         | 1,527 |        | 1,293
|Savings accounts                              |       | 6,263          |         | 2,290 |        | 1,182
|Certificates of deposit greater than $100,000 |       | 2,170          |         | 1,620 |        | 1,903
|Certificates of deposit less than $100,000    |       | 1,312          |         | 1,051 |        | 1,620
|Borrowings                                    |       | 883            |         | 574   |        | 478  
|                                             
|                                              | Total |                | $14,873 |       | $7,283 |       | $6,681
|                                             



|          |             
|--------- | ------------
|NOTE 13  | Income Taxes



|             |  |                |  |           |  |          |  |       
|------------ |  | -------------- |  | --------- |  | -------- |  | ------
|            
|             |  | Current Tax    |  | Deferred  |  | Total   
|December 31, |  | Expense        |  | (Benefit) |  | Expense 
|            
|             |  | (In Thousands)
|2005:        |  | Federal        |  | $6,148    |  | ($639)   |  | $5,509
|             |  | State          |  | 1,597     |  | (182)    |  | 1,415 
|            
|Total        |  |                |  | $7,745    |  | ($821)   |  | $6,924
|            
|2004:        |  | Federal        |  | $6,139    |  | ($998)   |  | $5,141
|             |  | State          |  | 1,348     |  | (262)    |  | 1,086 
|            
|Total        |  |                |  | $7,487    |  | ($1,260) |  | $6,227
|            
|2003:        |  | Federal        |  | $6,689    |  | ($1,398) |  | $5,291
|             |  | State          |  | 1,565     |  | (340)    |  | 1,225 
|            
|Total        |  |                |  | $8,254    |  | ($1,738) |  | $6,516
|            

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|                                       |       |                |        |        |        |        |       
|-------------------------------------- | ----- | -------------- | ------ | ------ | ------ | ------ | ------
|                                      
|December 31,                           |       | 2005           |        | 2004   |        | 2003  
|                                      
|                                       |       | (In Thousands)
|Computed expected income tax expense |       | $6,333         |        | $5,924 |        | $5,971
|State income taxes, net                |       | 920            |        | 706    |        | 796   
|Other                                  |       | (329)          |        | (403)  |        | (251) 
|                                      
|                                       | Total |                | $6,924 |        | $6,227 |        | $6,516
|                                      



|                                      |                        |                |        |        |        |        |       
|------------------------------------- | ---------------------- | -------------- | ------ | ------ | ------ | ------ | ------
|                                     
|December 31,                          |                        | 2005           |        | 2004   |        | 2003  
|                                     
|                                      |                        | (In Thousands)
|Provision for loan losses             |                        | $5,796         |        | $5,612 |        | $4,962
|Loan fees, net of costs               |                        | 1,227          |        | 1,150  |        | 1,062 
|Unrealized gain on available-for-sale |                        |                |        |        |        |       
|                                      | investment securities  |                | 341    |        | (3)    |        | (436) 
|Depreciation                          |                        | 678            |        | 386    |        | 263   
|Other, net                            |                        | 796            |        | 528    |        | 130   
|                                     
|                                      | Net Deferred Tax Asset |                | $8,838 |        | $7,673 |        | $5,981
|                                     



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NOTE 14  Comprehensive Income




|                                                                                    |  |                |          |  |           |  |      |            |  |  |        | 
|----------------------------------------------------------------------------------- |  | -------------- | -------- |  | --------- |  | ---- | ---------- |  |  | ------ | 
|                                                                                    | 
|                                                                                    |  | Tax            |          |  |          
|                                                                                    |  | Before Tax     |          |  | (Expense) |  |      |           
|December 31,                                                                        |  | Amount         |          |  | Benefit   |  |      | Net Amount | 
|                                                                                    | 
|                                                                                    |  | (In Thousands) |         
|2005:                                                                               |  |                |          |  |           |  |      |            |  |  |        | 
|Unrealized net holding losses on investment securities arising
    during 2005      |  |                | ($828)   |  |           |  | $340 |            |  |  | ($488) | 
|Plus: Reclassification adjustment for net realized gains
    included in net income |  |                | (9)      |  |           |  | 4    |            |  |  | (5)    | 
|                                                                                   
|Net unrealized losses                                                               |  |                | ($837)   |  |           |  | $344 |            |  |  | ($493) | 
|                                                                                   
|2004:                                                                               |  |                |          |  |           |  |      |            |  |  |        | 
|Unrealized net holding losses on investment securities arising
    during 2004      |  |                | ($900)   |  |           |  | $370 |            |  |  | ($530) | 
|Plus: Reclassification adjustment for net realized gains
    included in net income |  |                | (151)    |  |           |  | 62   |            |  |  | (89)   | 
|                                                                                   
|Net unrealized losses                                                               |  |                | ($1,051) |  |           |  | $432 |            |  |  | ($619) | 
|                                                                                   
|2003:                                                                               |  |                |          |  |           |  |      |            |  |  |        | 
|Unrealized net holding losses on investment securities arising
    during 2003      |  |                | ($676)   |  |           |  | $278 |            |  |  | ($398) | 
|Plus: Reclassification adjustment for net realized gains
    included in net income |  |                | (310)    |  |           |  | 127  |            |  |  | (183)  | 
|                                                                                   
|Net unrealized losses                                                               |  |                | ($986)   |  |           |  | $405 |            |  |  | ($581) | 
|                                                                                   



|          |                       
|--------- | ----------------------
|NOTE 15  | Employee Benefit Plans









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|          |             
|--------- | ------------
|NOTE 16  | Common Stock







|          |        
|--------- | -------
|NOTE 17  | Options

10-year


|                              |  |           |  |          |        |  |          |             
|----------------------------- |  | --------- |  | -------- | ------ |  | -------- | ------------
|                             
|                              |  | Weighted  |  |          |       
|                              |  | Shares    |  | Average  |        |  | Range of
|                              |  | Under     |  | Exercise |        |  | Exercise
|                              |  | Option    |  | Price    |        |  | Price   
|                             
|December 31, 2002 outstanding |  | 447,647   |  |          | $8.26  |  |          | $6.64-$23.11
|Granted  2003                |  | 104,500   |  |          | 14.00  |  |          |             
|Forfeited                     |  | (4,250)   |  |          | 11.83  |  |          |             
|Exercised                     |  | (125,937) |  |          | 5.72   |  |          |             
|                             
|December 31, 2003 outstanding |  | 421,960   |  |          | $10.40 |  |          | $6.64-$23.11
|Granted  2004                |  | 49,838    |  |          | 19.81  |  |          |             
|Forfeited                     |  | (6,750)   |  |          | 13.38  |  |          |             
|Exercised                     |  | (59,957)  |  |          | 6.73   |  |          |             
|                             
|December 31, 2004 outstanding |  | 405,091   |  |          | $12.05 |  |          | $6.64-$23.11
|Granted  2005                |  | 46,418    |  |          | 20.40  |  |          |             
|Forfeited                     |  | (2,862)   |  |          | 17.78  |  |          |             
|Exercised                     |  | (24,644)  |  |          | 9.61   |  |          |             
|                             
|December 31, 2005 outstanding |  | 424,003   |  |          | $13.07 |  |          | $6.64-$23.11
|                             







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|          |                                       
|--------- | --------------------------------------
|NOTE 18  | Commitments and Contingent Liabilities



|                        |       |        |       
|----------------------- | ----- | ------ | ------
|                       
|Year nding December 31:
|                       
|(In Thousands)         
|2006                    |       | $1,338
|2007                    |       | 1,193 
|2008                    |       | 1,227 
|2009                    |       | 154   
|2010                    |       | 71    
|Thereafter              |       | 1,545 
|                       
|                        | Total |        | $5,528
|                       







Off-Balance Sheet Financial Instruments:




|                               |                              |                |  |          |      |  |   |         | 
|------------------------------ | ---------------------------- | -------------- |  | -------- | ---- |  | - | ------- | 
|                               |                             
|December 31,                   |                              | 2005           |  |          | 2004 | 
|                               |                             
|                               |                              | (In Thousands) | 
|Off-balance sheet commitments: |                              |                |  |          |      |  |   |        
|                               | Commitments to extend credit |                |  | $151,316 |      |  | $ | 137,480 | 
|                               | Standby letters of credit    |                |  | 20,788   |      |  |   | 4,590   | 
|                              

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|          |                   
|--------- | ------------------
|NOTE 19  | Regulatory Matters







|                                         |  |                |  |             |  |                  |  |       |  |         |  |       
|---------------------------------------- |  | -------------- |  | ----------- |  | ---------------- |  | ----- |  | ------- |  | ------
|                                        
|                                         |  |                |  | Adequately- |  |                 
|Consolidated                             |  | Actual         |  | Capitalized |  | Well-Capitalized
|                                        
|                                         |  | Amount         |  | Ratio       |  | Amount           |  | Ratio |  | Amount  |  | Ratio 
|                                        
|                                         |  | (In Thousands)
|As of December 31, 2005:                 |  |                |  |             |  |                  |  |       |  |         |  |       
|Total Capital (to risk-weighted assets)  |  | $106,587       |  | 13.35%      |  | $63,872          |  | M8.0% |  | $79,840 |  | M10.0%
|Tier I Capital (to risk-weighted assets) |  | $96,598        |  | 12.10%      |  | $31,933          |  | M4.0% |  | $47,900 |  | M6.0% 
|Tier I Capital (to average assets)       |  | $96,598        |  | 10.81%      |  | $35,744          |  | M4.0% |  | $44,680 |  | M5.0% 
|As of December 31, 2004:                 |  |                |  |             |  |                  |  |       |  |         |  |       
|Total Capital (to risk-weighted assets)  |  | $93,814        |  | 12.87%      |  | $58,315          |  | M8.0% |  | $72,894 |  | M10.0%
|Tier I Capital (to risk-weighted assets) |  | $84,682        |  | 11.62%      |  | $29,150          |  | M4.0% |  | $43,726 |  | M6.0% 
|Tier I Capital (to average assets)       |  | $84,682        |  | 10.72%      |  | $31,598          |  | M4.0% |  | $39,497 |  | M5.0% 

47



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|                                         |  |                |  |             |  |                  |  |       |  |         |  |       
|---------------------------------------- |  | -------------- |  | ----------- |  | ---------------- |  | ----- |  | ------- |  | ------
|                                        
|                                         |  |                |  | Adequately- |  |                 
|Northrim Bank                            |  | Actual         |  | Capitalized |  | Well-Capitalized
|                                        
|                                         |  | Amount         |  | Ratio       |  | Amount           |  | Ratio |  | Amount  |  | Ratio 
|                                        
|                                         |  | (In Thousands)
|As of December 31, 2005:                 |  |                |  |             |  |                  |  |       |  |         |  |       
|Total Capital (to risk-weighted assets)  |  | $92,004        |  | 11.57%      |  | $63,616          |  | M8.0% |  | $79,519 |  | M10.0%
|Tier I Capital (to risk-weighted assets) |  | $82,056        |  | 10.32%      |  | $31,805          |  | M4.0% |  | $47,707 |  | M6.0% 
|Tier I Capital (to average assets)       |  | $82,056        |  | 9.24%       |  | $35,522          |  | M4.0% |  | $44,403 |  | M5.0% 
|As of December 31, 2004:                 |  |                |  |             |  |                  |  |       |  |         |  |       
|Total Capital (to risk-weighted assets)  |  | $83,284        |  | 11.44%      |  | $58,241          |  | M8.0% |  | $72,801 |  | M10.0%
|Tier I Capital (to risk-weighted assets) |  | $74,160        |  | 10.18%      |  | $29,139          |  | M4.0% |  | $43,709 |  | M6.0% 
|Tier I Capital (to average assets)       |  | $74,160        |  | 9.40%       |  | $31,557          |  | M4.0% |  | $39,447 |  | M5.0% 
|                                        



|          |                                    
|--------- | -----------------------------------
|NOTE 20  | Fair Value of Financial Instruments



Cash and Money Market Investments:


Investment Securities:


Loans:


Purchased Receivables:


Deposit Liabilities:


FHLB Advance:


Junior Subordinated Debentures:


Commitments to Extend Credit and Standby Letters of
Credit:


Limitations:


48



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|                                    |                                   |                |          |       |          |          |          |       |         
|----------------------------------- | --------------------------------- | -------------- | -------- | ----- | -------- | -------- | -------- | ----- | --------
|                                   
|December 31,                        |                                   | 2005           |          | 2004 
|                                   
|                                    |                                   | Carrying       |          | Fair  |          | Carrying |          | Fair 
|                                    |                                   | Amount         |          | Value |          | Amount   |          | Value
|                                   
|                                    |                                   | (In Thousands)
|Financial Assets:                   |                                   |                |          |       |          |          |          |      
|                                    | Cash and money market investments |                | $89,690  |       | $89,690  |          | $31,093  |       | $31,093 
|                                    | Investment securities             |                | 54,975   |       | 54,996   |          | 61,475   |       | 61,522  
|                                    | Net loans                         |                | 694,353  |       | 686,984  |          | 667,505  |       | 667,969 
|                                    | Purchased receivables             |                | 12,198   |       | 12,198   |          | 2,191    |       | 2,191   
|                                    | Accrued interest receivable       |                | 4,397    |       | 4,397    |          | 3,678    |       | 3,678   
|                                   
|Financial Liabilities:              |                                   |                |          |       |          |          |          |      
|                                    | Deposits                          |                | $779,866 |       | $779,677 |          | $699,061 |       | $698,801
|                                    | Accrued interest payable          |                | 469      |       | 469      |          | 337      |       | 337     
|                                    | Borrowings                        |                | 8,415    |       | 8,415    |          | 6,478    |       | 6,478   
|                                    | Junior subordinated debentures    |                | 18,000   |       | 18,000   |          | 8,000    |       | 8,000   
|                                   
|Unrecognized Financial Instruments: |                                   |                |          |       |          |          |          |      
|                                    | Commitments to extend credit      |                | $151,316 |       | $1,513   |          | $137,480 |       | $1,375  
|                                    | Standby letters of credit         |                | 20,788   |       | 208      |          | 4,590    |       | 46      
|                                   



|          |                                
|--------- | -------------------------------
|NOTE 21  | Quarterly Results of Operations

|                            |                            |                                         |        |          |        |         |        |          |         |        | 
|--------------------------- | -------------------------- | --------------------------------------- | ------ | -------- | ------ | ------- | ------ | -------- | ------- | ------ | 
|                            |                           
|2005 Quarter Ended          |                            | Dec. 31                                 |        | Sept. 30 |        | June 30 |        | March 31 |        
|                            |                           
|                            |                            | (In Thousands Except Per Share Amounts) |       
|Total interest income       |                            | $16,344                                 |        | $15,047  |        | $14,078 |        |          | $13,312 |       
|                           
|Total interest expense      |                            | 4,730                                   |        | 3,910    |        | 3,403   |        |          | 2,830   |       
|                           
|                           
|                            | Net interest income        |                                         | 11,614 |          | 11,137 |         | 10,675 |          |         | 10,482 | 
|                           
|Provision for loan losses   |                            | 642                                     |        | 428      |        | 100     |        |          |        |       
|                           
|Other operating income      |                            | 1,426                                   |        | 1,494    |        | 1,065   |        |          | 848     |       
|                           
|Other operating expense     |                            | 7,371                                   |        | 7,605    |        | 7,373   |        |          | 7,128   |       
|                           
|                            | Income before income taxes |                                         | 5,027  |          | 4,598  |         | 4,267  |          |         | 4,202  | 
|                           
|Income taxes                |                            | 1,935                                   |        | 1,756    |        | 1,611   |        |          | 1,622   |       
|                           
|                           
|                            | Net Income                 |                                         | $3,092 |          | $2,842 |         | $2,656 |          |         | $2,580 | 
|                           
|                           
|Earnings per share, basic   |                            | $0.53                                   |        | $0.48    |        | $0.44   |        |          | $0.42   |       
|                           
|                           
|Earnings per share, diluted |                            | $0.51                                   |        | $0.47    |        | $0.42   |        |          | $0.41   |       
|                           

49



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|                            |                            |                                         |        |          |        |         |         |        |          |  |         |        | 
|--------------------------- | -------------------------- | --------------------------------------- | ------ | -------- | ------ | ------- | ------- | ------ | -------- |  | ------- | ------ | 
|                            |                           
|2004 Quarter Ended          |                            | Dec. 31                                 |        | Sept. 30 |        | June 30 |         |        | March 31 | 
|                            |                           
|                            |                            | (In Thousands Except Per Share Amounts) |       
|Total interest income       |                            | $13,202                                 |        | $12,119  |        |         | $11,859 |        |          |  | $11,374 |       
|                           
|Total interest expense      |                            | 2,300                                   |        | 1,920    |        |         | 1,580   |        |          |  | 1,485   |       
|                           
|                           
|                            | Net interest income        |                                         | 10,902 |          | 10,199 |         |         | 10,279 |          |  |         | 9,889  | 
|                           
|Provision for loan losses   |                            | 600                                     |        | 143      |        |         | 429     |        |          |  | 429     |       
|                           
|Other operating income      |                            | 1,114                                   |        | 885      |        |         | 955     |        |          |  | 836     |       
|                           
|Other operating expense     |                            | 6,850                                   |        | 6,545    |        |         | 6,507   |        |          |  | 6,631   |       
|                           
|                           
|                            | Income before income taxes |                                         | 4,566  |          | 4,396  |         |         | 4,298  |          |  |         | 3,665  | 
|                           
|Income taxes                |                            | 1,699                                   |        | 1,699    |        |         | 1,536   |        |          |  | 1,293   |       
|                           
|                           
|                            | Net Income                 |                                         | $2,867 |          | $2,697 |         |         | $2,762 |          |  |         | $2,372 | 
|                           
|                           
|Earnings per share, basic   |                            | $0.47                                   |        | $0.44    |        |         | $0.45   |        |          |  | $0.39   |       
|                           
|                           
|Earnings per share, diluted |                            | $0.46                                   |        | $0.43    |        |         | $0.44   |        |          |  | $0.38   |       
|                           





|          |                    
|--------- | -------------------
|NOTE 22  | Disputes and Claims



50



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##### Table of Contents





|          |                                     
|--------- | ------------------------------------
|NOTE 23  | Parent Company Financial Information



|                                |                                         |                                                                  |                                            |          |          |         |         |         |        
|------------------------------- | --------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------ | -------- | -------- | ------- | ------- | ------- | -------
|                               
|Balance Sheets for December 31, |                                         | 2005                                                             |                                            | 2004     |          | 2003   
|                               
|                                |                                         | (In Thousands)                                                  
|Assets                         
|                                | Cash                                    |                                                                  | $11,014                                    |          | $8,735   |         | $7,910 
|                                | Investment in Northrim Bank             |                                                                  | 87,922                                     |          | 80,797   |         | 73,133 
|                                | Investment in NISC                      |                                                                  | 2,484                                      |          | 552      |         | (54)   
|                                | Investment in NCT1                      |                                                                  | 248                                        |          | 248      |         | 248    
|                                | Investment in NST2                      |                                                                  | 310                                        |          |         |         |       
|                                | Other assets                            |                                                                  | 891                                        |          | 252      |         | 504    
|                               
|                                |                                         | Total Assets                                                     |                                            | $102,869 |          | $90,584 |         | $81,741
|                               
|                               
|Liabilities                     |                                         |                                                                  |                                            |          |          |        
|                                | Junior subordinated debentures          |                                                                  | $18,558                                    |          | $8,248   |         | $8,013 
|                                | Taxes payable and other payables        |                                                                  | (359)                                      |          | (1,084)  |         | (1,581)
|                                | Other liabilities                       |                                                                  | 196                                        |          | 62       |         | 24     
|                               
|                                |                                         | Total Liabilities                                                |                                            | 18,395   |          | 7,226   |         | 6,456  
|                               
|Shareholders Equity            |                                         |                                                                  |                                            |          |          |        
|                                | Common stock                            |                                                                  | 5,803                                      |          | 6,089    |         | 6,050  
|                                | Additional paid-in capital              |                                                                  | 39,161                                     |          | 45,876   |         | 45,615 
|                                | Retained earnings                       |                                                                  | 39,999                                     |          | 31,389   |         | 22,997 
|                                | Accumulated other comprehensive income- |                                                                  |                                            |          |          |         |        
|                                |                                         | net unrealized gains on available for sale investment securities |                                            | (489)    |          | 4       |         | 623    
|                               
|                                |                                         |                                                                  | Total Shareholders Equity                 |          | 84,474   |         | 83,358  |         | 75,285 
|                               
|                                |                                         |                                                                  | Total Liabilities and Shareholders Equity |          | $102,869 |         | $90,584 |         | $81,741
|                               

|                                      |                                   |                |                                |        |         |        |         |        |        
|------------------------------------- | --------------------------------- | -------------- | ------------------------------ | ------ | ------- | ------ | ------- | ------ | -------
|                                     
|Statements of Income for Years Ended: |                                   | 2005           |                                | 2004   |         | 2003  
|                                     
|                                      |                                   | (In Thousands)
|Income                                |                                   |                |                                |        |         |       
|                                      | Interest income                   |                | $229                           |        | $177    |        | $83    
|                                      | Net income from Northrim Bank     |                | 12,118                         |        | 11,659  |        | 11,306 
|                                      | Net loss from NISC                |                | (233)                          |        | (269)   |        | (565)  
|                                      | Other income                      |                |                               |        | 1       |        | 7      
|                                     
|                                      |                                   | Total Income   |                                | 12,114 |         | 11,568 |         | 10,831
|Expense                               |                                   |                |                                |        |         |       
|                                      | Interest expense                  |                | 565                            |        | 387     |        | 243    
|                                      | Administrative and other expenses |                | 846                            |        | 954     |        | 588    
|                                     
|                                      |                                   |                | Total Expense                  |        | 1,411   |        | 1,341   |        | 831    
|                                      |                                   |                | Net Income Before Income Taxes |        | 10,703  |        | 10,227  |        | 10,000 
|Income tax expense (benefit)          |                                   | (467)          |                                | (473)  |         | (545) 
|                                     
|                                      |                                   |                | Net Income                     |        | $11,170 |        | $10,700 |        | $10,545
|                                     

51



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|                                                 |                                                      |                                           |          |         |          |        |          |      
|------------------------------------------------ | ---------------------------------------------------- | ----------------------------------------- | -------- | ------- | -------- | ------ | -------- | -----
|                                                
|Statements of Cash Flows for Years Ended:        |                                                      | 2005                                      |          | 2004    |          | 2003  
|                                                
|                                                 |                                                      | (In Thousands)                           
|Operating Activities:                            |                                                      |                                           |          |         |          |       
|                                                 | Net income                                           |                                           | $11,170  |         | $10,700  |        | $10,545 
|Adjustments to Reconcile Net Income to Net Cash: |                                                      |                                           |          |         |          |       
|                                                 | Equity in earnings from subsidiaries                 |                                           | (11,885) |         | (11,390) |        | (10,741)
|                                                 | Changes in other assets and liabilities              |                                           | 220      |         | 398      |        | (641)   
|                                                
|                                                 |                                                      | Net Cash Used from Operating Activities   |          | (495)   |          | (292)  |          | (837)
|Investing Activities:                            |                                                      |                                           |          |         |          |       
|                                                 | Investment in NISC & NCT1                            |                                           | (2,165)  |         | (250)    |        | (973)   
|                                                 | Purchases of software and equipment                  |                                           |         |         |         |        | (11)    
|                                                
|                                                 |                                                      | Net Cash Used by Investing Activities     |          | (2,165) |          | (250)  |          | (984)
|Financing Activities:                            |                                                      |                                           |          |         |          |       
|                                                 | Dividends paid to shareholders                       |                                           | (2,560)  |         | (2,308)  |        | (2,008) 
|                                                 | Dividends received from Northrim Bank                |                                           | 4,500    |         | 3,375    |        | 4,969   
|                                                 | Proceeds from issuance of trust preferred securities |                                           | 10,000   |         |         |        | 8,000   
|                                                 | Proceeds from issuance of common stock               |                                           | 337      |         | 300      |        | 425     
|                                                 | Repurchase of common stock                           |                                           | (7,338)  |         |         |        | (2,219) 
|                                                
|                                                 |                                                      | Net Cash Provided by Financing Activities |          | 4,939   |          | 1,367  |          | 9,167
|                                                
|Net Increase by Cash and Cash Equivalents        |                                                      | 2,279                                     |          | 825     |          | 7,346 
|                                                
|Cash and Cash Equivalents at beginning of period |                                                      | 8,735                                     |          | 7,910   |          | 564   
|                                                
|Cash and Cash Equivalents at end of period       |                                                      | $11,014                                   |          | $8,735  |          | $7,910
|                                                

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Annual Report on
Form 10-K






92-0175752    562-0062








12b-2






12b-2


S-K 10-K.






10-K 10-K.


53



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Index


|         |  |                                                                                                                         |  |                      
|-------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|         |  |                                                                                                                         |  | Page                 
|         |  | Part I                                                                                                                  |  |                      
|        
|Item 1.  |  | Business                                                                                                                |  | 1-4, 6-19, 54-60     
|         |  | General                                                                                                                 |  | 1-4, 54-60           
|         |  | Investment Portfolio                                                                                                    |  | 15-17, 35-36, 48     
|         |  | Loan Portfolio                                                                                                          |  | 11-15, 37-38         
|         |  | Summary of Loan Loss Experience                                                                                         |  | 11-15, 37-38         
|         |  | Deposits                                                                                                                |  | 17-18, 44            
|         |  | Return on Equity and Assets                                                                                             |  | 5                    
|         |  | Short-term Borrowings                                                                                                   |  | 18, 41-42            
|        
|Item 1A. |  | Risk Factors                                                                                                            |  | 59-60                
|        
|Item 1B. |  | Unsolved Staff Comments                                                                                                 |  | None                 
|        
|Item 2.  |  | Properties                                                                                                              |  | 61                   
|        
|Item 3.  |  | Legal Proceedings                                                                                                       |  | None                 
|        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                     |  | None                 
|        
|         |  | Part II                                                                                                                 |  |                      
|        
|Item 5.  |  | Market for Registrants Common Equity and Related
    Stockholder Matters and Issuer Purchases of Equity Securities     |  | 19, 20, 34, 44-46, 52
|        
|Item 6.  |  | Selected Financial Data                                                                                                 |  | 5                    
|        
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                               |  | 6-25                 
|        
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                              |  | 23-24                
|        
|Item 8.  |  | Financial Statements and Supplementary Data                                                                             |  | 28-52                
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure                                |  | None                 
|        
|Item 9A. |  | Conclusion Regarding the Effectiveness of Disclosure Controls
    and Procedures                                        |  | 25                   
|         |  | Managements Report on Internal Control Over Financial
    Reporting                                                    |  | 25                   
|         |  | Report of Independent Registered Public Accounting Firm:
    Effectiveness of Internal Control Over Financial Reporting |  | 26                   
|        
|Item 9B. |  | Other Information                                                                                                       |  | None                 
|        
|         |  | Part III                                                                                                                |  |                      
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                      |  | *                    
|        
|Item 11. |  | Executive Compensation                                                                                                  |  | *                    
|        
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder Matters                      |  | *                    
|        
|Item 13. |  | Certain Relationships and Related Transactions                                                                          |  | *                    
|        
|Item 14. |  | Principal Accountant Fees and Services                                                                                  |  | *                    
|        
|         |  | Part IV                                                                                                                 |  |                      
|        
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                                 |  | 62                   



54



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General




Competition




out-of




55



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##### Table of Contents





|                                       |       |                        |      |    |          |  |           |              |  |  |     |      | 
|-------------------------------------- | ----- | ---------------------- | ---- | -- | -------- |  | --------- | ------------ |  |  | --- | ---- | 
|                                       |      
|Market Share in Greater Anchorage Area |      
|                                       |      
|                                       |       | Number of              |      |    | Total    |  |           | Market share | 
|Financial institution                  |       | branches               |      |    | deposits |  |           | of deposits  | 
|                                       |      
|                                       |       | (Dollars in thousands) |     
|Northrim Bank                          |       |                        | 8(1) |    |          |  | $655,214  |              |  |  | 21% |     
|Wells Fargo Bank Alaska                |       |                        | 14   |    |          |  | 1,217,306 |              |  |  | 39% |     
|First National Bank Alaska             |       |                        | 10   |    |          |  | 820,627   |              |  |  | 26% |     
|Key Bank                               |       |                        | 4    |    |          |  | 367,589   |              |  |  | 12% |     
|Alaska First Bank & Trust              |       |                        | 2    |    |          |  | 51,728    |              |  |  | 2%  |     
|                                      
|                                       | Total |                        |      | 47 |          |  |           | $3,112,464   |  |  |     | 100% | 
|                                      



Employees and Key Personnel






Alaska Economy








56



---



##### Table of Contents











Supervision and Regulation










57



---



##### Table of Contents











out-of out-of


















58



---



##### Table of Contents







Risk Factors






Adequacy of Loan Loss Allowance:


Growth and Management:


Changes in Market Interest Rates:


Geographic Concentration:


Regulation:


59



---



##### Table of Contents





Competition:


Credit Risk:


60



---



##### Table of Contents



Properties




|                                                                                  |  |             |  |                            
|--------------------------------------------------------------------------------- |  | ----------- |  | ---------------------------
|Locations                                                                         |  | Type        |  | Leased/Owned               
|                                                                                 
|Midtown Financial Center: Northrim Headquarters
    3111 C Street, Anchorage, AK  |  | Traditional |  | Leased                     
|                                                                                 
|SouthSide Financial Center
    8730 Old Seward Highway, Anchorage, AK             |  | Traditional |  | Land leased; building owned
|                                                                                 
|36thAvenue
    Branch
    811 East
    36thAvenue,
    Anchorage, AK              |  | Traditional |  | Owned                      
|                                                                                 
|Huffman Branch
    1501 East Huffman Road, Anchorage, AK                          |  | Supermarket |  | Leased                     
|                                                                                 
|Jewel Lake Branch
    4000 West Dimond Blvd., Anchorage, AK                       |  | Supermarket |  | Leased                     
|                                                                                 
|Seventh Avenue Branch
    550 West Seventh Avenue, Anchorage, AK                  |  | Traditional |  | Leased                     
|                                                                                 
|West Anchorage Branch/ Small Business Center
    2709 Spenard Road, Anchorage, AK |  | Traditional |  | Owned                      
|                                                                                 
|Eagle River Branch
    12812 Old Glenn Highway, Fire Lake Plaza, Eagle River, AK  |  | Traditional |  | Leased                     
|                                                                                 
|Fairbanks Financial Center
    714 Fourth Avenue, Suite 100, Fairbanks, AK        |  | Traditional |  | Leased                     
|                                                                                 
|Wasilla Financial Center
    850 E. USA Circle, Suite A, Wasilla, AK              |  | Traditional |  | Owned                      

Financial Statements and Exhibits


Financial Statements






| |                                                             
| | ------------------------------------------------------------
| | Consolidated Balance Sheets as of December 31, 2005 and 2004









61



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##### Table of Contents



Exhibits




|        |       |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- | ---------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                 
|Number  |       | Name of Document
|        | 3.1   |                  |  | Amended and Restated Articles of
    Incorporation(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 3.2   |                  |  | Bylaws(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 4.1   |                  |  | Form of Common Stock
    Certificate(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 4.2   |                  |  | Pursuant to Section 6.0(b)(4)(iii)(A) of
    Regulation S-K, copies of instruments defining rights of
    holders of long-term debt and preferred securities are not
    filed. The Company agrees to furnish a copy thereof to the
    Securities and Exchange Commission upon request                                                                                                                                                                                                                                                                                         
|       
|        | 4.3   |                  |  | Indenture dated as of December 16,
    2005(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 4.4   |                  |  | Form of Junior Subordinated Debt Security due
    2036(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10.1  |                  |  | Employee Stock Option and Restricted Stock Award
    Plan(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 10.2  |                  |  | 2000 Employee Stock Incentive
    Plan(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10.3  |                  |  | Amended and Restated Employment Agreement with R. Marc
    Langland(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 10.4  |                  |  | Amended and Restated Employment Agreement with Christopher N.
    Knudson(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 10.5  |                  |  | Amended and Restated Employment Agreement with Victor P.
    Mollozzi(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 10.6  |                  |  | Employment Agreement with Joseph
    Schierhorn(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|        | 10.7  |                  |  | Plan and Agreement of Reorganization between the Registrant and
    Northrim Bank dated as of March 7,
    2001(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|        | 10.8  |                  |  | Supplemental Executive Retirement Plan dated July 1, 1994,
    as amended January 8,
    2004(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 10.9  |                  |  | Supplemental Executive Retirement Deferred Compensation
    Plan(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.10 |                  |  | 2004 Stock Incentive
    Plan(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 10.11 |                  |  | Employment Agreement with Robert
    Shake(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10.12 |                  |  | Capital Securities Purchase Agreement dated December 14,
    2005(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|        | 10.13 |                  |  | Amended and Restated Declaration of Trust Northrim
    Statutory Trust 2 dated as of December 16,
    2005(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 21    |                  |  | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |       |                  |  | Northrim Bank
    Northrim Investment Services Company
    Northrim Capital Trust 1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 23    |                  |  | Consent of KPMG
    LLP(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 24    |                  |  | Power of
    Attorney(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 31.1  |                  |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. § 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of
    2002(5)                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 31.2  |                  |  | Certification of Chief Financial Officer pursuant to
    18 U.S.C. § 1350, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of
    2002(5)                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 32.1  |                  |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of
    2002(5)                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 32.2  |                  |  | Certification of the Chief Financial Officer pursuant to
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of
    2002(5)                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        |       |                  |  | (1)Incorporated
    by reference to the Companys Form 8-A, filed with the
    SEC on January 14, 2002(2)Incorporated
    by reference to the Companys Form 10-K for the year
    ended December 31, 2002, filed with the SEC on
    March 19, 2003(3)Incorporated
    by reference to the Companys Form 10-K for the year
    ended December 31, 2003, filed with the SEC on
    March 15, 2004(4)Incorporated
    by reference to the Companys Form 10-K for the year
    ended December 31, 2004, filed with the SEC on
    March 15, 2005(5)Filed
    with this Form 10-K

62



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Signatures






| |                       
| | ----------------------
| | Northrim BanCorp, Inc.



| |    |                     
| | -- | --------------------
| | By | /s/ R. Marc Langland

| |                                                
| | -----------------------------------------------
| | R. Marc Langland                               
| | Chairman, President and Chief Executive Officer





| |                                                   
| | --------------------------------------------------
| | Principal Executive Officer:                      
|
| | /s/ R. Marc Langland                              
| | R. Marc Langland                                  
| | Chairman, President and Chief Executive Officer   
|
| | Principal Financial Officer:                      
|
| | /s/ Joseph M. Schierhorn                          
| | Joseph M. Schierhorn                              
| | Executive Vice President, Chief Financial Officer,
| | Compliance Manager                                

10-K, attorney-in


|                 |  |                       
|---------------- |  | ----------------------
|Larry S. Cash    |  | Christopher N. Knudson
|Mark G. Copeland |  | R. Marc Langland      
|Frank A. Danner  |  | Richard L. Lowell     
|Ronald A. Davis  |  | Irene Sparks Rowan    
|Anthony Drabek   |  | John C. Swalling      



| |                        
| | -----------------------
| | By /s/ R. Marc Langland
| | R. Marc Langland       
| | as Attorney-in-fact    
|
| | March 13, 2006         

63



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Investor Information


Annual Meeting


|          |  |                                                                         
|--------- |  | ------------------------------------------------------------------------
|Date:     |  | Thursday, May 4, 2006                                                   
|Time:     |  | 9 a.m.                                                                  
|Location: |  | Hilton Anchorage Hotel
    500 West Third Avenue
    Anchorage, AK 99501

Stock Symbol




Auditor




Transfer Agent and Registrar


1-800


Legal Counsel




Information Requests






|  |                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Visit our home page, www.northrim.com, and click on the
    For Investorssection for stock information
    and copies of earnings and dividend releases.                                                          
| 
| | If you would like to be added to Northrims investor
    e-mail list or have
    investor information mailed to you, send a request to
    investors@nrim.com or call our Corporate Secretary at
    (907) 261-3301.

Written requests should be mailed to the following
address:














E-mail:


http://www.northrim.com


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