**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 ———————————
 **FORM
        10-K**
  **x** **** **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **For
        the Fiscal Year Ended December 31, 2005**
 **OR**
 **o** **** **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **For
        the transition period from _________ to __________.** **Commission
        File Number 000-30707**
 **First
        Northern Community Bancorp**
 (Exact
        name of Registrant as specified in its charter)
 
 California
              68-0450397(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification Number)
 
 195
                  N. First St., Dixon, CA
              95620(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 **707-678-3041**
 (Registrant’s
        telephone number including area code)
 
 Securities
                  registered pursuant to Section 12(b) of the Act:
              NoneSecurities
                  registered pursuant to Section 12(g) of the Act:
              Common
                  Stock, no par value
                (Title
                  of Class)
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 **Yes** **o** **No** **x**
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange Act.
 **Yes** **o** **No** **x**
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports) and (2) has been subject to such filing requirements
        for
        the past 90 days.
 **Yes** **x** **No** **o**
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (Section 229.405 of this chapter) is not contained herein,
        and
        will not be contained, to the best of Registrant’s knowledge, in definitive
        proxy or information statements incorporated by reference in Part III of
        this Form 10-K or any amendment to this Form 10-K. x
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 **Large
        accelerated filer** **o** **** **Accelerated
        filer** **x** **** **Non-accelerated
        filer** **o**
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). ****
 **Yes** **o** **No** **x**
 
 The
        aggregate market value of the Common Stock held by non-affiliates of the
        Registrant on June 30, 2005 (based upon the last reported sales price of
        such
        stock on the OTC Bulletin Board on June 30, 2005) was $174,867,436.
  The
        number of shares of Common Stock outstanding as of March 14, 2006 was 7,557,234.
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Items
        10, 11, 12 (as to security ownership of certain beneficial owners and
        management), 13 and 14 of Part III incorporate by reference information
        from the registrant’s proxy statement to be filed with the Securities and
        Exchange Commission in connection with the solicitation of proxies for the
        registrant’s 2006 Annual Meeting of Shareholders.
   
  **TABLE
        OF CONTENTS**
  **PART
                  I**
              **Page**Item
                  1. Business
              3Item
                  1A. Risk factors
              14Item
                  1B. Unresolved Staff Comments
              17Item
                  2. Properties
              18Item
                  3. Legal Proceedings
              18Item
                  4. Submission of Matters to a Vote of Security Holders
              19**PART
                  II**Item
                  5. Market for the Registrant's Common Equity, Related Stockholder
                  Matters
                  and Issuer Purchases of Equity Securities
              19Item
                  6. Selected Financial Data
              21Item
                  7. Management's Discussion and Analysis of Financial Condition
                  and Results
                  of Operation
              22Item
                  7A. Quantitative and Qualitative Disclosures about Market
                  Risk
              41Item
                  8. Financial Statements and Supplementary Data
              43Item
                  9. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              78Item
                  9A. Controls and Procedures
              78Item
                  9B. Other Information
              79**PART
                  III**Item
                  10. Directors and Executive Officers of the Registrant
              79Item
                  11. Executive Compensation
              79Item
                  12. Security Ownership of Certain Beneficial Owners and Management
                  and
                  Related Stockholder Matters
              80Item
                  13. Certain Relationships and Related Transactions
              80Item
                  14. Principal Accountant Fees and Services
              80**PART
                  IV**Item
                  15. Exhibits and Financial Statement Schedules
              81Signatures
              83
 
  2
  **PART
        I**
 
 **ITEM
        1 - BUSINESS**
 
 *This
        Annual Report on Form 10-K contains forward-looking statements within the
        meaning of Section 27A of the Securities Act of 1933, as amended, and Section
        21E of the Securities Exchange Act of 1934, as amended, and are subject to
        the
“safe harbor” created by those sections. Forward-looking statements include the
        information concerning possible or assumed future results of operations of
        the
        Company set forth under the heading “Management's Discussion and Analysis of
        Financial Condition and Results of Operations.” Forward-looking statements also
        include statements in which words such as “expect,” “anticipate,” “intend,”
“plan,” “believe,” estimate,” “consider,” or similar expressions are used. These
        forward-looking statements involve certain risks and uncertainties that could
        cause actual results to differ materially from those in the forward-looking
        statements. Such risks and uncertainties include, but are not limited to,
        the
        risks discussed in Item 1A under the caption “Risk Factors” and other risk
        factors discussed elsewhere in this Report. The Company undertakes no obligation
        to update any forward-looking statements to reflect events or circumstances
        arising after the date on which they are made.*
 
 Unless
        otherwise indicated, all information herein has been adjusted to give effect
        to
        our two-for-one stock split and stock dividends.
 
 First
        Northern Bank of Dixon (“First Northern” or the “Bank”) was established in 1910
        under a California state charter as Northern Solano Bank, and opened for
        business on February 1st of that year. On January 2, 1912, the First National
        Bank of Dixon was established under a Federal Charter, and until 1955, the
        two
        entities operated side by side under the same roof and with the same management.
        In an effort to increase efficiency of operation, reduce operating expense,
        and
        improve lending capacity, the two banks were consolidated on April 8, 1955,
        with
        the First National Bank of Dixon as the surviving entity.
 
 On
        January 1, 1980, the Bank’s Federal Charter was relinquished in favor of a
        California State Charter, and the Bank’s name was changed to First Northern Bank
        of Dixon.
 
 In
        April of 2000, the shareholders of First Northern approved a corporate
        reorganization, which provided for the creation of a bank holding company,
        First
        Northern Community Bancorp (the “Company”). The objective of this
        reorganization, which was effected May 19, 2000, was to enable the Bank to
        better compete and grow in its competitive and rapidly changing marketplace.
        As
        a result of the reorganization, the Bank is a wholly owned and principal
        operating subsidiary of the Company.
 
 First
        Northern engages in the general commercial banking business in the Solano,
        Yolo,
        Placer and Sacramento Counties of California.
 
 The
        Company’s and the Bank’s Administrative Offices are located in Dixon,
        California. Also located in Dixon are the back office functions of the
        Information Services/Central Operations Department and the Central Loan
        Department.
 
 The
        Bank has eleven full service branches. Five are located in the Solano County
        cities of Dixon, Fairfield, Suisun City, and Vacaville (2). Four branches
        are
        located in the Yolo County cities of Winters, Davis, West Sacramento and
        Woodland. One branch is located in Downtown Sacramento, Sacramento County
        and,
        one branch is located in the city of Roseville in Placer County. The Bank
        also
        has two satellite-banking offices inside retirement communities in the city
        of
        Davis. In addition, the Bank has real estate loan offices in Davis, Woodland,
        Vacaville, El Dorado Hills and Roseville that originate residential mortgages
        and construction loans. The Bank also has a Small Business Administration
        (the
“SBA”) Loan Department and an Asset Management & Trust Department in
        Sacramento, Sacramento County that serve the Bank’s entire market
        area.
 
 First
        Northern is in the commercial banking business, which includes accepting
        demand,
        interest bearing transaction, savings, and time deposits, and making commercial,
        consumer, and real estate related loans. It also offers installment note
        collection, issues cashier’s checks and money orders, sells travelers’ checks,
        rents safe deposit boxes, and provides other customary banking services.
        The
        Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and each
        depositor’s account is insured up to $100,000.
 
 First
        Northern also offers a broad range of alternative investment products and
        services. The Bank offers these services through an arrangement with Raymond
        James Financial Services, Inc., an independent broker/dealer and a member
        of
        NASD and SIPC. All investments and/or financial services offered by
        representatives of Raymond James Financial Services, Inc. are not insured
        by the
        FDIC.
  3
 
 The
        Bank offers equipment leasing and limited international banking services
        through
        third parties.
 
 The
        operating policy of the Bank since its inception has emphasized serving the
        banking needs of individuals and small-to medium-sized businesses. In Dixon,
        this has included businesses involved in crop and livestock production.
        Historically, the economy of the Dixon area has been primarily dependent
        upon
        agricultural related sources of income and most employment opportunities
        have
        also been related to agriculture. Since 2000, Dixon has been growing and
        becoming more diverse with noticeable expansion in the areas of industrial,
        commercial, retail and residential housing projects.
 
 Agriculture
        continued to be a significant factor in the Bank’s business after the opening of
        the first branch office in Winters in 1970. A significant step was taken
        in 1976
        to reduce the Company’s dependence on agriculture with the opening of the Davis
        Branch.
 
 The
        Davis economy is supported significantly by the University of California,
        Davis.
        In 1981, a branch was opened in South Davis, and was consolidated into the
        main
        Davis Branch in 1986.
 
 In
        1983, the West Sacramento Branch was opened. The West Sacramento economy
        is
        built primarily around transportation and distribution related business.
        This
        addition to the Bank’s market area further reduced the Company’s dependence on
        agriculture.
 
 In
        order to accommodate the demand of the Bank’s customers for long-term
        residential real estate loans, a Real Estate Loan Office was opened in 1983.
        This office is centrally located in Davis, and has enabled the Bank to access
        the secondary real estate market.
 
 The
        Vacaville Branch was opened in 1985. Vacaville is a rapidly growing community
        with a diverse economic base including a California state prison, food
        processing, distribution, shopping centers (Factory Outlet Stores), medical,
        biotech and other varied industries.
 
 In
        1994, the Fairfield Branch was opened. Fairfield has also been a rapidly
        growing
        community bounded by Vacaville on the east. Its diverse economic base includes
        military (Travis AFB), food processing (an Anheuser-Busch plant), retail
        (Solano
        Mall), manufacturing, medical, agriculture, and other varied industries.
        Fairfield is the county seat of Solano County.
 
 A
        real estate loan production office was opened in El Dorado Hills, in April
        1996,
        to serve the growing mortgage loan demand in the foothills area east of
        Sacramento.
 
 The
        SBA Loan Department was opened in April 1997 in Sacramento to serve the small
        business and industrial loan demand throughout the Bank’s entire market
        area.
 
 In
        June of 1997, the Bank’s seventh branch was opened in Woodland, the county seat
        of Yolo County. Woodland is an expanding and diversified city with an economy
        dominated by agribusiness, retail services, and an expanding industrial
        sector.
 
 The
        Bank’s eighth branch, the Downtown Financial Center, opened in July of 2000 in
        Vacaville to serve the business and individual financial needs on the west
        side
        of Interstate-80. Also in July of 2000, in an adjacent office, the Bank opened
        its third real estate loan production office.
 
 Two
        satellite banking offices of the Bank’s Davis Branch were opened in 2001 in the
        Davis senior living communities of Covell Gardens and the University Retirement
        Community.
 
 In
        December of 2001, Roseville became the site of the Bank’s fourth real estate
        loan production office. This office serves the residential mortgage loan
        needs
        throughout Placer County.
 
 In
        March of 2002 the Bank opened its ninth branch in a new class-A commercial
        building located on the harbor in Suisun City. The Branch is located in Suisun’s
        Downtown waterfront area, which is part of an ongoing community revitalization
        project that continues to attract new small businesses and merchants.
 
 The
        Suisun City Branch is also in close proximity to the Fairfield Central Business
        District and should enable First Northern to expand its commercial sector
        market
        share.
  4
 
 In
        October of 2002, the Bank opened its tenth branch on a prominent corner in
        Downtown Sacramento to serve Sacramento Metro’s business center and its
        employees. The Bank’s Asset Management & Trust Department, located on the
        mezzanine of the Downtown Sacramento Branch, was opened in 2002 to serve
        the
        trust and fiduciary needs of the Bank’s entire market area. Fiduciary services
        are offered to individuals, businesses, governments and charitable organizations
        in the Solano, Yolo, Sacramento, Placer and El Dorado County
        regions.
 
 In
        August of 2003, a fifth full service real estate loan production office was
        opened in Woodland. This loan office is located within the same commercial
        office complex as the Bank’s Woodland Branch. The Bank’s history of servicing
        the Woodland community, coupled with the continued growth of the Woodland
        housing market prompted this decision to expand the Bank’s real estate loan
        service for the community.
 
 The
        Bank expanded it presence in Placer County in January 2005 by opening its
        eleventh full service branch on a prominent corner in the rapidly growing
        business district of Roseville.
 
 Through
        this period of change and diversification, the Bank’s strategic focus, which
        emphasizes serving the banking needs of individuals and small-to medium-sized
        businesses, has not changed. The Bank takes real estate, crop proceeds,
        securities, savings and time deposits, automobiles, and equipment as collateral
        for loans.
 
 Most
        of the Bank’s deposits are attracted from the market of northern and central
        Solano County and southern and central Yolo County. The Company believes
        that
        the Bank’s deposit base does not involve any undue concentration levels from one
        or a few major depositors.
 
 As
        of December 31, 2005, the Company and the Bank employed 236 full-time equivalent
        staff. The Company and the Bank consider their relationship with their employees
        to be good and have not experienced any interruptions of operations due to
        labor
        disagreements.
 
 First
        Northern has historically experienced seasonal swings in both deposit and
        loan
        volumes due primarily to general economic factors and specific economic factors
        affecting our clients. Deposits have typically hit lows in February or March
        and
        have peaked in November or December. Loans typically peak in the late spring
        and
        hit lows in the fall as crops are harvested and sold. Since the real estate
        and
        agricultural economies generally follow the same seasonal cycle, they experience
        the same deposit and loan fluctuations.
 
 **Available
        Information**
 
 The
        Company’s internet address is www.thatsmybank.com and the Company makes available free of charge on this website its Annual
        Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
        Form
        8-K and amendments to those reports, as soon as reasonably practicable after
        the
        Company electronically files such material with, or furnishes it to, the
        SEC.
        These filings are also accessible on the SEC's website at www.sec.gov .
        The information found on the Company’s website shall not be deemed incorporated
        by reference by any general statement incorporating by reference this report
        into any filing under the Securities Act of 1933 or under the Securities
        Exchange Act of 1934, except to the extent the Company specifically incorporates
        the information found on the Company’s website by reference, and shall not
        otherwise be deemed filed under such Acts.
 
 **The
        Effect of Government Policy on Banking**
 
 The
        earnings and growth of the Bank are affected not only by local market area
        factors and general economic conditions, but also by government monetary
        and
        fiscal policies. For example, the Board of Governors of the Federal Reserve
        System (the “FRB”) influences the supply of money through its open market
        operations in U.S. Government securities, adjustments to the discount rates
        applicable to borrowings by depository institutions and others and establishment
        of reserve requirements against both members and non-members financial
        institutions’ deposits. Such actions significantly affect the overall growth and
        distribution of loans, investments and deposits and also affect interest
        rates
        charged on loans and paid on deposits. The nature and impact of future changes
        in such policies on the business and earnings of the Company cannot be
        predicted. Additionally, state and federal tax policies can impact banking
        organizations.
  5
  As
        a consequence of the extensive regulation of commercial banking activities
        in
        the United States, the business of the Company is particularly susceptible
        to
        being affected by the enactment of federal and state legislation which may
        have
        the effect of increasing or decreasing the cost of doing business, modifying
        permissible activities or enhancing the competitive position of other financial
        institutions. Any change in applicable laws or regulations may have a material
        adverse effect on the business and prospects of the Company.
 
 **Regulation
        and Supervision of Bank Holding Companies**
 
 The
        Company is a bank holding company subject to the Bank Holding Company Act
        of
        1956, as amended (the “BHCA”). The Company reports to, registers with, and may
        be examined by, the FRB. The FRB also has the authority to examine the Company’s
        subsidiaries. The costs of any examination by the FRB are payable by the
        Company.
 
 The
        Company is a bank holding company within the meaning of Section 3700 of the
        California Financial Code. As such, the Company and the Bank are subject
        to
        examination by, and may be required to file reports with, the California
        Commissioner of Financial Institutions (the “Commissioner”).
 
 The
        FRB has significant supervisory and regulatory authority over the Company
        and
        its affiliates. The FRB requires the Company to maintain certain levels of
        capital. *See* “Capital
        Standards” below for more information. The FRB also has the authority to take
        enforcement action against any bank holding company that commits any unsafe
        or
        unsound practice, or violates certain laws, regulations or conditions imposed
        in
        writing by the FRB. *See* “Prompt
        Corrective Action and Other Enforcement Mechanisms” below for more information.
        According to FRB policy, bank holding companies are expected to act as a
        source
        of financial strength to subsidiary banks, and to commit resources to support
        subsidiary banks. This support may be required at times when a bank holding
        company may not be able to provide such support.
 
 Under
        the BHCA, a company generally must obtain the prior approval of the FRB before
        it exercises a controlling influence over a bank, or acquires directly or
        indirectly, more than 5% of the voting shares or substantially all of the
        assets
        of any bank or bank holding company. Thus, the Company is required to obtain
        the
        prior approval of the FRB before it acquires, merges or consolidates with
        any
        bank or bank holding company. Any company seeking to acquire, merge or
        consolidate with the Company also would be required to obtain the prior approval
        of the FRB.
 
 The
        Company is generally prohibited under the BHCA from acquiring ownership or
        control of more than 5% of the voting shares of any company that is not a
        bank
        or bank holding company and from engaging directly or indirectly in activities
        other than banking, managing banks, or providing services to affiliates of
        the
        holding company. However, a bank holding company, with the approval of the
        FRB,
        may engage, or acquire the voting shares of companies engaged, in activities
        that the FRB has determined to be so closely related to banking or managing
        or
        controlling banks as to be a proper incident thereto. A bank holding company
        must demonstrate that the benefits to the public of the proposed activity
        will
        outweigh the possible adverse effects associated with such
        activity.
 
 The
        Gramm-Leach-Bliley Act of 1999 (“GLBA”) eliminated many of the restrictions
        placed on the activities of bank holding companies that become financial
        holding
        companies. Among other things, GLBA repealed certain Glass-Steagall Act
        restrictions on affiliations between banks and securities firms, and amended
        the
        BHCA to permit bank holding companies that are financial holding companies
        to
        engage in activities, and acquire companies engaged in activities, that are:
        financial in nature (including insurance underwriting, insurance company
        portfolio investment, financial advisor, securities underwriting, dealing
        and
        market-making, and merchant banking activities); incidental to financial
        activities; or complementary to financial activities if the FRB determines
        that
        they pose no substantial risk to the safety or soundness of depository
        institutions or the financial system in general. The Company has not become
        a
        financial holding company. GLBA also permits national banks to engage in
        activities considered financial in nature through a financial subsidiary,
        subject to certain conditions and limitations and with the approval of the
        Comptroller of the Currency.
 
 A
        bank holding company may acquire banks in states other than its home state
        without regard to the permissibility of such acquisitions under state law,
        but
        subject to any state requirement that the bank has been organized and operating
        for a minimum period of time, not to exceed five years, and the requirement
        that
        the bank holding company, prior to or following the proposed acquisition,
        controls no more than 10% of the total amount of deposits of insured depository
        institutions in the United States and no more than 30% of such deposits in
        that
        state (or such lesser or greater amount set by state law). Banks may also
        merge
        across state lines, thereby creating interstate branches. Furthermore, a
        bank is
        able to open new branches in a state in which it does not already have banking
        operations, if the laws of such state permit such de novo
        branching.
  6
  Under
        California law, (a) out-of-state banks that wish to establish a California
        branch office to conduct core banking business must first acquire an existing
        five year old California bank or industrial bank by merger or purchase, (b)
        California state-chartered banks are empowered to conduct various authorized
        branch-like activities on an agency basis through affiliated and unaffiliated
        insured depository institutions in California and other states, and (c) the
        Commissioner of the Department of Financial Institutions is authorized to
        approve an interstate acquisition or merger which would result in a deposit
        concentration in California exceeding 30% if the Commissioner finds that
        the
        transaction is consistent with public convenience and advantage. However,
        a
        state bank chartered in a state other than California may not enter California
        by purchasing a California branch office of a California bank or industrial
        bank
        without purchasing the entire entity or by establishing a de novo California
        bank.
 
 The
        FRB generally prohibits a bank holding company from declaring or paying a
        cash
        dividend which would impose undue pressure on the capital of subsidiary banks
        or
        would be funded only through borrowing or other arrangements that might
        adversely affect a bank holding company's financial position. The FRB's policy
        is that a bank holding company should not continue its existing rate of cash
        dividends on its common stock unless its net income is sufficient to fully
        fund
        each dividend and its prospective rate of earnings retention appears consistent
        with its capital needs, asset quality and overall financial condition. The
        Company is also subject to restrictions relating to the payment of dividends
        under California corporate law. See “Restrictions on Dividends and Other
        Distributions” below for additional restrictions on the ability of the Company
        and the Bank to pay dividends.
 
 Transactions
        between the Company and the Bank are subject to a number of other restrictions.
        FRB policies forbid the payment by bank subsidiaries of management fees,
        which
        are unreasonable in amount or exceed the fair market value of the services
        rendered (or, if no market exists, actual costs plus a reasonable profit).
        Subject to certain limitations, depository institution subsidiaries of bank
        holding companies may extend credit to, invest in the securities of, purchase
        assets from, or issue a guarantee, acceptance, or letter of credit on behalf
        of,
        an affiliate, provided that the aggregate of such transactions with affiliates
        may not exceed 10% of the capital stock and surplus of the institution, and
        the
        aggregate of such transactions with all affiliates may not exceed 20% of
        the
        capital stock and surplus of such institution. The Company may only borrow
        from
        depository institution subsidiaries if the loan is secured by marketable
        obligations with a value of a designated amount in excess of the loan. Further,
        the Company may not sell a low-quality asset to the Bank.
 
 **Bank
        Regulation and Supervision**
 
 The
        Bank is subject to regulation, supervision and regular examination by the
        California Department of Financial Institutions (“DFI”) and the Federal Deposit
        Insurance Corporation (the “FDIC”) and the Company by the FRB. The regulations
        of these agencies affect most aspects of the Company’s business and prescribe
        permissible types of loans and investments, the amount of required reserves,
        requirements for branch offices, the permissible scope of the Company’s
        activities and various other requirements. While the Bank is not a member
        of the
        FRB, it is also directly subject to certain regulations of the FRB dealing
        primarily with check clearing activities, establishment of banking reserves,
        Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal
        Credit Opportunity (Regulation B). In addition, the banking industry is subject
        to significantly increased regulatory scrutiny and enforcement regarding
        Bank
        Secrecy Act and anti-money laundering matters. In recent years, a number
        of
        banks and bank holding companies announced the imposition of regulatory
        sanctions, including regulatory agreements and, in some cases, fines and
        penalties by the bank regulators due to failures to comply with the Bank
        Secrecy
        Act and other anti-money laundering legislation. In a number of these cases,
        the
        fines and penalties have been significant.
 
 Under
        California law, the Bank is subject to various restrictions on, and requirements
        regarding, its operations and administration including the maintenance of
        branch
        offices and automated teller machines, capital and reserve requirements,
        deposits and borrowings, stockholder rights and duties, and investment and
        lending activities.
  7
  California
        law permits a state chartered bank to invest in the stock and securities
        of
        other corporations, subject to a state chartered bank receiving either general
        authorization or, depending on the amount of the proposed investment, specific
        authorization from the Commissioner. Federal banking laws, however, impose
        limitations on the activities and equity investments of state chartered,
        federally insured banks. The FDIC rules on investments prohibit a state bank
        from acquiring an equity investment of a type, or in an amount, not permissible
        for a national bank. Non-permissible investments must have been divested
        by
        state banks no later than December 19, 1996. FDIC rules also prohibit a state
        bank from engaging as a principal in any activity that is not permissible
        for a
        national bank, unless the bank is adequately capitalized and the FDIC approves
        the activity after determining that such activity does not pose a significant
        risk to the deposit insurance fund. The FDIC rules on activities generally
        permit subsidiaries of banks, without prior specific FDIC authorization,
        to
        engage in those activities that have been approved by the FRB for bank holding
        companies because such activities are so closely related to banking to be
        a
        proper incident thereto. Other activities generally require specific FDIC
        prior
        approval and the FDIC may impose additional restrictions on such activities
        on a
        case-by-case basis in approving applications to engage in otherwise
        impermissible activities.
 
 **The
        USA Patriot Act**
 
 Title
        III of the United and Strengthening America by Providing Appropriate Tools
        Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”)
        includes numerous provisions for fighting international money laundering
        and
        blocking terrorism access to the U.S. financial system. The USA Patriot Act
        requires certain additional due diligence and record keeping practices,
        including, but not limited to, new customers, correspondent and private banking
        accounts. In
        March 2006, President Bush signed into law a renewal of the USA Patriot
        Act.
 
 Part
        of the USA Patriot Act is the International Money Laundering Abatement and
        Financial Anti-Terrorism Act of 2001 (“IMLAFATA”). Among its provisions,
        IMLAFATA requires each financial institution to: (i) establish an anti-money
        laundering program; (ii) establish appropriate anti-money laundering policies,
        procedures and controls; (iii) appoint a Bank Secrecy Act officer responsible
        for day-to-day compliance; and (iv) conduct independent audits. In addition,
        IMLAFATA contains a provision encouraging cooperation among financial
        institutions, regulatory authorities and law enforcement authorities with
        respect to individuals, entities and organizations engaged in, or reasonably
        suspected of engaging in, terrorist acts or money laundering activities.
        IMLAFATA expands the circumstances under which funds in a bank account may
        be
        forfeited and requires covered financial institutions to respond under certain
        circumstances to requests for information from federal banking agencies within
        120 hours. IMLAFATA also amends the BHCA and the Bank Merger Act to require
        the
        federal banking agencies to consider the effectiveness of a financial
        institution's anti-money laundering activities when reviewing an application
        under these acts.
 
 Pursuant
        to IMLAFATA, the Secretary of the Treasury, in consultation with the heads
        of
        other government agencies, has adopted and proposed special measures applicable
        to banks, bank holding companies, and/or other financial institutions. These
        measures include enhanced record keeping and reporting requirements for certain
        financial transactions that are of primary money laundering concern, due
        diligence requirements concerning the beneficial ownership of certain types
        of
        accounts, and restrictions or prohibitions on certain types of accounts with
        foreign financial institutions.
 
 **Privacy
        Restrictions**
 
 GLBA,
        in addition to the previous described changes in permissible non-banking
        activities permitted to banks, bank holding companies and financial holding
        companies, also requires financial institutions in the U.S. to provide certain
        privacy disclosures to customers and consumers, to comply with certain
        restrictions on the sharing and usage of personally identifiable information,
        and to implement and maintain commercially reasonable customer information
        safeguarding standards.
 
 The
        Company believes that it complies with all provisions of GLBA and all
        implementing regulations, and the Bank has developed appropriate policies
        and
        procedures to meet its responsibilities in connection with the privacy
        provisions of GLBA.
 
 California
        and other state legislatures have adopted privacy laws, including laws
        prohibiting sharing of customer information without the customer’s prior
        permission. These laws may make it more difficult for the Company to share
        information with its marketing partners, reduce the effectiveness of marketing
        programs, and increase the cost of marketing programs.
 
 8
  **Capital
        Standards**
 
 The
        federal banking agencies have risk-based capital adequacy guidelines intended
        to
        provide a measure of capital adequacy that reflects the degree of risk
        associated with a banking organization's operations for both transactions
        reported on the balance sheet as assets and transactions, such as letters
        of
        credit and recourse arrangements, which are recorded as off-balance-sheet
        items.
        Under these guidelines, nominal dollar amounts of assets and credit equivalent
        amounts of off-balance-sheet items are multiplied by one of several risk
        adjustment percentages, which range from 0% for assets with low credit risk,
        such as certain U.S. government securities, to 100% for assets with relatively
        higher credit risk, such as certain loans.
 
 In
        determining the capital level the Bank is required to maintain, the federal
        banking agencies do not, in all respects, follow generally accepted accounting
        principles (“GAAP”) and have special rules which have the effect of reducing the
        amount of capital that will be recognized for purposes of determining the
        capital adequacy of the Bank.
 
 A
        banking organization's risk-based capital ratios are obtained by dividing
        its
        qualifying capital by its total risk-adjusted assets and off-balance-sheet
        items. The regulators measure risk-adjusted assets and off balance sheet
        items
        against both total qualifying capital (the sum of Tier 1 capital and limited
        amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
        common
        stock, retained earnings, non-cumulative perpetual preferred stock, trust
        preferred securities (for up to 25% of total tier 1 capital), other types
        of
        qualifying preferred stock and minority interests in certain subsidiaries,
        less
        most other intangible assets and other adjustments. Net unrealized losses
        on
        available-for-sale equity securities with readily determinable fair value
        must
        be deducted in determining Tier 1 capital. For Tier 1 capital purposes, deferred
        tax assets that can only be realized if an institution earns sufficient taxable
        income in the future are limited to the amount that the institution is expected
        to realize within one year, or 10% of Tier 1 capital, whichever is less.
        Tier 2
        capital may consist of a limited amount of the allowance for possible loan
        and
        lease losses, term preferred stock and other types of preferred stock and
        trust
        preferred securities not qualifying as Tier 1 capital, term subordinated
        debt
        and certain other instruments with some characteristics of equity. The inclusion
        of elements of Tier 2 capital are subject to certain other requirements and
        limitations of the federal banking agencies. The federal banking agencies
        require a minimum ratio of qualifying total capital to risk-adjusted assets
        and
        off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted
        average risk-adjusted assets and off-balance-sheet items of 4%.
 
 Under
        FDIC regulations, there are also two rules governing minimum capital levels
        that
        FDIC-supervised banks must maintain against the risks to which they are exposed.
        The first rule makes risk-based capital standards consistent for two types
        of
        credit enhancements (i.e., recourse arrangements and direct credit substitutes)
        and requires different amounts of capital for different risk positions in
        asset
        securitization transactions. The second rule permits limited amounts of
        unrealized gains on debt and equity securities to be recognized for risk-based
        capital purposes as of September 1, 1998. The FDIC rules also provide that
        a
        qualifying institution that sells small business loans and leases with recourse
        must hold capital only against the amount of recourse retained. In general,
        a
        qualifying institution is one that is well capitalized under the FDIC's prompt
        corrective action rules. The amount of recourse that can receive the
        preferential capital treatment cannot exceed 15% of the institution's total
        risk-based capital.
 
 Effective
        January 1, 2002, the federal banking agencies, including the FDIC, adopted
        new
        regulations to change their regulatory capital standards to address the
        treatment of recourse obligations, residual interests and direct credit
        substitutes in asset securitizations that expose banks primarily to credit
        risk.
        Capital requirements for positions in securitization transactions are varied
        according to their relative risk exposures, while limited use is permitted
        of
        credit ratings from rating agencies, a banking organization’s qualifying
        internal risk rating system or qualifying software. The regulation requires
        a
        bank to deduct from Tier 1 capital, and from assets, all credit-enhancing
        interest only-strips, whether retained or purchased that exceed 25% of Tier
        1
        capital. Additionally, a bank must maintain dollar-for-dollar risk-based
        capital
        for any remaining credit-enhancing interest-only strips and any residual
        interests that do not qualify for a ratings-based approach. The regulation
        specifically reserves the right to modify any risk-weight, credit conversion
        factor or credit equivalent amount, on a case-by-case basis, to take into
        account any novel transactions that do not fit well into the currently defined
        categories.
  9
  
 In
        addition to the risk-based guidelines, federal banking regulators require
        banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
        average total assets, referred to as the leverage capital ratio. For a banking
        organization rated in the highest of the five categories used by regulators
        to
        rate banking organizations, the minimum lever-age ratio of Tier 1 capital
        to
        total assets must be 3%. It is improbable; however, that an institution with
        a
        3% leverage ratio would receive the highest rating by the regulators since
        a
        strong capital position is a significant part of the regulators' rating.
        For all
        banking organizations not rated in the highest category, the minimum leverage
        ratio must be at least 100 to 200 basis points above the 3% minimum. Thus,
        the
        effective minimum leverage ratio, for all practical purposes, must be at
        least
        4% or 5%. In addition to these uniform risk-based capital guidelines and
        leverage ratios that apply across the industry, the regulators have the
        discretion to set individual minimum capital requirements for specific
        institutions at rates significantly above the minimum guidelines and
        ratios.
 
 As
        of December 31, 2005, the Company’s and the Bank’s capital ratios exceeded
        applicable regulatory requirements.
 
 The
        following tables present the capital ratios for the Company and the Bank,
        compared to the standards for well-capitalized bank holding companies and
        depository institutions, as of December 31, 2005 (amounts in thousands
        except percentage amounts).
 
 The
                  CompanyWell
              
              MinimumActual
              
              Capitalized
              
              CapitalCapital
              
              Ratio
              
              Ratio
              
              RequirementLeverage
              
              $
              56,438
              
              
              8.5
              %
              
              5.0
              %
              
              4.0
              %Tier 1
                  Risk-Based
              
              
              56,438
              
              
              10.6
              %
              
              6.0
              %
              
              4.0
              %Total
                  Risk-Based
              
              
              62,824
              
              
              11.8
              %
              
              10.0
              %
              
              8.0
              %
 
 The
                  BankWell
              
              MinimumActual
              
              Capitalized
              
              CapitalCapital
              
              Ratio
              
              Ratio
              
              RequirementLeverage
              
              $
              55,287
              
              
              8.3
              %
              
              5.0
              %
              
              4.0
              %Tier 1
                  Risk-Based
              
              
              55,287
              
              
              10.4
              %
              
              6.0
              %
              
              4.0
              %Total
                  Risk-Based
              
              
              61,672
              
              
              11.6
              %
              
              10.0
              %
              
              8.0
              %
 
 
 The
        federal banking agencies must take into consideration concentrations of credit
        risk and risks from non-traditional activities, as well as an institution's
        ability to manage those risks, when determining the adequacy of an institution's
        capital. This evaluation will be made as a part of the institution's regular
        safety and soundness examination. The federal banking agencies must also
        consider interest rate risk (when the interest rate sensitivity of an
        institution's assets does not match the sensitivity of its liabilities or
        its
        off-balance-sheet position) in evaluation of a Bank’s capital
        adequacy.
 
 **Prompt
        Corrective Action and Other Enforcement Mechanisms**
 
 The
        Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
        requires each federal banking agency to take prompt corrective action to
        resolve
        the problems of insured depository institutions, including but not limited
        to
        those that fall below one or more prescribed minimum capital ratios. The
        law
        required each federal banking agency to promulgate regulations defining the
        following five categories in which an insured depository institution will
        be
        placed, based on the level of its capital ratios: well capitalized, adequately
        capitalized, under-capitalized, significantly undercapitalized and critically
        undercapitalized.
  10
  
 Under
        the prompt corrective action provisions of FDICIA, an insured depository
        institution generally will be classified in the following categories based
        on
        the capital measures indicated below:
 
 “Well
                  capitalized”
                Total
                  risk-based capital of 10%;
                Tier 1
                  risk-based capital of 6%; and
                Leverage
                  ratio of 5%.
              “Adequately
                  capitalized”
                Total
                  risk-based capital of 8%;
                Tier 1
                  risk-based capital of 4%; and
                Leverage
                  ratio of 4%.
 
 “Undercapitalized”
                Total
                  risk-based capital less than 8%;
                Tier 1
                  risk-based capital less than 4%; or
                Leverage
                  ratio less than 4%.
              “Significantly
                  undercapitalized”
                Total
                  risk-based capital less than 6%;
                Tier 1
                  risk-based capital less than 3%; or
                Leverage
                  ratio less than 3%.
 
 “Critically
                  undercapitalized”
                Tangible
                  equity to total assets less than 2%.
 
 
 An
        institution that, based upon its capital levels, is classified as “well
        capitalized,” “adequately capitalized” or “under-capitalized” may be treated as
        though it were in the next lower capital category if the appropriate federal
        banking agency, after notice and opportunity for hearing, determines that
        an unsafe or unsound condition or an unsafe or unsound practice warrants
        such
        treatment. At each successive lower capital category, an insured depository
        institution is subject to more restrictions. Management believes that at
        December 31, 2005, the Company and the Bank met the requirements for “well
        capitalized institutions.”
 
 In
        addition to measures taken under the prompt corrective action provisions,
        commercial banking organizations may be subject to potential enforcement
        actions
        by the federal regulators for unsafe or unsound practices in conducting their
        businesses or for violations of any law, rule, regulation or any condition
        imposed in writing by the agency or any written agreement with the agency.
        Enforcement actions may include the imposition of a conservator or receiver,
        the
        issuance of a cease-and-desist order that can be judicially enforced, the
        termination of insurance of deposits (in the case of a depository institution),
        the imposition of civil money penalties, the issuance of directives to increase
        capital, the issuance of formal and informal agreements, the issuance of
        removal
        and prohibition orders against institution-affiliated parties and the
        enforcement of such actions through injunctions or restraining orders based
        upon
        a judicial determination that the agency would be harmed if such equitable
        relief was not granted. Additionally, a holding company’s inability to serve as
        a source of strength to its subsidiary banking organizations could serve
        as an
        additional basis for a regulatory action against the holding
        company.
 
 **Safety
        and Soundness Standards**
 
 FDICIA
        also implemented certain specific restrictions on transactions and required
        federal banking regulators to adopt overall safety and soundness standards
        for
        depository institutions related to internal control, loan underwriting and
        documentation and asset growth. Among other things, FDICIA limits the interest
        rates paid on deposits by undercapitalized institutions, restricts the use
        of
        brokered deposits, limits the aggregate extensions of credit by a depository
        institution to an executive officer, director, principal shareholder or related
        interest, and reduces deposit insurance coverage for deposits offered by
        undercapitalized institutions for deposits by certain employee benefits
        accounts.
 
 The
        federal banking agencies may require an institution to submit to an acceptable
        compliance plan as well as have the flexibility to pursue other more appropriate
        or effective courses of action given the specific circumstances and severity
        of
        an institution's non-compliance with one or more standards.
 
 **Restrictions
        on Dividends and Other Distributions**
 
 The
        power of the board of directors of an insured depository institution to declare
        a cash dividend or other distribution with respect to capital is subject
        to
        statutory and regulatory restrictions which limit the amount available for
        such
        distribution depending upon the earnings, financial condition and cash needs
        of
        the institution, as well as general business conditions. FDICIA prohibits
        insured depository institutions from paying management fees to any controlling
        persons or, with certain limited exceptions, making capital distributions,
        including dividends, if, after such transaction, the institution would be
        undercapitalized.
  11
 
 The
        federal banking agencies also have authority to prohibit a depository
        institution from engaging in business practices, which are considered to
        be
        unsafe or unsound, possibly including payment of dividends or other payments
        under certain circumstances even if such payments are not expressly prohibited
        by statute.
 
 In
        addition to the restrictions imposed under federal law, banks chartered under
        California law generally may only pay cash dividends to the extent such payments
        do not exceed the lesser of retained earnings of the Bank’s net income for its
        last three fiscal years (less any distributions to shareholders during such
        period). In the event a bank desires to pay cash dividends in excess of such
        amount, the bank may pay a cash dividend with the prior approval of the
        Commissioner in an amount not exceeding the greatest of the Bank’s retained
        earnings, the Bank’s net income for its last fiscal year, or the Bank’s net
        income for its current fiscal year.
 
 **Premiums
        for Deposit Insurance and Assessments for Examinations**
 
 FDICIA
        established several mechanisms to increase funds to protect deposits insured
        by
        the Bank Insurance Fund (“BIF”) administered by the FDIC. The FDIC is authorized
        to borrow up to $30 billion from the United States Treasury; up to 90% of
        the
        fair market value of assets of institutions acquired by the FDIC as receiver
        from the Federal Financing Bank; and from depository institutions that are
        members of the BIF. Any borrowings not repaid by asset sales are to be repaid
        through insurance premiums assessed to member institutions. Such premiums
        must
        be sufficient to repay any borrowed funds within 15 years and provide insurance
        fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides
        authority for special assessments against insured deposits. No assurance
        can be
        given at this time as to what the future level of insurance premiums will
        be.
 
 The
        FDIC has implemented a risk-based deposit insurance assessment system under
        which the assessment rate for an insured institution may vary according to
        the
        regulatory capital levels of the institution and other factors (including
        supervisory evaluations). In recent years, the Bank and other well capitalized
        and well managed depository institutions have not paid premiums for FDIC
        deposit
        insurance, while all other insured depository institutions have been required
        to
        pay premiums ranging from 3 to 27 cents per $100 of domestic deposits. However,
        well capitalized and well managed depository institutions may be required
        to pay
        premiums on deposit insurance in the future. The outcome of legislative and
        regulatory initiatives, the deposit insurance fund loss experience and other
        factors will determine the amount of such premiums.
 
 The
        Deposit Insurance Funds Act of 1996 (the “Deposit Funds Act”) separated the
        Financing Corporation (“FICO”) assessment to service the interest on FICO bond
        obligations from the BIF and Savings Association Insurance Fund (“SAIF”)
        assessments. The FICO annual assessment on individual depository institutions
        is
        in addition to the amount, if any, paid for deposit insurance according to
        the
        FDIC’s risk-based assessment rate schedules. FICO assessment rates may be
        adjusted quarterly by the FDIC. The current FICO assessment rate is 1.32
        cents
        per $100 of deposits. In addition, the FDIC has authority to impose special
        assessments from time to time, subject to certain limitations specified in
        the
        Deposit Funds Act.
 
 The
        Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), signed into law
        by President Bush on February 8, 2006 as part of the Deficit Reduction Act
        of
        2005, provides for the establishment of a new Deposit Insurance Fund (the
“DIF”)
        and the merger of each of the BIF and the SAIF into it. The Reform Act
        authorizes revisions to the FDIC’s current risk-based assessment system, but
        provides that the FDIC’s assessment regulations as in effect immediately before
        the date of the enactment of the Reform Act will continue to apply to all
        members of the DIF until such regulations are modified by the FDIC in accordance
        with the Act. With regard to factors affecting assessment rates, the Reform
        Act
        eliminates the designated reserve ratio previously in effect for the BIF
        and the
        SAIF of 1.25 percent of estimated insured deposits and directs the FDIC to
        designate a reserve ratio for the DIF for each calendar year within the range
        of
        1.15 to 1.5 percent of estimated insured deposits. The Reform Act also provides
        for indexing of the $100,000 maximum deposit insurance coverage amount to
        reflect inflation, increases the deposit insurance coverage for retirement
        accounts to $250,000, and also provides for dividends of amounts in the DIF
        above certain specified thresholds from time to time and a one-time credit
        against assessments for certain insured depository institutions that capitalized
        the deposit insurance system. The dividends and the credit are to be determined
        on a historical basis concept utilizing an institution’s assessment base in 1996
        and adding premiums paid since that time. The Reform Act calls for final
        FDIC
        regulations implementing the statute to be effective within 270 days after
        enactment of the Act, although the merger of the BIF and the SAIF into the
        DIF
        is to take place no later than the first day of the calendar quarter beginning
        after the 90-day period following enactment of the Reform Act.
 
 
 
 
 12
 
 **Community
        Reinvestment Act and Fair Lending**
 
 The
        Bank is subject to certain fair lending requirements and reporting obligations
        involving home mortgage lending operations and Community Reinvestment Act
        (“CRA”) activities. The CRA generally requires the federal banking agencies to
        evaluate the record of a financial institution in meeting the credit needs
        of
        the bank’s local communities, including low and moderate-income neighborhoods.
        In addition to substantive penalties and corrective measures that may be
        required for a violation of certain fair lending laws, the federal banking
        agencies may take compliance with such laws and CRA into account when regulating
        and supervising other activities, particularly applications involving business
        expansion.
 
 **Sarbanes
        - Oxley Act**
 
 On
        July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002.
        This legislation addressed accounting oversight and corporate governance
        matters
        among public companies, including:
 
 ·
              the
                  creation of a five-member oversight board that sets standards for
                  accountants and has investigative and disciplinary
                  powers;
 ·
              the
                  prohibition of accounting firms from providing various types of
                  consulting
                  services to public clients and requires accounting firms to rotate
                  partners among public client assignments every five
                  years;
 ·
              increased
                  penalties for financial crimes;
 ·
              expanded
                  disclosure of corporate operations and internal controls and certification
                  of financial statements;
 ·
              enhanced
                  controls on, and reporting of, insider trading;
                  and
 ·
              prohibition
                  on lending to officers and directors of public companies, although
                  the
                  Bank may continue to make these loans within the constraints of
                  existing
                  banking regulations.
 
 Among
        other provisions, Section 302(a) of the Sarbanes-Oxley Act requires that
        our
        Chief Executive Officer and Chief Financial Officer certify that our quarterly
        and annual reports do not contain any untrue statement or omission of a material
        fact. Specific requirements of the certifications include having these officers
        confirm that they are responsible for establishing, maintaining and regularly
        evaluating the effectiveness of our disclosure controls and procedures; they
        have made certain disclosures to our auditors and Audit Committee about our
        internal controls; and they have included information in our quarterly and
        annual reports about their evaluation and whether there have been significant
        changes in our internal controls or in other factors that could significantly
        affect internal controls subsequent to their evaluation.
 
 In
        addition, Section 404 of the Sarbanes-Oxley Act and the SEC’s rules and
        regulations there under require our management to evaluate, with the
        participation of our principal executive and principal financial officers,
        the
        effectiveness, as of the end of each fiscal year, of our internal control
        over
        financial reporting. Our management must then provide a report of management
        on
        our internal control over financial reporting that contains, among other
        things,
        a statement of their responsibility for establishing and maintaining adequate
        internal control over financial reporting, and a statement identifying the
        framework they used to evaluate the effectiveness of our internal control
        over
        financial reporting.
 
 **Pending
        Legislation and Regulations**
 
 Proposals
        to change the laws and regulations governing the banking and financial services
        industry are frequently introduced in Congress, in the state legislatures
        and
        before the various bank regulatory agencies. The likelihood and timing of
        any
        such changes and the impact such changes might have on the Company cannot
        be
        determined at this time.
 
 
 13
  **Competition**
 
 In
        the past, an independent bank’s principal competitors for deposits and loans
        have been other banks (particularly major banks), savings and loan associations
        and credit unions. For agricultural loans, the Bank also competes with
        constituent entities with the Federal Farm Credit System. To a lesser extent,
        competition was also provided by thrift and loans, mortgage brokerage companies
        and insurance companies. Other institutions, such as brokerage houses, mutual
        fund companies, credit card companies, and even retail establishments have
        offered new investment vehicles, which also compete with banks for deposit
        business. The direction of federal legislation in recent years seems to favor
        competition among different types of financial institutions and to foster
        new
        entrants into the financial services market.
 
 The
        enactment of GLBA is the latest evidence of this trend, and it is anticipated
        that this trend will continue as financial services institutions combine
        to take
        advantage of the elimination of the barriers against such affiliations. The
        enactment of the federal Interstate Banking and Branching Act in 1994 and
        the
        California Interstate Banking and Branching Act of 1995 have increased
        competition within California. Recent legislation has also made it easier
        for
        out-of-state credit unions to conduct business in California and allows
        industrial banks to offer consumers more lending products. Moreover, regulatory
        reform, as well as other changes in federal and California law will also
        affect
        competition. The availability of banking services over the Internet or
“e-banking” has continued to expand. While the impact of these changes, and of
        other proposed changes, cannot be predicted with certainty, it is clear that
        the
        business of banking in California will remain highly competitive.
 
 In
        order to compete with major financial institutions and other competitors
        in its
        primary service areas, the Bank relies upon the experience of its executive
        and
        senior officers in serving business clients, and upon its specialized services,
        local promotional activities and the personal contacts made by its officers,
        directors, and employees.
 
 For
        customers whose loan demand exceeds the Bank’s legal lending limit, the Bank may
        arrange for such loans on a participation basis with correspondent banks.
        The
        seasonal swings discussed earlier have, in the past, had some impact on the
        Bank’s liquidity. The management of investment maturities, sale of loan
        participations, federal fund borrowings, qualification for funds under the
        Federal Reserve Bank’s seasonal credit program, and the ability to sell
        mortgages in the secondary market has allowed the Bank to satisfactorily
        manage
        its liquidity.
 
 
 **ITEM
        1A - RISK FACTORS**
 
 In
        addition to factors mentioned elsewhere in this Report, the factors contained
        below, among others, could cause our financial condition and results of
        operations to be materially and adversely affected. If this were to happen,
        the
        value of our common stock could decline, perhaps significantly, and you could
        lose all or part of your investment.
 
 **Lending
        Risks Associated with Commercial Banking Activities**
 
 The
        Bank’s business strategy is to focus on commercial business loans (which
        includes agricultural loans), construction loans and commercial and multi-family
        real estate loans. The principal factors affecting the Bank’s risk of loss in
        connection with commercial business loans include the borrower's ability
        to
        manage its business affairs and cash flows, general economic conditions and,
        with respect to agricultural loans, weather and climate conditions. Loans
        secured by commercial real estate are generally larger and involve a greater
        degree of credit and transaction risk than residential mortgage (one to four
        family) loans. Because payments on loans secured by commercial and multi-family
        real estate properties are often dependent on successful operation or management
        of the underlying properties, repayment of such loans may be dependent on
        factors other than the prevailing conditions in the real estate market or
        the
        economy. Real estate construction financing is generally considered to involve
        a
        higher degree of credit risk than long-term financing on improved,
        owner-occupied real estate. Risk of loss on a construction loan is dependent
        largely upon the accuracy of the initial estimate of the property's value
        at
        completion of construction or development compared to the estimated cost
        (including interest) of construction. If the estimate of value proves to
        be
        inaccurate, the Bank may be confronted with a project which, when completed,
        has
        a value which is insufficient to assure full repayment of the construction
        loan.
 
 Although
        the Bank manages lending risks through its underwriting and credit
        administration policies, no assurance can be given that such risks will not
        materialize, in which event, the Company’s financial condition, results of
        operations, cash flows and business prospects could be materially adversely
        affected.
 
 
 14
  **Dependence
        on Real Estate Lending**
 
 At
        December 31, 2005, approximately 73% of the Bank’s loans (excluding loans
        held-for-sale) were secured by real estate. The value of the Bank’s real estate
        collateral has been, and could in the future continue to be, adversely affected
        by any economic recession and any resulting adverse impact on the real estate
        market in Northern California such as that experienced during the early 1990’s. *See* “Adverse
        California Economic Conditions Could Adversely Affect the Bank’s Business”
below.
 
 The
        Bank’s primary lending focus has historically been commercial (including
        agricultural), construction and real estate mortgage. At December 31, 2005,
        real
        estate mortgage (excluding loans held-for-sale) and construction loans comprised
        approximately 50% and 23%, respectively, of the total loans in the Bank’s
        portfolio. At December 31, 2005, all of the Bank’s real estate mortgage and
        construction loans and approximately 51% of its commercial loans were secured
        fully or in part by deeds of trust on underlying real estate. The Company’s
        dependence on real estate increases the risk of loss in both the Bank’s loan
        portfolio and its holdings of other real estate owned if economic conditions
        in
        Northern California deteriorate in the future. Deterioration of the real
        estate
        market in Northern California would have a material adverse effect on the
        Company’s business, financial condition and results of operations. *See* “Adverse
        California Economic Conditions Could Adversely Affect the Bank’s Business”
below.
 
 **Adverse
        California Economic Conditions Could Adversely Affect the Bank’s
        Business**
 
 The
        Bank’s operations and a substantial majority of the Bank’s assets and deposits
        are generated and concentrated primarily in Northern California, particularly
        the counties of Placer, Sacramento, Solano and Yolo, and are likely to remain
        so
        for the foreseeable future. At December 31, 2005, approximately 73% of the
        Bank’s loan portfolio (excluding loans held-for-sale) consisted of real
        estate-related loans, all of which were secured by collateral located in
        Northern California. As a result, poor economic conditions in Northern
        California may cause the Bank to incur losses associated with high default
        rates
        and decreased collateral values in its loan portfolio. In the early 1990’s, the
        California economy experienced an economic recession that resulted in increases
        in the level of delinquencies and losses for many of the state’s financial
        institutions. If economic conditions in California decline or if California
        were
        to experience another recession, it is expected that the Bank’s level of problem
        assets would increase accordingly. California real estate is also subject
        to
        certain natural disasters, such as earthquakes, floods and mudslides, which
        are
        typically not covered by the standard hazard insurance policies maintained
        by
        borrowers. Uninsured disasters may make it difficult or impossible for borrowers
        to repay loans made by the Bank. The occurrence of natural disasters in
        California could have a material adverse effect on the Company’s financial
        condition, results of operations, cash flows and business prospects.
        California’s state government has undergone serious fiscal and budget
        difficulties in the recent past. While the California electorate on March
        2,
        2004, approved various ballot measures aimed at addressing this situation, including a $15
        billion bond issue, the long-term impact of this situation on the California
        economy and the Company’s markets cannot be predicted.
 
 **Interest
        Rate Risk**
 
 The
        income of the Bank depends to a great extent on “interest rate differentials”
and the resulting net interest margins (i.e., the difference between the
        interest rates earned on the Bank’s interest-earning assets such as loans and
        investment securities, and the interest rates paid on the Bank’s
        interest-bearing liabilities such as deposits and borrowings). These rates
        are
        highly sensitive to many factors, which are beyond the Bank’s control,
        including, but not limited to, general economic conditions and the policies
        of
        various governmental and regulatory agencies, in particular, the FRB. The
        Bank
        is generally adversely affected by declining interest rates. In addition,
        changes in monetary policy, including changes in interest rates, influence
        the
        origination of loans, the purchase of investments and the generation of deposits
        and affect the rates received on loans and investment securities and paid
        on
        deposits, which could have a material adverse effect on the Company’s business,
        financial condition and results of operations. *See* “Quantitative
        and Qualitative Disclosures About Market Risk.”
 
 **Potential
        Volatility of Deposits**
 
 At
        December 31, 2005, 11% of the dollar value of the Company’s total deposits was
        represented by time certificates of deposit in excess of $100,000. These
        deposits are considered volatile and could be subject to withdrawal. Withdrawal
        of a material amount of such deposits would adversely impact the Company’s
        liquidity, profitability, business prospects, results of operations and cash
        flows.
 
 
 15
 
 **Dividends**
 
 The
        ability of the Company to pay cash dividends in the future depends on the
        Company’s profitability, growth and capital needs. In addition, the California
        law restricts the ability of the Company to pay dividends. No assurance can
        be
        given that the Company will pay any dividends in the future or, if paid,
        such
        dividends will not be discontinued. *See* “Bank
        Regulation and Supervision-Restrictions on Dividends and Other
        Distributions.”
 
 **Competition**
 
 In
        California generally, and in the Bank’s primary market area specifically, major
        banks dominate the commercial banking industry. By virtue of their larger
        capital bases, such institutions have substantially greater lending limits
        than
        those of the Bank. In obtaining deposits and making loans, the Bank competes
        with these larger commercial banks and other financial institutions, such
        as
        savings and loan associations, credit unions and member institutions of the
        Farm
        Credit System, which offer many services that traditionally were offered
        only by
        banks. Using the financial holding company structure, insurance companies
        and
        securities firms may compete more directly with banks and bank holding
        companies. In addition, the Bank competes with other institutions such as
        mutual
        fund companies, brokerage firms, and even retail stores seeking to penetrate
        the
        financial services market. Also, technology and other changes increasingly
        allow
        parties to complete financial transactions electronically, and in many cases,
        without banks. For example, consumers can pay bills and transfer funds over
        the
        internet and by telephone without banks. Non-bank financial service providers
        may have lower overhead costs and are subject to fewer regulatory constraints.
        If consumers do not use banks to complete their financial transactions, we
        could
        potentially lose fee income, deposits and income generated from those deposits.
        During periods of declining interest rates, competitors with lower costs
        of
        capital may solicit the Bank’s customers to refinance their loans. Furthermore,
        during periods of economic slowdown or recession, the Bank’s borrowers may face
        financial difficulties and be more receptive to offers from the Bank’s
        competitors to refinance their loans. No assurance can be given that the
        Bank
        will be able to compete with these lenders. See “Business -
        Competition.”
 
 **Government
        Regulation and Legislation**
 
 The
        Company and the Bank are subject to extensive state and federal regulation,
        supervision and legislation, which govern almost all aspects of the operations
        of the Company and the Bank. The business of the Bank is particularly
        susceptible to being affected by the enactment of federal and state legislation,
        which may have the effect of increasing the cost of doing business, modifying
        permissible activities or enhancing the competitive position of other financial
        institutions. Such laws are subject to change from time to time and are
        primarily intended for the protection of consumers, depositors and the deposit
        insurance funds and not for the protection of shareholders of the Company.
        The
        Company cannot predict what affect any presently contemplated or future changes
        in the laws or regulations or their interpretations would have on the business
        and prospects of the Company, but it could be material and adverse. *See* “Bank
        Regulation and Supervision.”
 
 
 **Reliance
        on Key Employees and Others**
 
 The
        Company’s future success depends to a significant extent on the efforts and
        abilities of its executive officers. The loss of the services of certain
        of
        these individuals, or the failure of the Company to attract and retain other
        qualified personnel, could have a material adverse effect on the Company’s
        business, financial condition and results of operations.
 
 **War
        on Terrorism; Foreign Hostilities**
 
 Acts
        or threats of terrorism and actions taken by the U.S. or other governments
        as a
        result of such acts or threats may result in a downturn in U.S. economic
        conditions and could adversely affect business and economic conditions in
        the
        U.S. generally and in our principal markets. The war in Iraq has also generated
        various political and economic uncertainties affecting the global and U.S.
        economies.
 
 
 16
  **Critical
        Accounting Policies**
 
 The
        Company’s financial statements are presented in accordance with accounting
        principles generally accepted in the United States of America (“US GAAP”). The
        financial information contained within our financial statements is, to a
        significant extent, financial information that is based on approximate measures
        of the financial effects of transactions and events that have already occurred.
        A variety of factors could affect the ultimate value that is obtained either
        when earning income, recognizing an expense, recovering an asset or relieving
        a
        liability. Along with other factors, we use historical loss factors to determine
        the inherent loss that may be present in our loan portfolio. Actual losses
        could
        differ significantly from the historical loss factors that we use. Other
        estimates that we use are fair value of our securities and expected useful
        lives
        of our depreciable assets. We have not entered into derivative contracts
        for our
        customers or for ourselves, which relate to interest rate, credit, equity,
        commodity, energy, or weather-related indices. US GAAP itself may change
        from
        one previously acceptable method to another method. Although the economics
        of
        our transactions would be the same, the timing of events that would impact
        our
        transactions could change. Accounting standards and interpretations currently
        affecting the Company and its subsidiaries may change at any time, and the
        Company’s financial condition and results of operations may be adversely
        affected.
 
 
 **Adequacy
        of Allowance for Loan and Other Real Estate Losses**
 
 The
        Bank’s allowance for estimated losses on loans was approximately $7.9 million,
        or 1.70% of total loans at December 31, 2005 compared to $7.4 million or
        1.70%
        of total loans in 2004 and 352% of total non-performing loans at December
        31,
        2005 compared to 150% in 2004. Material future additions to the allowance
        for
        estimated losses on loans may be necessary if material adverse changes in
        economic conditions occur and the performance of the Bank’s loan portfolio
        deteriorates. In addition an allowance for losses on other real estate owned
        may
        also be required in order to reflect changes in the markets for real estate
        in
        which the Bank’s other real estate owned is located and other factors which may
        result in adjustments which are necessary to ensure that the Bank’s foreclosed
        assets are carried at the lower of cost or fair value, less estimated costs
        to
        dispose of the properties. Moreover, the FDIC and the DFI, as an integral
        part
        of their examination process, periodically review the Bank’s allowance for
        estimated losses on loans and the carrying value of its assets. Increases
        in the
        provisions for estimated losses on loans and foreclosed assets would adversely
        affect the Bank’s financial condition and results of operations. *See* “Management's
        Discussion and Analysis of Financial Condition and Results of Operations
        -
        Summary of Loan Loss Experience.”
 
 
 **Shares
        Eligible for Future Sale**
 
 As
        of December 31, 2005, the Company had 7,558,759 shares of Common Stock
        outstanding, all of which are eligible for sale in the public market without
        restriction. Future sales of substantial amounts of the Company’s Common Stock,
        or the perception that such sales could occur, could have a material adverse
        effect on the market price of the Common Stock. In addition, options to acquire
        up to 7% of the unissued authorized shares of Common Stock at exercise prices
        ranging from $4.53 to $23.50 have been issued to directors and employees
        of the
        Company, over the past six (6) years, under the Company’s 2000 Stock Option Plan
        and Outside Directors 2000 Non-statutory Stock Option Plan, and options to
        acquire up to an additional 9% of the unissued authorized shares of Common
        Stock
        are reserved for issuance under such plans. No prediction can be made as
        to the
        effect, if any, that future sales of shares, or the availability of shares
        for
        future sale, will have on the market price of the Company’s Common Stock. *See* “Market
        for the Registrant's Common Equity, Related Stockholder Matters and Issuer
        Purchases of Equity Securities.”
 
 
 **Limited
        Public Market; Volatility in Stock Price**
 
 The
        Company’s common stock is not listed on any exchange, nor is it included on
        NASDAQ. However, trades may be reported on the OTC Bulletin Board under the
        symbol “FNRN”. The Company is aware that Hoefer & Arnett, Inc., The Seidler
        Companies, Inc., Wedbush Morgan Securities and Monroe Securities, Inc. all
        currently make a market in the Company’s common stock. Management is aware that
        there are also private transactions in the Company’s common stock. However, the
        limited trading market for the Company’s common stock may make it difficult for
        shareholders to dispose of their shares. Also, the price of the Company’s common
        stock may be affected by general market price movements as well as developments
        specifically related to the financial services sector, including interest
        rate
        movements, quarterly variations, or changes in financial estimates by securities
        analysts and a significant reduction in the price of the stock of another
        participant in the financial services industry, as well as the level of
        repurchases of Company stock by the Company pursuant to its stock repurchase
        program.
 
 **Technology
        and Computer Systems**
 
 Advances
        and changes in technology can significantly impact the business and operations
        of the Company. The Company faces many challenges including the increased
        demand
        for providing computer access to Company accounts and the systems to perform
        banking transactions electronically. The Company’s merchant processing services
        require the use of advanced computer hardware and software technology and
        rapidly changing customer and regulatory requirements. The Company’s ability to
        compete depends on its ability to continue to adapt its technology on a timely
        and cost-effective basis to meet these requirements. In addition, the Company’s
        business and operations are susceptible to negative impacts from computer
        system
        failures, communication and energy disruption and unethical individuals with
        the
        technological ability to cause disruptions or failures of the Company’s data
        processing systems.
 
 17
 
 **Environmental
        Risks**
 
 The
        Company, in its ordinary course of business, acquires real property securing
        loans that are in default, and there is a risk that hazardous substances
        or
        waste, contaminants or pollutants could exist on such properties. The Company
        may be required to remove or remediate such substances from the affected
        properties at its expense, and the cost of such removal or remediation may
        substantially exceed the value of the affected properties or the loans secured
        by such properties. Furthermore, the Company may not have adequate remedies
        against the prior owners or other responsible parties to recover its costs.
        Finally, the Company may find it difficult or impossible to sell the affected
        properties either prior to or following any such removal. In addition, the
        Company may be considered liable for environmental liabilities in connection
        with its borrowers' properties, if, among other things, it participates in
        the
        management of its borrowers' operations. The occurrence of such an event
        could
        have a material adverse effect on the Company’s business, financial condition,
        results of operations and cash flows.
 
 
 **Dilution**
 
 As
        of December 31, 2005, the Company had outstanding options to purchase an
        aggregate of 568,602 shares of Common Stock at exercise prices ranging from
        $4.53 to $23.50 per share, or a weighted average exercise price per share
        of
        $9.36. To the extent such options are exercised, shareholders of the Company
        will experience dilution. *See* “Market
        for the Registrant's Common Equity, Related Stockholder Matters and Issuer
        Purchases of Equity Securities.”
 
 
 **ITEM
        1B - UNRESOLVED STAFF COMMENTS**
 
 None.
 
 
 **ITEM
        2 - PROPERTIES**
 
 The
          Company and the Bank are engaged in the banking business through 19 offices
          in
          five counties in Northern California including seven offices in Solano
          County,
          eight in Yolo County, three in Sacramento County, two in Placer County,
          and one
          in El Dorado County. In addition, the Company owns two vacant lots, one
          in
          northern Solano County and the other in eastern Sacramento County for possible
          future bank sites. The Company and the Bank believe all of their offices
          are
          constructed and equipped to meet prescribed security requirements.
 The
            Bank owns three branch office locations and two administrative facilities
            and
            leases 14 facilities. Most of the leases contain multiple renewal options
            and
            provisions for rental increases, principally for changes in the cost
            of living
            index, property taxes and maintenance.
   **ITEM
          3 - LEGAL PROCEEDINGS**
 
 Neither
        the Company nor the Bank is a party to any material pending legal proceeding,
        nor is any of their property the subject of any material pending legal
        proceeding, except ordinary routine litigation arising in the ordinary course
        of
        the Bank's business and incidental to its business, none of which are expected
        to have a material adverse impact upon the Company's or the Bank's business,
        financial position or results of operations.
 
 
 **ITEM
        4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
        matters were submitted to a vote of the Company’s shareholders during the fourth
        quarter of the fiscal year covered by this report.
 
 
 18
  **PART
        II**
 
 **ITEM
        5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES**
 
 The
        Company’s common stock is not listed on any exchange, nor is it included on
        NASDAQ. However, trades may be reported on the OTC Bulletin Board under the
        symbol “FNRN”. The Company is aware that Hoefer & Arnett, Inc., The Seidler
        Companies, Inc., Wedbush Morgan Securities and Monroe Securities, Inc. all
        currently make a market in the Company’s common stock. Management is aware that
        there are also private transactions in the Company’s common stock and the data
        set forth below may not reflect all such transactions.
 
 The
        following table summarizes the range of sales prices of the Company’s Common
        Stock for each quarter during the last two fiscal years and is based on
        information provided by The Seidler Companies, Inc. The quotations reflect
        the
        price that would be received by the seller without retail mark-up, mark-down
        or
        commissions and may not have represented actual transactions:
 
 QUARTER/YEAR
              
              HIGH*
              
              LOW*4th
                  Quarter 2005
              
              $23.68
              
              $21.703rd
                  Quarter 2005
              
              $23.58
              
              $21.702nd
                  Quarter 2005
              
              $24.42
              
              $15.091st
                  Quarter 2005
              
              $15.13
              
              $12.46
 
 4th
                  Quarter 2004
              
              $12.90
              
              $11.573rd
                  Quarter 2004
              
              $11.79
              
              $11.352nd
                  Quarter 2004
              
              $12.13
              
              $11.241st
                  Quarter 2004
              
              $12.33
              
              $10.87
 
 *
        Price adjusted for dividends and splits.
 
 As
        of December 31, 2005, there were approximately 1,114 holders of record of
        the
        Company’s common stock, no par value, which is the only class of equity
        securities authorized or issued.
 
 
 In
        the last three years the Company has declared the following stock
        dividends:
 
 Shareholder
                Record
                  Date
              
              Dividend
                Percentage
              
              Date
                PayableFebruary
                  28, 2006
              
              6%
              
              March
                  31, 2006February
                  28, 2005
              
              6%
              
              March
                  31, 2005February
                  27, 2004
              
              6%
              
              March
                  31, 2004
 
 In
        addition to the above, on April 21, 2005, the Board of Directors of the Company
        declared a two-for-one stock split. The stock split doubled the outstanding
        common stock recorded on the books of the Company as of the record date,
        May 10,
        2005.
 
 The
        Company does not expect to pay a cash dividend in the foreseeable
        future.
  
  
 **Purchases
        of Equity Securities by the Issuer or Affiliated
        Purchasers**
 
 On
        April 16, 2004, the Company approved a stock repurchase program effective
        April
        30, 2004 to replace the Company’s previous stock purchase plan that expired on
        April 30, 2004. The stock repurchase program, which will remain in effect
        until
        April 30, 2006, allows repurchases by the Company in an aggregate of up to
        3% of
        the Company’s outstanding shares of common stock over each rolling twelve-month
        period. The Company repurchased 38,097 shares of the Company’s outstanding
        common stock during the fourth quarter of the year ended December 31, 2005.
        The
        following table details stock repurchase activity during this
        period:
 
 (a)
              (b)
              (c)
              (d)Period
              Total
                  Number of Shares Purchased
              Average
                  Price Paid per Share
              Number
                  of Shares Purchased as Part of Publicly Announced Plan or
                  Program
              Maximum
                  Number of Shares that May Yet Be Purchased Under the Plans or
                  ProgramsOctober
                  2005
              509
              $23.75
              509
              71,421November
                  2005
              27,318
              $23.59
              27,318
              46,975December
                  2005
              10,270
              $24.35
              10,270
              41,101Total
              38,097
              $23.80
              38,097
              41,101
 
 
 
 
  
  **ITEM
        6 - SELECTED FINANCIAL DATA**
 
 The
        selected consolidated financial data below have been derived from the Company’s
        audited consolidated financial statements. The selected consolidated financial
        data set forth below as of December 31, 2002, and 2001 have been derived
        from
        the Company’s historical financial statements not included in this Report. The
        financial information for 2005, 2004 and 2003 should be read in conjunction
        with
“Management's Discussion and Analysis of Financial Condition and Results of
        Operations,” which is in Part I (Item 7) of this Report and with the Company’s
        audited consolidated financial statements and the notes thereto, which are
        included in Part II (Item 8) of this Report.
 
 **Consolidated
        Financial Data as of and for the year ended December
        31,**
 (in
        thousands, except share and per share amounts)
 
 2005
              
              2004
              
              2003
              
              2002
              
              2001Interest
                  Income and Loan Fees
              
              $
              40,902
              
              $
              31,619
              
              $
              30,326
              
              $
              28,941
              
              $
              29,524Interest
                  Expense
              
              
              (5,729
              )
              
              (3,426
              )
              
              (3,109
              )
              
              (4,237
              )
              
              (8,318
              )Net
                  Interest Income
              
              
              35,173
              
              
              28,193
              
              
              27,217
              
              
              24,704
              
              
              21,206(Provision
                  for) Reversal and Recovery of Loan Losses
              
              
              (600
              )
              
              (207
              )
              
              (2,153
              )
              
              (676
              )
              
              308Net
                  Interest Income after (Provision for) Reversal and Recovery of
                  Loan
                  Losses
              
              
              34,573
              
              
              27,986
              
              
              25,064
              
              
              24,028
              
              
              21,514Other
                  Operating Income
              
              
              5,720
              
              
              5,214
              
              
              7,160
              
              
              4,972
              
              
              3,525Other
                  Operating Expense
              
              
              (26,813
              )
              
              (22,943
              )
              
              (22,868
              )
              
              (20,411
              )
              
              (16,936
              )Income
                  before Taxes
              
              
              13,480
              
              
              10,257
              
              
              9,356
              
              
              8,589
              
              
              8,103Provision
                  for Taxes
              
              
              (4,792
              )
              
              (3,550
              )
              
              (3,245
              )
              
              (2,871
              )
              
              (2,774
              )Net
                  Income
              
              $
              8,688
              
              $
              6,707
              
              $
              6,111
              
              $
              5,718
              
              $
              5,329Basic
                  Income Per Share
              
              $
              1.08
              
              $
              .79
              
              $
              .75
              
              $
              .69
              
              $
              .63Diluted
                  Income Per Share
              
              $
              1.04
              
              $
              .77
              
              $
              .74
              
              $
              .67
              
              $
              .61Total
                  Assets
              
              $
              660,647
              
              $
              629,503
              
              $
              559,441
              
              $
              495,876
              
              $
              440,643Total
                  Investments
              
              $
              48,788
              
              $
              55,154
              
              $
              50,235
              
              $
              69,958
              
              $
              96,797Total
                  Loans, including loans held-for-sale, net
              
              $
              460,501
              
              $
              433,421
              
              $
              380,491
              
              $
              356,018
              
              $
              270,286Total
                  Deposits
              
              $
              581,781
              
              $
              557,186
              
              $
              498,849
              
              $
              442,241
              
              $
              391,815Total
                  Equity
              
              $
              56,802
              
              $
              51,901
              
              $
              46,972
              
              $
              43,442
              
              $
              41,556Weighted
                  Average Shares of Common Stock outstanding used for Basic Income
                  Per Share
                  Computation 1
              
              
              8,053,023
              
              
              8,536,738
              
              
              8,127,406
              
              
              8,268,512
              
              
              8,482,548Weighted
                  Average Shares of Common Stock outstanding used for Diluted Income
                  Per
                Share
                  Computation1
              
              
              8,364,269
              
              
              8,725,238
              
              
              8,296,202
              
              
              8,482,552
              
              
              8,683,002Return
                  on Average Total Assets
              
              
              1.35
              %
              
              1.14
              %
              
              1.18
              %
              
              1.25
              %
              
              1.30
              %Net
                  Income/Average Equity
              
              
              16.17
              %
              
              13.73
              %
              
              13.56
              %
              
              13.71
              %
              
              13.55
              %Net
                  Income/Average Deposits
              
              
              1.52
              %
              
              1.28
              %
              
              1.32
              %
              
              1.40
              %
              
              1.46
              %Average
                  Loans/Average Deposits
              
              
              79.44
              %
              
              75.81
              %
              
              79.25
              %
              
              73.99
              %
              
              66.96
              %Average
                  Equity to Average Total Assets
              
              
              8.37
              %
              
              8.32
              %
              
              8.69
              %
              
              9.11
              %
              
              9.60
              %
 
 1.All
                  years have been restated to give retroactive effect for stock dividends
                  issued and stock splits.
 
  
  
 **ITEM
        7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF
        OPERATION**
 
 *This
        Annual Report on Form 10-K contains forward-looking statements within the
        meaning of Section 27A of the Securities Act of 1933, as amended, and Section
        21E of the Securities Exchange Act of 1934, as amended, and are subject to
        the
“safe harbor” created by those sections. Forward-looking statements include the
        information concerning possible or assumed future results of operations of
        the
        Company set forth under the heading “Management's Discussion and Analysis of
        Financial Condition and Results of Operations.” Forward-looking statements also
        include statements in which words such as “expect,” “anticipate,” “intend,”
“plan,” “believe,” “estimate,” “consider,” or similar expressions are used.
        These forward-looking statements involve certain risks and uncertainties
        that
        could cause actual results to differ materially from those in the
        forward-looking statements. Such risks and uncertainties include, but are
        not
        limited to, the risks discussed in Item 1A under the caption “Risk Factors” and
        other risk factors discussed elsewhere in this Report. The Company undertakes
        no
        obligation to update any forward-looking statements to reflect events or
        circumstances arising after the date on which they are made.*
 
 **Introduction**
 
 This
        overview of Management’s Discussion and Analysis highlights selected information
        in this annual report and may not contain all of the information that is
        important to you. For a more complete understanding of trends, events,
        commitments, uncertainties, liquidity, capital resources and critical accounting
        estimates, you should carefully read this entire annual report.
 
 Our
        subsidiary, First Northern Bank of Dixon, is a California state-chartered
        bank
        that derives most of its revenues from lending and deposit taking in the
        Sacramento Valley region of Northern California. Interest rates, business
        conditions and customer confidence all affect our ability to generate revenues.
        In addition, the regulatory environment and competition can challenge our
        ability to generate those revenues.
 
 The
        Company experienced strong earnings performance in 2005 due to a combination
        of
        (1) growth in earning assets, (2) improvement in the mix of earning assets
        as
        reflected by an increase in loans as a percentage of average earning assets,
        and
        (3) the increase in low cost deposits which helped to support the increase
        in
        loans. Financial highlights for 2005 include:
 
 ·
              Net
                  income for 2005 totaled $8.7 million, a 29.9% increase compared
                  to $6.7
                  million for 2004. Net income per common share for 2005 of $1.08
                  increased
                  36.7% compared to $0.79 for 2004, and net income per common share
                  on a
                  fully diluted basis was $1.04 for 2005, an increase of 35.1% compared
                  to
                  $0.77 for 2004.
 
 ·
              Loans
                  (including loans held-for-sale) increased to $460.5 million at
                  December 31, 2005, a 6.3% increase from $433.4 million at
                  December 31, 2004. Commercial loans totaled $87.1 million at
                  December 31, 2005, down 2.9% from $89.7 million a year earlier;
                  agriculture loans were $32.8 million, down 0.3% from $32.9 million
                  at
                  December 31, 2004; real estate construction loans were $103.4 million,
                  up
                  20.8% from $85.6 million at December 31, 2004; and real estate
                  mortgage loans were $233.0 million, up 5.6% from $220.6 million
                  a year
                  earlier.
 
 ·
              Average
                  deposits grew to $569.8 million during 2005, a $47.6 million or
                  9.1%
                  increase from 2004.
 
 ·
              The
                  Company reported average total assets of $642.5 million at
                  December 31, 2005, up 9.4% from $587.1 million a year
                  earlier.
 
 ·
              The
                  provision for loan losses in 2005 totaled $600,000, an increase
                  of 189.9%
                  from $207,000 in 2004. Net charge-offs were $128,000 in 2005 compared
                  to
                  $232,000 in net recoveries in 2004. The increase in the provision
                  for loan
                  losses and increase in net charge-offs can be primarily attributed
                  to
                  increased loan volume combined with charge-offs.
 
 ·
              Net
                  interest income totaled $35.2 million for 2005, an increase of
                  24.8% from
                  $28.2 million in 2004, primarily due to strong loan volumes and
                  increased
                  rates.
 
 ·
              Other
                  operating income totaled $5.7 million for the year ended December 31,
                  2005, an increase of 9.6% from $5.2 million for the year ended
                  December 31, 2004. The increase was due primarily to an increase in
                  service charges on deposit accounts and a gain on other real estate
                  owned.
  
  
 ·
              Other
                  operating expenses totaled $26.8 million for 2005, up 17.0% from
                  $22.9
                  million in 2004. Contributing to the increase were increased accounting
                  and audit and consulting fees associated with Sarbanes-Oxley Act
                  compliance, incentive compensation expense, profit sharing payments,
                  increased rents and other expenses associated with opening new
                  branches
                  and offices, and advertising
                  expenses.
 
 ·
              The
                  Company’s common stock price experienced an 82.3% increase during 2005,
                  closing at $23.11 per share at December 31, 2005, compared to $12.68
                  per share at December 31,
                  2004.
 
 Looking
        forward to 2006, the Company intends to continue its long-term strategy of
        maintaining deposit growth to fund growth in loans and other earning assets
        and
        intends to identify opportunities for growing other operating income in areas
        such as Asset Management and Trust and Investment and Brokerage Services,
        and
        deposit fee income while remaining conscious of the need to maintain appropriate
        expense levels. We expect continued improvement in credit quality, continued
        strong commercial and real estate loan volumes and deposit growth, assuming
        that
        inflation remains in check throughout the year. If the current gradual move
        toward higher interest rates continues, the Company’s net interest income and
        net interest margin may increase due to an increase in the volume of variable
        rate loans and the level of federal funds remaining to be invested in higher
        yielding loans or securities, unless accompanied by a disproportionate increase
        in funding costs and/or a decrease in loan volume due to increased interest
        rates.
 
 **Critical
        Accounting Policies and Estimates**
 
 First
        Northern Community Bancorp’s (The Company’s) discussion and analysis of its
        financial condition and results of operations are based upon the Company’s
        consolidated financial statements, which have been prepared in accordance
        with
        accounting principles generally accepted in the United States. The preparation
        of these financial statements requires the Company to make estimates and
        judgments that affect the reported amounts of assets, liabilities, income
        and
        expenses, and related disclosure of contingent assets and liabilities. On
        an
        on-going basis, the Company evaluates its estimates, including those related
        to
        the allowance for loan losses, other real estate owned, investments and income
        taxes. The Company bases its estimates on historical experience and on various
        other assumptions that are believed to be reasonable under the circumstances,
        the results of which form the basis for making judgments about the carrying
        values of assets and liabilities that are not readily apparent from other
        sources. Actual results may differ from these estimates under different
        assumptions or conditions.
 
 The
        Company’s most significant estimates are approved by its Management team, which
        is comprised of its most senior officers. At the end of each financial reporting
        period, a review of these estimates is presented to the Company’s Board of
        Directors.
 
 The
        Company believes the following critical accounting policy affects its more
        significant judgments and estimates used in the preparation of its consolidated
        financial statements. The Company believes the allowance for loan losses
        accounting policy is critical because the loan portfolio represents the largest
        asset type on the consolidated balance sheet. The Company maintains an allowance
        for loan losses resulting from the inability of borrowers to make required
        loan
        payments. Loan losses are charged off against the allowance, while recoveries
        of
        amounts previously charged off are credited to the allowance. A provision
        for
        loan losses is charged to operations based on the Company’s periodic evaluation
        of the factors mentioned below, as well as other pertinent factors. The
        allowance for loan losses consists of an allocated component and an unallocated
        component. The components of the allowance for loan losses represent an
        estimation done pursuant to either Statement of Financial Accounting Standards
        No. (“SFAS”) 5, Accounting for Contingencies, or SFAS 114, Accounting by
        Creditors for Impairment of a Loan. The allocated component of the allowance
        for
        loan losses reflects expected losses resulting from analyses developed through
        specific credit allocations for individual loans and historical loss experience
        for each loan category. The specific credit allocations are based on regular
        analyses of all loans where the internal credit rating is at or below a
        predetermined classification. These analyses involve a high degree of judgment
        in estimating the amount of loss associated with specific loans, including
        estimating the amount and timing of future cash flows and collateral values.
        The
        historical loan loss element is determined using analysis that examines loss
        experience.
 
 
 
 
 
 
 
 The
        allocated component of the allowance for loan losses also includes consideration
        of concentrations and changes in portfolio mix and volume. The unallocated
        portion of the allowance reflects the Company’s estimate of probable inherent
        but undetected losses within the portfolio due to uncertainties in economic
        conditions, delays in obtaining information, including unfavorable information
        about a borrower’s financial condition, the difficulty in identifying triggering
        events that correlate perfectly to subsequent loss rates, and risk factors
        that
        have not yet manifested themselves in loss allocation factors. Uncertainty
        surrounding the strength and timing of economic cycles also affects estimates
        of
        loss. There are many factors affecting the allowance for loan losses; some
        are
        quantitative while others require qualitative judgment. Although the Company
        believes its process for determining the allowance adequately considers all
        of
        the potential factors that could potentially result in credit losses, the
        process includes subjective elements and may be susceptible to significant
        change. To the extent actual outcomes differ from Company estimates, additional
        provision for credit losses could be required that could adversely affect
        earnings or financial position in future periods.
 
 **Prospective
        Accounting Pronouncements**
  Financial
        Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), *Share-Based
        Payment (“Statement 123(R)”)* .
        Statement 123(R) addresses the accounting for share-based payment transactions
        in which an enterprise receives employee services in exchange for (a) equity
        instruments of the enterprise or (b) liabilities that are based on the fair
        value of the enterprise’s equity instruments or that may be settled by the
        issuance of such equity instruments. Statement 123(R) requires an entity
        to
        recognize the grant-date fair-value of stock options and other equity-based
        compensation issued to employees in the income statement. The revised Statement
        generally requires that an entity account for those transactions using the
        fair-value-based method, and eliminates an entity’s ability to account for
        share-based compensation transactions using the intrinsic value method of
        accounting in Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        which was permitted under Statement 123, as originally issued.
  Statement
        123 (R) requires both public and non-public entities to disclose information
        needed about the nature of the share-based payment transactions and the effects
        of those transactions on the financial statements.
  Statement
        123(R) is effective for public companies as of the beginning of the next
        fiscal
        year that begins after June 15, 2005. All public companies that adopted the
        fair-value-based method of accounting, rather than the minimum-value method,
        must use either the modified prospective or the modified retrospective
        transition method. The Company previously adopted the fair value recognition
        provisions of FASB Statement 148, *Accounting
        for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
        Statement No. 123* ,
        for stock-based employee compensation under the prospective method. *See* Notes to Consolidated Financial Statements (1) (k), (page 55). The Company
        does
        not anticipate the adoption of Statement 123(R) to have a significant impact
        on
        the consolidated financial statements.
 
 American
        Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-03, *Accounting
        for Certain Loans or Debt Securities Acquired in a Transfer (“SOP
        03-03”)* .
        SOP 03-03 addresses accounting for differences between contractual cash flows
        and cash flows expected to be collected from an investor’s initial investment in
        loans or debt securities (loans) acquired in a transfer if those differences
        are
        attributable, at least in part, to credit quality. It includes loans with
        evidence of deterioration of credit quality since origination acquired by
        completion of a transfer, including such loans acquired in purchase business
        combinations, and applies to all non-governmental entities, including
        not-for-profit organizations. SOP 03-03 does not apply to loans originated
        by
        the entity or acquired loans that have not deteriorated in credit quality
        since
        origination. SOP 03-03 is effective for loans acquired in fiscal years beginning
        after December 15, 2004. The adoption of SOP 03-03 had no impact on the
        consolidated financial statements.
  Statement
        154 replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
        Changes in Interim Financial Statements.  The Statement changes the
        accounting for, and reporting of, a change in accounting principle. 
Statement 154 requires retrospective application to prior period’s financial
        statements of voluntary changes in accounting principle and changes required
        by
        new accounting standards when the standard does not include specific transition
        provisions, unless it is impracticable to do so.   Statement 154 is
        effective for accounting changes and corrections of errors in fiscal years
        beginning after December 15, 2005.  Early application is permitted for
        accounting changes and corrections of errors during fiscal years beginning
        after
        June 1, 2005. The
        Company does not anticipate that Statement 154 will have a significant impact
        on
        the consolidated financial statements.
 
 
 
 
 
 The
        following statistical information and discussion should be read in conjunction
        with the Selected Financial Data included in Part I (Item 6) and the audited
        consolidated financial statements and accompanying notes included in Part
        II
        (Item 8) of this Annual Report on Form 10-K.
 
 The
        following tables present information regarding the consolidated average assets,
        liabilities and stockholders’ equity, the amounts of interest income from
        average earning assets and the resulting yields, and the amount of interest
        expense paid on interest-bearing liabilities. Average loan balances include
        non-performing loans. Interest income includes proceeds from loans on
        non-accrual status only to the extent cash payments have been received and
        applied as interest income. Tax-exempt income is not shown on a tax equivalent
        basis.
 
 **Distribution
        of Assets, Liabilities and Stockholders' Equity;**
 **Interest
        Rates and Interest Differential**
 
 2005
              
              2004
              
              2003Average
              
              
              
              Average
              
              
              
              AverageBalance
              
              Percent
              
              Balance
              
              Percent
              
              Balance
              
              PercentASSETSCash
                  and Due From Banks
              
              $
              31,287
              
              
              4.87
              %
              $
              37,542
              
              
              6.40
              %
              $
              35,627
              
              
              6.87
              %Investment
                  Securities:U.S.
                  Government Securities
              
              
              20,279
              
              
              3.16
              %
              
              15,745
              
              
              2.68
              %
              
              14,234
              
              
              2.74
              %Obligations
                  of States & PoliticalSubdivisions
              
              
              27,045
              
              
              4.21
              %
              
              32,899
              
              
              5.60
              %
              
              43,822
              
              
              8.45
              %Other
                  Securities
              
              
              3,065
              
              
              0.48
              %
              
              3,277
              
              
              0.56
              %
              
              4,544
              
              
              0.88
              %Federal
                  Funds Sold
              
              
              81,948
              
              
              12.75
              %
              
              77,169
              
              
              13.15
              %
              
              30,164
              
              
              5.82
              %Loans1
              
              
              452,646
              
              
              70.45
              %
              
              395,883
              
              
              67.43
              %
              
              367,520
              
              
              70.85
              %Other
                  Assets
              
              
              26,211
              
              
              4.08
              %
              
              24,551
              
              
              4.18
              %
              
              22,761
              
              
              4.39
              %Total
                  Assets
              
              $
              642,481
              
              
              100.00
              %
              $
              587,066
              
              
              100.00
              %
              $
              518,672
              
              
              100.00
              %LIABILITIES
                  &STOCKHOLDERS'
                  EQUITYDeposits:Demand
              
              $
              184,171
              
              
              28.67
              %
              $
              158,676
              
              
              27.03
              %
              $
              138,161
              
              
              26.64
              %Interest-Bearing
                  Transaction Deposits
              
              
              73,990
              
              
              11.52
              %
              
              63,619
              
              
              10.84
              %
              
              53,810
              
              
              10.37
              %Savings
                  & MMDAs
              
              
              190,562
              
              
              29.65
              %
              
              174,539
              
              
              29.73
              %
              
              152,542
              
              
              29.41
              %Time
                  Certificates
              
              
              121,067
              
              
              18.84
              %
              
              125,366
              
              
              21.35
              %
              
              119,250
              
              
              22.99
              %Borrowed
                  Funds
              
              
              14,320
              
              
              2.23
              %
              
              13,681
              
              
              2.33
              %
              
              7,368
              
              
              1.42
              %Other
                  Liabilities
              
              
              4,627
              
              
              0.72
              %
              
              2,332
              
              
              0.40
              %
              
              2,490
              
              
              0.48
              %Stockholders'
                  Equity
              
              
              53,744
              
              
              8.37
              %
              
              48,853
              
              
              8.32
              %
              
              45,051
              
              
              8.69
              %Total
                  Liabilities & Stockholders’ Equity
              
              $
              642,481
              
              
              100.00
              %
              $
              587,066
              
              
              100.00
              %
              $
              518,672
              
              
              100.00
              %1.
                  Average Balances for Loans include non-accrual loans and are net
                  of the
                  allowance for loan losses.
 
 
 
 
 
  
  
 **Net
                    Interest Earnings****Average
                    Balances, Yields and Rates**(Dollars
                    in thousands)2005
                
                2004
                
                2003Yields
                
                
                
                
                
                Yields
                
                
                
                
                
                YieldsInterest
                
                Earned/
                
                
                
                Interest
                
                Earned/
                
                
                
                Interest
                
                Earned/Average
                
                Income/
                
                Rates
                
                Average
                
                Income/
                
                Rates
                
                Average
                
                Income/
                
                RatesAssets
                
                Balance
                
                Expense
                
                Paid
                
                Balance
                
                Expense
                
                Paid
                
                Balance
                
                Expense
                
                PaidSecurities:U.S.
                    Government
                
                $
                20,279
                
                $
                767
                
                
                3.78
                %
                $
                15,745
                
                $
                747
                
                
                4.74
                %
                $
                14,234
                
                $
                849
                
                
                5.96
                %Obligations
                    of StatesAnd
                    Political Subdivisions1
                
                
                27,045
                
                
                1,577
                
                
                5.83
                %
                
                32,899
                
                
                1,892
                
                
                5.75
                %
                
                43,822
                
                
                2,501
                
                
                5.71
                %Other
                    Securities
                
                
                3,065
                
                
                133
                
                
                4.34
                %
                
                3,277
                
                
                135
                
                
                4.12
                %
                
                4,544
                
                
                163
                
                
                3.59
                %Total
                    Investment Securities
                
                
                50,389
                
                
                2,477
                
                
                4.92
                %
                
                51,921
                
                
                2,774
                
                
                5.34
                %
                
                62,600
                
                
                3,513
                
                
                5.61
                %Federal
                    Funds Sold
                
                
                81,948
                
                
                2,587
                
                
                3.16
                %
                
                77,169
                
                
                972
                
                
                1.26
                %
                
                30,164
                
                
                275
                
                
                0.91
                %Loans2
                
                
                452,646
                
                
                32,808
                
                
                7.25
                %
                
                395,883
                
                
                25,331
                
                
                6.40
                %
                
                367,520
                
                
                23,615
                
                
                6.43
                %Loan
                    Fees
                
                
                —
                
                
                3,030
                
                
                0.67
                %
                
                —
                
                
                2,542
                
                
                0.64
                %
                
                —
                
                
                2,923
                
                
                0.80
                %Total
                    Loans, IncludingLoan
                    Fees
                
                
                452,646
                
                
                35,838
                
                
                7.92
                %
                
                395,883
                
                
                27,873
                
                
                7.04
                %
                
                367,520
                
                
                26,538
                
                
                7.22
                %Total
                    Earning Assets
                
                
                584,983
                
                $
                40,902
                
                
                6.99
                %
                
                524,973
                
                $
                31,619
                
                
                6.02
                %
                
                460,284
                
                $
                30,326
                
                
                6.59
                %Cash
                    and Due from Banks
                
                
                31,287
                
                
                
                
                
                
                
                
                37,542
                
                
                
                
                
                
                
                
                35,627Premises
                    and Equipment
                
                
                7,743
                
                
                
                
                
                
                
                
                7,531
                
                
                
                
                
                
                
                
                7,914Interest
                    Receivableand
                    Other Assets
                
                
                18,468
                
                
                
                
                
                
                
                
                17,020
                
                
                
                
                
                
                
                
                14,847Total
                    Assets
                
                $
                642,481
                
                
                
                
                
                
                
                $
                587,066
                
                
                
                
                
                
                
                $
                518,672
 1.
                  Interest income and yields on tax-exempt securities are not presented
                  on a
                  tax equivalent basis.2.
                  Average Balances for Loans include non-accrual loans and are net
                  of the
                  allowance for loan losses, but non-accrued interest thereon is
                  excluded.
 
 
 
 
 
 
 
 
 
  
  
 **Continuation
            of**
 **Net
            Interest Earnings**
 **Average
            Balances, Yields and Rates**
 (Dollars
            in thousands)
 2005
                    
                    2004
                    
                    2003Yields
                    
                    
                    
                    
                    
                    Yields
                    
                    
                    
                    
                    
                    YieldsInterest
                    
                    Earned/
                    
                    
                    
                    Interest
                    
                    Earned/
                    
                    
                    
                    Interest
                    
                    Earned/Liabilities
                        and
                    
                    Average
                    
                    Income/
                    
                    Rates
                    
                    Average
                    
                    Income/
                    
                    Rates
                    
                    Average
                    
                    Income/
                    
                    RatesStockholders'
                        Equity
                    
                    Balance
                    
                    Expense
                    
                    Paid
                    
                    Balance
                    
                    Expense
                    
                    Paid
                    
                    Balance
                    
                    Expense
                    
                    PaidInterest-Bearing
                        Deposits:Interest-BearingTransaction
                        Deposits
                    
                    $
                    73,990
                    
                    $
                    512
                    
                    
                    0.69
                    %
                    $
                    63,619
                    
                    $
                    89
                    
                    
                    0.14
                    %
                    $
                    53,810
                    
                    $
                    80
                    
                    
                    0.15
                    %Savings
                        & MMDAs
                    
                    
                    190,562
                    
                    
                    2,279
                    
                    
                    1.20
                    %
                    
                    174,539
                    
                    
                    893
                    
                    
                    0.51
                    %
                    
                    152,542
                    
                    
                    706
                    
                    
                    0.46
                    %Time
                        Certificates
                    
                    
                    121,067
                    
                    
                    2,443
                    
                    
                    2.02
                    %
                    
                    125,366
                    
                    
                    2,003
                    
                    
                    1.60
                    %
                    
                    119,250
                    
                    
                    2,056
                    
                    
                    1.72
                    %Total
                        Interest-Bearing Deposits
                    
                    
                    385,619
                    
                    
                    5,234
                    
                    
                    1.36
                    %
                    
                    363,524
                    
                    
                    2,985
                    
                    
                    0.82
                    %
                    
                    325,602
                    
                    
                    2,842
                    
                    
                    0.87
                    %Borrowed
                        Funds
                    
                    
                    14,320
                    
                    
                    495
                    
                    
                    3.46
                    %
                    
                    13,681
                    
                    
                    441
                    
                    
                    3.22
                    %
                    
                    7,368
                    
                    
                    267
                    
                    
                    3.62
                    %Total
                        Interest-BearingDeposits
                        and Funds
                    
                    
                    399,939
                    
                    
                    5,729
                    
                    
                    1.43
                    %
                    
                    377,205
                    
                    
                    3,426
                    
                    
                    0.91
                    %
                    
                    332,970
                    
                    
                    3,109
                    
                    
                    0.93
                    %Demand
                        Deposits
                    
                    
                    184,171
                    
                    
                    —
                    
                    
                    —
                    
                    
                    158,676
                    
                    
                    —
                    
                    
                    —
                    
                    
                    138,161
                    
                    
                    —
                    
                    
                    —Total
                        Deposits andBorrowed
                        Funds
                    
                    
                    584,110
                    
                    $
                    5,729
                    
                    
                    0.98
                    %
                    
                    535,881
                    
                    $
                    3,426
                    
                    
                    0.64
                    %
                    
                    471,131
                    
                    $
                    3,109
                    
                    
                    0.66
                    %Accrued
                        Interest andOther
                        Liabilities
                    
                    
                    4,627
                    
                    
                    
                    
                    
                    
                    
                    
                    2,332
                    
                    
                    
                    
                    
                    
                    
                    
                    2,490Stockholders'
                        Equity
                    
                    
                    53,744
                    
                    
                    
                    
                    
                    
                    
                    
                    48,853
                    
                    
                    
                    
                    
                    
                    
                    
                    45,051Total
                        Liabilities andStockholders'
                        Equity
                    
                    $
                    642,481
                    
                    
                    
                    
                    
                    
                    
                    $
                    587,066
                    
                    
                    
                    
                    
                    
                    
                    $
                    518,672Net
                        Interest Income andNet
                        Interest Margin1
                    
                    
                    
                    
                    $
                    35,173
                    
                    
                    6.01
                    %
                    
                    
                    
                    $
                    28,193
                    
                    
                    5.37
                    %
                    
                    
                    
                    $
                    27,217
                    
                    
                    5.91
                    %Net
                        Interest Spread2
                    
                    
                    
                    
                    
                    
                    
                    
                    5.56
                    %
                    
                    
                    
                    
                    
                    
                    
                    5.11
                    %
                    
                    
                    
                    
                    
                    
                    
                    5.66
                    %
 
   1.
            Net
            interest margin is computed by dividing net interest income by total
            average
            interest-earning assets.
 
 2.
            Net
            interest spread represents the average yield earned on interest-earning
            assets
            less the average rate paid on interest-bearing liabilities.
  27
  **Analysis
          of Changes**
 **in
          Interest Income and Interest Expense**
 (Dollars
          in thousands)
 
 Following
          is an analysis of changes in interest income and expense (dollars in thousands)
          for 2005 over 2004 and 2004 over 2003. Changes not solely due to interest
          rate
          or volume have been allocated proportionately to interest rate and
          volume.
 
 2005
                    Over 2004
                
                2004
                    Over 2003Interest
                
                
                
                
                
                InterestVolume
                
                Rate
                
                Change
                
                Volume
                
                Rate
                
                ChangeIncrease
                    (Decrease) inInterest
                    Income:Loans
                    & Banker’s Acceptance
                
                $
                3,882
                
                $
                3,595
                
                $
                7,477
                
                $
                1,826
                
                $
                (110
                )
                $
                1,716Investment
                    Securities
                
                
                (81
                )
                
                (216
                )
                
                (297
                )
                
                (576
                )
                
                (163
                )
                
                (739
                )Federal
                    Funds Sold
                
                
                63
                
                
                1,552
                
                
                1,615
                
                
                559
                
                
                138
                
                
                697Loan
                    Fees
                
                
                488
                
                
                —
                
                
                488
                
                
                (381
                )
                
                —
                
                
                (381
                )$
                4,352
                
                $
                4,931
                
                $
                9,283
                
                $
                1,428
                
                $
                (135
                )
                $
                1,293Increase
                    (Decrease) inInterest
                    Expense:Deposits:Interest-BearingTransaction
                    Deposits
                
                $
                17
                
                $
                406
                
                $
                423
                
                $
                13
                
                $
                (4
                )
                $
                9Savings
                    & MMDAs
                
                
                88
                
                
                1,298
                
                
                1,386
                
                
                107
                
                
                80
                
                
                187Time
                    Certificates
                
                
                (66
                )
                
                506
                
                
                440
                
                
                146
                
                
                (199
                )
                
                (53
                )Borrowed
                    Funds
                
                
                21
                
                
                33
                
                
                54
                
                
                199
                
                
                (25
                )
                
                174$
                60
                
                $
                2,243
                
                $
                2,303
                
                $
                465
                
                $
                (148
                )
                $
                317Increase
                    (Decrease) inNet
                    Interest Income
                
                $
                4,292
                
                $
                2,688
                
                $
                6,980
                
                $
                963
                
                $
                13
                
                $
                976
 
 28
  **INVESTMENT
          PORTFOLIO**
 
 **Composition
          of Investment Securities**
 
 The
          mix
          of investment securities held by the Company at December 31, for the previous
          three fiscal years is as follows (dollars
          in thousands) :
 
 2005
                
                2004
                
                2003Investment
                    securities available for sale:U.S.
                    Treasury Securities
                
                $
                250
                
                
                256
                
                
                516Securities
                    of U.S. GovernmentAgencies
                    and Corporations
                
                
                21,556
                
                
                21,063
                
                
                12,027Obligations
                    of State &Political
                    Subdivisions
                
                
                23,047
                
                
                30,747
                
                
                34,431Mortgage
                    Backed Securities
                
                
                1,803
                
                
                1,260
                
                
                1,903Other
                    Securities
                
                
                2,132
                
                
                1,828
                
                
                1,358Total
                    Investments
                
                $
                48,788
                
                
                55,154
                
                
                50,235
 
 **Maturities
          of Investment Securities**
 
 The
          following table is a summary of the relative maturities (d ollars
          in
          thousands) and
          yields of the Company’s investment securities as of December 31, 2005. The
          yields on tax-exempt securities are shown on a tax equivalent
          basis.
  **Period
          to Maturity**
 
 Within
                    One Year
                
                After
                    One But
                  Within
                    Five Years
                
                After
                    Five But
                  Within
                    Ten YearsSecurity
                
                Amount
                
                Yield
                
                Amount
                
                Yield
                
                Amount
                
                YieldU.S.
                    Treasury Securities
                
                $
                250
                
                
                4.54
                %
                $
                —
                
                
                —
                
                $
                —
                
                
                —Securities
                    of U.S. GovernmentAgencies
                    and Corporations
                
                
                7,911
                
                
                3.97
                %
                
                13,645
                
                
                3.60
                %
                
                —
                
                
                —Obligations
                    of State &Political
                    Subdivisions
                
                
                4,162
                
                
                7.00
                %
                
                15,048
                
                
                7.59
                %
                
                2,569
                
                
                8.10
                %Mortgage
                    Backed Securities
                
                
                53
                
                
                7.03
                %
                
                1,750
                
                
                5.14
                %
                
                —
                
                
                —TOTAL
                
                $
                12,376
                
                
                5.02
                %
                $
                30,443
                
                
                5.66
                %
                $
                2,569
                
                
                8.10
                %
 
  After
                    Ten Years
                
                Other
                
                TotalSecurity
                
                Amount
                
                Yield
                
                Amount
                
                Yield
                
                Amount
                
                YieldU.S.
                    Treasury Securities
                
                $
                —
                
                
                —
                
                $
                —
                
                
                —
                
                $
                250
                
                
                4.54
                %Securities
                    of U.S. GovernmentAgencies
                    and Corporations
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                21,556
                
                
                3.74
                %Obligations
                    of State &Political
                    Subdivisions
                
                
                1,268
                
                
                7.25
                %
                
                —
                
                
                —
                
                
                23,047
                
                
                7.52
                %Mortgage
                    Backed Securities
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,803
                
                
                5.20
                %Other
                    Securities
                
                
                —
                
                
                —
                
                
                2,132
                
                
                4.34
                %
                
                2,132
                
                
                4.34
                %TOTAL
                
                $
                1,268
                
                
                7.25
                %
                $
                2,132
                
                
                4.34
                %
                $
                48,788
                
                
                5.61
                %
 
  29
 
 **LOAN
          PORTFOLIO**
 
 **Composition
          of Loans**
 
 The
          mix
          of loans, net of deferred origination fees and allowance for loan losses
          and
          excluding loans held-for-sale, at December 31, for the previous five fiscal
          years is as follows (d ollars
          in
          thousands ):
 
 December
                    31,2005
                
                2004
                
                2003Balance
                
                Percent
                
                Balance
                
                Percent
                
                Balance
                
                PercentCommercial
                
                $
                87,091
                
                
                19.1
                %
                $
                89,721
                
                
                20.9
                %
                $
                88,949
                
                
                24.1
                %Agriculture
                
                
                32,808
                
                
                7.2
                %
                
                32,910
                
                
                7.7
                %
                
                32,766
                
                
                8.9
                %Real
                    Estate Mortgage
                
                
                228,524
                
                
                50.1
                %
                
                216,846
                
                
                50.4
                %
                
                174,867
                
                
                47.2
                %Real
                    Estate Construction
                
                
                103,422
                
                
                22.7
                %
                
                85,584
                
                
                19.9
                %
                
                68,370
                
                
                18.5
                %Installment
                
                
                4,216
                
                
                0.9
                %
                
                4,641
                
                
                1.1
                %
                
                4,867
                
                
                1.3
                %TOTAL
                
                $
                456,061
                
                
                100.0
                %
                $
                429,702
                
                
                100.0
                %
                $
                369,819
                
                
                100.0
                %
 
 2002
                
                2001Balance
                
                Percent
                
                Balance
                
                PercentCommercial
                
                $
                76,887
                
                
                24.6
                %
                $
                57,717
                
                
                23.5
                %Agriculture
                
                
                31,926
                
                
                10.2
                %
                
                26,247
                
                
                10.7
                %Real
                    Estate Mortgage
                
                
                144,171
                
                
                46.0
                %
                
                107,700
                
                
                44.0
                %Real
                    Estate Construction
                
                
                54,094
                
                
                17.3
                %
                
                47,604
                
                
                19.4
                %Installment
                
                
                5,967
                
                
                1.9
                %
                
                5,944
                
                
                2.4
                %TOTAL
                
                $
                313,045
                
                
                100.0
                %
                $
                245,212
                
                
                100.0
                %
 
 Commercial
          loans are primarily for financing the needs of a diverse group of businesses
          located in the Bank’s market area. The Bank also makes loans to individuals for
          investment purposes. Most of these loans are relatively short-term (an
          overall
          average life of approximately two years) and secured by various types of
          collateral. Real estate construction loans are generally for financing
          the
          construction of single-family residential homes for well-qualified individuals
          and builders. These loans are secured by real estate and have short
          maturities.
 
 As
          shown
          in the comparative figures for loan mix during 2005 and 2004, total loans
          increased as a result of increases in real estate construction loans and
          real
          estate mortgage loans which were partially offset by a decrease in commercial
          loans, agricultural loans and installment loans.
  30
  **Maturities
          and Sensitivities of Loans to Changes in Interest
          Rates**
 
 Loan
          maturities of the loan portfolio at December 31, 2005 are as follows (dollars in thousands) exclude s
          loans
          held-for-sale:
 
 Maturing
                
                Fixed
                    Rate
                
                Variable
                    Rate
                
                TotalWithin
                    one year
                
                $
                39,566
                
                $
                160,465
                
                $
                200,031After
                    one year through five years
                
                
                45,296
                
                
                81,144
                
                
                126,440After
                    five years
                
                
                18,527
                
                
                111,063
                
                
                129,590Total
                
                $
                103,389
                
                $
                352,672
                
                $
                456,061
 
 
 **Non-accrual,
          Past Due and Restructured Loans**
  It
          is the
          Bank’s policy to recognize interest income on an accrual basis. Accrual of
          interest is suspended when a loan has been in default as to principal or
          interest for 90 days, unless well secured by collateral believed by management
          to have a fair market value that at least equals the book value of the
          loan plus
          accrued interest receivable and in the process of collection. Real estate
          acquired through foreclosure is written down to its estimated fair market
          value
          at the time of acquisition and is carried as a non-earning asset until
          sold. Any
          write-down at the time of acquisition is charged against the allowance
          for loan
          losses; subsequent write-downs or gains or losses upon disposition are
          credited
          or charged to non-interest income/expense. The Bank has made no foreign
          loans.
 
 The
          following table shows the aggregate amounts of assets (d ollars
          in
          thousands )
          in each
          category at December 31, for the years indicated:
 
 2005
                
                2004
                
                2003
                
                2002
                
                2001Non-accrual
                    Loans
                
                $
                2,073
                
                $
                4,907
                
                $
                3,877
                
                $
                552
                
                $
                53090
                    Days Past Due But Still Accruing
                
                
                178
                
                
                55
                
                
                4
                
                
                8
                
                
                54Total
                    Non-performing Loans
                
                
                2,251
                
                
                4,962
                
                
                3,881
                
                
                560
                
                
                584Other
                    Real Estate Owned
                
                
                268
                
                
                —
                
                
                —
                
                
                —
                
                
                837Total
                    Non-performing Assets
                
                $
                2,519
                
                $
                4,962
                
                $
                3,881
                
                $
                560
                
                $
                1,421
 
  If
          interest on non-accrual loans had been accrued, such interest income would
          have
          approximated $101,000, $280,000, and $228,000 during the years ended December
          31, 2005, 2004 and 2003, respectively. Income actually recognized for these
          loans approximated $100,000, $64,000 and $164,000 for the years ended December
          31, 2005, 2004 and 2003, respectively.
 
 There
          was
          a $2,443,000 decrease in non-performing assets for 2005 over 2004. At December
          31, 2005, non-performing assets included one non-accrual commercial loan
          totaling $289,000 and three non-accrual agricultural loans totaling $1,784,000.
          Additional non-performing assets included one loan past due more than 90
          days
          totaling $178,000. Other Real Estate Owned (“OREO”) properties totaled $268,000
          at December 31, 2005. The Bank’s management believes that nearly $1,872,000 of
          the $2,073,000 in non-accrual loans at December 31, 2005, are adequately
          collateralized or guaranteed by a governmental entity, and the remaining
          $201,000 may have some potential loss which management believes is sufficiently
          covered by the Bank’s existing loan loss reserve (Allowance for Loan
          Losses).
  31
 
 **Potential
          Problem Loans**
 
 In
          addition to the non-performing assets described above, the Bank's Branch
          Managers each month submit to the Loan Committee of the Board of Directors
          a
          report detailing the status of those loans that are past due over sixty
          days and
          each quarter a report detailing the status of those loans that are classified
          as
          such. Also included in the report are those loans that are not necessarily
          past
          due, but the branch manager is aware of problems with these loans which
          may
          result in a loss.
 
 The
          monthly Allowance for Loan Loss Analysis Report is prepared based upon
          the
          Problem Loan Report, internal loan grading, regulatory classifications
          and loan
          review classification and is reviewed by the Asset Quality Committee of
          the
          Bank. The Asset Quality Committee reviewed the Allowance for Loan Loss
          Analysis
          Report, dated December 31, 2005, on February 22, 2006. This report included
          all
          non-performing loans reported in the table on the previous page and all
          other
          potential problem loans. Excluding the non-performing loans cited previously,
          loans totaling $10,290,000 were classified as potential problem loans.
          Of these
          loans, loans totaling $9,351,000 are adequately collateralized or guaranteed,
          the remaining loans totaling $939,000 may have some loss potential which
          management believes is sufficiently covered by the Bank’s existing loan loss
          reserve (Allowance for Loan Losses). The ratio of the Allowance for Loan
          Losses
          to total loans at December 31, 2005 was 1.70%.
 
 **SUMMARY
          OF LOAN LOSS EXPERIENCE**
 
 The
          Allowance for Loan Losses is maintained at a level believed by management
          to be
          adequate to provide for losses that can be reasonably anticipated. The
          allowance
          is increased by provisions charged to operating expense and reduced by
          net
          charge-offs. The Bank makes credit reviews of the loan portfolio and considers
          current economic conditions, loan loss experience, and other factors in
          determining the adequacy of the allowance for loan losses. The allowance
          for
          loan losses is based on estimates and actual losses may vary from current
          estimates.
 
 **Analysis
          of the Allowance for Loan Losses**
 (D ollars
          in
          thousands )
 
 2005
                
                2004
                
                2003
                
                2002
                
                2001Balance
                    at Beginning of Year
                
                $
                7,445
                
                $
                7,006
                
                $
                6,630
                
                $
                6,116
                
                $
                6,418Provision
                    for (Recovery of) Loan Losses
                
                
                600
                
                
                207
                
                
                2,153
                
                
                676
                
                
                (308
                )Loans
                    Charged-Off:Commercial
                
                
                (670
                )
                
                (122
                )
                
                (143
                )
                
                (51
                )
                
                (63
                )Agriculture
                
                
                —
                
                
                (214
                )
                
                (1,662
                )
                
                (191
                )
                
                (50
                )Installment
                    Loans to Individuals
                
                
                (185
                )
                
                (46
                )
                
                (104
                )
                
                (87
                )
                
                (41
                )Total
                    Charged-Off
                
                
                (855
                )
                
                (382
                )
                
                (1,909
                )
                
                (329
                )
                
                (154
                )Recoveries:Commercial
                
                
                64
                
                
                199
                
                
                101
                
                
                92
                
                
                113Agriculture
                
                
                663
                
                
                399
                
                
                11
                
                
                33
                
                
                25Real
                    Estate Mortgage
                
                
                —
                
                
                —
                
                
                —
                
                
                35
                
                
                —Installment
                    Loans to Individuals
                
                
                —
                
                
                16
                
                
                20
                
                
                7
                
                
                22Total
                    Recoveries
                
                
                727
                
                
                614
                
                
                132
                
                
                167
                
                
                160Net
                    (Charge-Offs) Recoveries
                
                
                (128
                )
                
                232
                
                
                (1,777
                )
                
                (162
                )
                
                6Balance
                    at End of Year
                
                $
                7,917
                
                $
                7,445
                
                $
                7,006
                
                $
                6,630
                
                $
                6,116Ratio
                    of Net (Charge-Offs) RecoveriesDuring
                    the Year to Average LoansOutstanding
                    During the Year
                
                
                (0.03
                %)
                
                0.06
                %
                
                (0.48
                %)
                
                (0.05
                %)
                
                0.00
                %
  32
 
 **Allocation
          of the Allowance for Loan Losses**
 
 The
          Allowance for Loan Losses has been established as a general reserve available
          to
          absorb possible future losses throughout the Loan Portfolio. The following
          table
          is an allocation of the Allowance for Loan Losses balance on the dates
          indicated
          (d ollars
          in
          thousands ):
  December
                    31, 2005
                
                December
                    31, 2004
                
                December
                    31, 2003Allocation
                    of
                  Allowance
                    for
                  loan
                    Losses
                  Balance
                
                Loans
                    as
                  a
                    %
                    of
                  Total
                  Loans
                
                Allocation
                    of
                  Allowance
                  for
                    loan
                  Losses
                  Balance
                
                Loans
                    as a
                  %
                    of Total
                  Loans
                
                Allocation
                    of
                  Allowance
                    for
                  loan
                    Losses
                  Balance
                
                Loans
                    as a
                  %
                    of Total
                  LoansLoan
                    Type:Commercial
                
                $
                1,779
                
                
                19.1
                %
                $
                1,727
                
                
                20.9
                %
                $
                1,881
                
                
                24.1
                %Agriculture
                
                
                1,518
                
                
                7.2
                %
                
                1,484
                
                
                7.7
                %
                
                1,746
                
                
                8.9
                %Real
                    Estate Mortgage
                
                
                3,003
                
                
                50.1
                %
                
                2,767
                
                
                50.4
                %
                
                2,181
                
                
                47.2
                %Real
                    Estate Construction
                
                
                1,001
                
                
                22.7
                %
                
                668
                
                
                19.9
                %
                
                621
                
                
                18.5
                %Installment
                
                
                616
                
                
                0.9
                %
                
                801
                
                
                1.1
                %
                
                577
                
                
                1.3
                %Total
                
                $
                7,917
                
                
                100.0
                %
                $
                7,445
                
                
                100.0
                %
                $
                7,006
                
                
                100.0
                %
 
 
 December
                    31, 2002
                
                December
                    31, 2001Allocationof
                  Allowance
                    for
                  loan
                    Losses
                  Balance
                
                Loans
                    as a
                  %
                    of Total
                  Loans
                
                Allocation
                    of
                  Allowance
                    for
                  loan
                    Losses
                  Balance
                
                Loans
                    as a
                  %
                    of Total
                  LoansLoan
                    Type:Commercial
                
                $
                2,377
                
                
                24.6
                %
                $
                3,279
                
                
                23.5
                %Agriculture
                
                
                974
                
                
                10.2
                %
                
                1,491
                
                
                10.7
                %Real
                    Estate Mortgage
                
                
                279
                
                
                46.0
                %
                
                306
                
                
                44.0
                %Real
                    Estate Construction
                
                
                2,472
                
                
                17.3
                %
                
                673
                
                
                19.4
                %Installment
                
                
                528
                
                
                1.9
                %
                
                367
                
                
                2.4
                %Total
                
                $
                6,630
                
                
                100.0
                %
                $
                6,116
                
                
                100.0
                %
 
 The
          Bank
          believes that any breakdown or allocation of the Reserve into loan categories
          lends an appearance of exactness, which does not exist, because the Reserve
          is
          available for all loans. The Reserve breakdown shown above is computed
          taking
          actual experience into consideration but should not be interpreted as an
          indication of the specific amount and allocation of actual charge-offs
          that may
          ultimately occur.
  33
  **Deposits**
 
 The
          following table sets forth the average amount and the average rate paid
          on each
          of the listed deposit categories (d ollars
          in
          thousands )
          during
          the periods specified:
 
 2005
                
                2004
                
                2003Average
                  Amount
                
                Average
                  Rate
                
                Average
                  Amount
                
                Average
                  Rate
                
                Average
                  Amount
                
                Average
                  RateDeposit
                    Type:Non-interest-Bearing
                    Demand
                
                $
                184,171
                
                
                —
                
                $
                158,676
                
                
                —
                
                $
                138,161
                
                
                —Interest-Bearing
                    Demand (NOW)
                
                $
                73,990
                
                
                0.69
                %
                $
                63,619
                
                
                0.14
                %
                $
                53,810
                
                
                0.15
                %Savings
                    and MMDAs
                
                $
                190,562
                
                
                1.20
                %
                $
                174,539
                
                
                0.51
                %
                $
                152,542
                
                
                0.46
                %Time
                
                $
                121,067
                
                
                2.02
                %
                $
                125,366
                
                
                1.60
                %
                $
                119,250
                
                
                1.72
                %
 
 
 The
          following table sets forth by time remaining to maturity the Bank’s time
          deposits in the amount of $100,000 or more (d ollars
          in
          thousands )
          as of
          December 31, 2005:
 
 Three
                    months or less
                
                $
                30,401Over
                    three months through twelve months
                
                
                32,129Over
                    twelve months
                
                
                3,456Total
                
                $
                65,986
 
 
 **Short-Term
          Borrowings**
 
 Short-term
          borrowings at December 31, 2005 and 2004, consisted of secured borrowings
          from
          the U.S. Treasury in the amounts of $1,476,000 and $1,677,000, respectively.
          The
          funds are placed at the discretion of the U.S. Treasury and are callable
          on
          demand by the U.S. Treasury.
 
 Additional
          short-term borrowings available to the Company consist of a line of credit
          and
          advances from the Federal Home Loan Bank (“FHLB”) secured under terms of a
          blanket collateral agreement by a pledge of FHLB stock and certain other
          qualifying collateral such as commercial and mortgage loans. At December
          31,
          2005, the Company had a current collateral borrowing capacity from the
          FHLB of
          $94,037,000. The Company also has unsecured formal lines of credit totaling
          $20,700,000 with correspondent banks and borrowing capacity of $2,000,000
          with
          the Federal Reserve Bank (loans and discounts), which is fully collateralized,
          with a pledge of U.S. Agency Notes.
 
 
 **Long-Term
          Borrowings**
 
 Long-term
          borrowings consisted of Federal Home Loan Bank advances, totaling $13,493,000
          and $13,779,000, respectively, at December 31, 2005 and 2004. Such advances
          ranged in maturity from 0.3 years to 3.3 years at a weighted average interest
          rate of 3.48% at December 31, 2005. Maturity ranged from 1.3 years to 4.3
          years
          at a weighted average interest rate of 3.47% at December 31, 2004. Average
          outstanding balances were $13,628,000 and $12,753,000, respectively, during
          2005
          and 2004. The weighted average interest rate paid was 3.48% in 2005 and
          3.36% in
          2004.
  34
 
 **Results
          of Operations**
 
 **Net
          Income**
 
 **Year
          Ended December 31, 2005 Compared to Year Ended December 31,
          2004**
 
 Net
          income for the year ended December 31, 2005, was $8,688,000, representing
          an
          increase of $1,981,000, or 30% over net income of $6,707,000 for the year
          ended
          December 31, 2004. The increase in net income is principally attributable
          to a
          $6,980,000 increase in net interest income and an increase of $506,000
          in other
          operating income, which was partially offset by a $2,371,000 increase in
          salaries and employee benefits, an increase of $393,000 in the provision
          for
          loan losses, a $194,000 increase in occupancy and equipment, a $320,000
          increase
          in advertising, and a $1,242,000 increase in the provision for income
          taxes.
 
 **Year
          Ended December 31, 2004 Compared to Year Ended December 31,
          2003**
 
 Net
          income for the year ended December 31, 2004, was $6,707,000, representing
          an
          increase of $596,000, or 10% over net income of $6,111,000 for the year
          ended
          December 31, 2003. The increase in net income is principally attributable
          to a
          $976,000 increase in net interest income, a decrease of $1,946,000 in the
          provision for loan losses, and a $215,000 decrease in salaries and employee
          benefits, which was partially offset by a decrease of $1,946,000 in other
          operating income, a $246,000 increase in occupancy and equipment, and a
          $305,000
          increase in the provision for income taxes.
 
 **Net
          Interest Income**
 
 Net
          interest income is the excess of interest and fees earned on the Bank’s loans,
          investment securities, federal funds sold and banker's acceptances over
          the
          interest expense paid on deposits, mortgage notes and other borrowed funds.
          It
          is primarily affected by the yields on the Bank’s interest-earning assets and
          loan fees and interest-bearing liabilities outstanding during the period.
          The
          $6,980,000 increase in the Bank’s net interest income in 2005 from 2004 was due
          to the effects of a higher level of core deposits and strong commercial
          and real
          estate loan volumes, combined with higher funding costs. The $976,000 increase
          in 2004 from 2003 was due to the effects of a higher level of core deposits
          and
          strong commercial and real estate loan volumes, combined with higher funding
          costs. The “Analysis of Changes in Interest Income and Interest Expense” set
          forth on Page 28 of this Annual Report on Form 10-K identifies the effects
          of
          interest rates and loan/deposit volume. Another factor that affected the
          net
          interest income was the average earning asset to average total asset ratio.
          This
          ratio was 91.1% in 2005, 89.4% in 2004 and 88.7% in 2003.
 
 Interest
          income on loans (including loan fees) was $35,838,000 for 2005, representing
          an
          increase of $7,965,000, or 28.58% from $27,873,000 for 2004. This compared
          to an
          increase in 2004 of $1,335,000 or 5.03% greater than loan interest income
          earned
          in 2003. The increased interest income on loans in 2005 over 2004 was the
          result
          of a 14.34% increase in loan volume, combined with an 85 basis point increase
          in
          loan interest rates and an increase of approximately $488,000 in loan fees.
          Loan
          fee comparisons were impacted by a net decrease in deferred loan fees and
          costs
          of $373,000 in 2005, a net increase of $326,000 in 2004, and a net decrease
          of
          $8,000 in 2003.
 
 Average
          outstanding federal funds sold fluctuated during this period, ranging from
          $81,948,000, in 2005 to $77,169,000 in 2004 and $30,164,000 in 2003. At
          December
          31, 2005 federal funds sold were $87,185,000. Federal funds are used primarily
          as a short-term investment to provide liquidity for funding of loan commitments
          or to accommodate seasonal deposit fluctuations. Federal funds sold yields
          were
          3.16%, 1.26% and 0.91% for 2005, 2004 and 2003, respectively.
 
 The
          average total level of investment securities decreased $1,532,000 in 2005
          to
          $50,389,000 from $51,921,000 in 2004 and decreased $10,679,000 in 2004
          to
          $51,921,000 from $62,600,000 in 2003. The level of securities interest
          income
          attributable to investment securities decreased to $2,477,000 in 2005 from
          $2,774,000 in 2004 and $3,513,000 in 2003, due to the effects of interest
          rates
          and volume. The Bank’s strategy for this period has emphasized the use of the
          investment portfolio to maintain the Bank’s increasing loan demand. The Bank
          continues to reinvest maturing securities to provide future liquidity while
          attempting to reinvest the cash flows in short duration securities that
          provide
          higher cash flow for reinvestment in a higher interest rate instrument.
          Investment securities yields were 4.92%, 5.34% and 5.61% for 2005, 2004
          and
          2003, respectively.
  35
  
 Total
          interest expense increased to $5,729,000 in 2005 from $3,426,000 in 2004,
          and
          increased to $3,426,000 in 2004 from $3,109,000 in 2003, representing a
          67.22%
          increase in 2005 over 2004 and a 10.20% increase in 2004 over 2003. The
          increase
          in total interest expense from 2005 to 2004 was due to increases in volume
          combined with increases in interest rates paid on deposits. The increase
          in
          total interest expense from 2004 to 2003 was primarily due to volume which
          was
          partially offset by an overall decrease in interest rates paid on
          deposits.
 
 The
          mix
          of deposits for the previous three years is as follows ( d ollars
          in
          thousands):
 
 2005
                
                2004
                
                2003Average
                  Balance
                
                Percent
                
                Average
                  Balance
                
                Percent
                
                Average
                  Balance
                
                PercentNon-interest-Bearing
                    Demand
                
                $
                184,171
                
                
                32.3
                %
                $
                158,676
                
                
                30.4
                %
                $
                138,161
                
                
                29.8
                %Interest-Bearing
                    Demand (NOW)
                
                
                73,990
                
                
                13.0
                %
                
                63,619
                
                
                12.2
                %
                
                53,810
                
                
                11.6
                %Savings
                    and MMDAs
                
                
                190,562
                
                
                33.4
                %
                
                174,539
                
                
                33.4
                %
                
                152,542
                
                
                32.9
                %Time
                
                
                121,067
                
                
                21.3
                %
                
                125,366
                
                
                24.0
                %
                
                119,250
                
                
                25.7
                %Total
                
                $
                569,790
                
                
                100.0
                %
                $
                522,200
                
                
                100.0
                %
                $
                463,763
                
                
                100.0
                %
 
 
 The
          three
          years ended December 31, 2005 have been characterized by fluctuating interest
          rates. Loan rates and deposit rates both increased in 2005 and 2004, while
          loan
          rates and deposit rates both decreased in 2003. The net spread between
          the rate
          for total earning assets and the rate for total deposits and borrowed funds
          increased 45 basis points in the period from 2005 to 2004 and decreased
          55 basis
          points in the period from 2004 to 2003.
 
 The
          Bank’s net interest margin (net interest income divided by average earning
          assets) was 6.01% in 2005, 5.37% in 2004, and 5.91% in 2003. The net interest
          margin benefited in 2005 from rising interest rates combined with increased
          loan
          volume and was partially offset by higher cost of funds, the continued
          flattening of the yield curve, a slowdown in mortgage originations and
          maturities and calls of higher yielding securities. Going forward into
          the first
          half of 2006, it is anticipated that net interest income and net interest
          margin
          will be higher because of anticipated increases of the Federal Funds
          Rate.
 
 **Provision
          for Loan Losses**
 
 The
          provision for loan losses is established by charges to earnings based on
          management's overall evaluation of the collectibility of the loan portfolio.
          Based on this evaluation, the provision for loan losses increased to $600,000
          in
          2005 from $207,000 in 2004, primarily as a result of loan growth and loan
          quality in the Bank’s loan portfolio. The amount of loans charged-off increased
          in 2005 to $855,000 from $382,000 in 2004, and recoveries increased to
          $727,000
          in 2005 from $614,000 in 2004. The increase in charge-offs was due, for
          the most
          part, to a charge-off of an unsecured commercial loan. The ratio of the
          Allowance for Loan Losses to total loans at December 31, 2005 was 1.70%.
          The
          ratio of the Allowance for Loan Losses to total non-accrual loans and loans
          past
          due 90 days or more at December 31, 2005 was 352% compared to 150% at December
          31, 2004.
 
 The
          provision decreased to $207,000 in 2004 from $2,153,000 in 2003. The decrease
          in
          2004 was primarily due to loan growth and loan quality. The amount of loans
          charged-off decreased in 2004 to $382,000 from $1,909,000 in 2003 and recoveries
          increased to $614,000 in 2004 from $132,000 in 2003. The decrease in charge-offs
          was the result of improved market conditions and loan quality in the Bank’s loan
          portfolio. The ratio of the Allowance for Loan Losses to total loans at
          December
          31, 2004 was 1.70%. The ratio of the Allowance for Loan Losses to total
          non-accrual loans and loans past due 90 days or more at December 31, 2004
          was
          150% compared to 181% at December 31, 2003.
  36
 
 **Other
          Operating Income and Expenses**
 
 Other
          operating income consisted primarily of service charges on deposit accounts,
          net
          realized gains on loans held-for-sale, gains on other real estate owned
          and
          other income. Service charges on deposit accounts increased $197,000 in
          2005
          over 2004 and $431,000 in 2004 over 2003. The increase in 2005 was due,
          for the
          most part, to increased service charges on regular and business checking
          accounts. Net realized gains on loans held-for-sale increased $21,000 in
          2005
          over 2004 and decreased $1,649,000 in 2004 over 2003. The increase in 2005
          was
          due, for the most part, to an increase in booked income for the mortgage
          servicing asset. Gains on other real estate owned increased $291,000 in
          2005
          over 2004 and decreased $27,000 in 2004 over 2003. The increase in 2005
          was due
          to the sale of a previously foreclosed commercial property. Other income
          decreased $15,000 in 2005 over 2004 and increased $89,000 in 2004 over
          2003.
 
 The
          Bank
          realized net gains of $15,000 on sale of investment securities in 2005,
          $3,000
          in 2004 and $793,000 in 2003.
 
 Other
          operating expenses consisted primarily of salaries and employee benefits,
          occupancy and equipment expense data processing, advertising, and other
          expenses. Other operating expenses increased to $26,813,000 in 2005 from
          $22,943,000 in 2004, and increased to $22,943,000 in 2004 from $22,868,000
          in
          2003, representing an increase of $3,870,000, or 16.9% in 2005 over 2004,
          and an
          increase of $75,000, or 0.3% in 2004 over 2003.
 
 Following
          is an analysis of the increase or decrease in the components of other operating
          expenses (dollars in thousands) during the periods specified:
 
 2005
                    over 2004
                
                2004
                    over 2003Amount
                
                Percent
                
                Amount
                
                PercentSalaries
                    and Employee Benefits
                
                $
                2,371
                
                
                17.5
                %
                $
                (215
                )
                
                (1.6
                %)Occupancy
                    and Equipment
                
                
                194
                
                
                6.4
                %
                
                246
                
                
                8.8
                %Data
                    Processing
                
                
                130
                
                
                12.0
                %
                
                39
                
                
                3.8
                %Stationery
                    and Supplies
                
                
                (5
                )
                
                (1.0
                %)
                
                (35
                )
                
                (6.7
                %)Advertising
                
                
                320
                
                
                76.9
                %
                
                7
                
                
                1.7
                %Directors
                    Fees
                
                
                1
                
                
                0.8
                %
                
                7
                
                
                5.8
                %Other
                    Expense
                
                
                859
                
                
                20.2
                %
                
                26
                
                
                0.6
                %Total
                
                $
                3,870
                
                
                16.9
                %
                $
                75
                
                
                0.3
                %
 
 In
          2005,
          salaries and employee benefits increased $2,371,000 to $15,916,000 from
          $13,545,000 for 2004. This increase was due, for the most part, to an increase
          in regular salaries, incentive compensation and profit sharing payments.
          Increases in occupancy and equipment were associated with increased rents
          and
          equipment associated with opening new branches and offices. Increases in
          the
          data processing area were attributed to continued emphasis on Internet-related
          products and security services and network improvements. Increases in
          advertising were due to increased costs related to promoting new deposit
          products. Other expenses increased, for the most part, due to increased
          accounting, audit and consulting fees associated with Sarbanes-Oxley Act
          compliance.
 
 In
          2004,
          salaries and employee benefits decreased $215,000 to $13,545,000 from
          $13,760,000 for 2003. This decrease was due, for the most part, to a reduction
          in incentive compensation and fewer real estate loan originations resulting
          in
          lower commissions paid. Increases in occupancy and equipment were associated
          with increased rents and equipment associated with opening new branches
          and
          offices. Increases in the data processing area were attributed to continued
          emphasis on Internet-related products and security services and network
          improvements. Decreases in stationary and supplies were attributed to a
          decrease
          in the usage of office supplies.
 
 **Income
          Taxes**
 
 The
          provision for income taxes is primarily affected by the tax rate, the level
          of
          earnings before taxes and the amount of lower taxes provided by non-taxable
          earnings. In 2005, taxes increased $1,242,000 to $4,792,000 from $3,550,000
          for
          2004. In 2004, taxes increased $305,000 to $3,550,000 from $3,245,000 for
          2003.
          The Bank’s effective tax rate was 36%, 35%, and 35%, for the years ended
          December 31, 2005, 2004 and 2003, respectively. Non-taxable municipal bond
          income was $562,000, $610,000, and $693,000 for the years ended December
          31,
          2005, 2004, and 2003, respectively.
  37
 
 **Liquidity,
          Contractual Obligations, Commitments, Off-Balance Sheet Arrangements and
          Capital
          Resources**
 
 Liquidity
          is defined as the ability to generate cash at a reasonable cost to fulfill
          lending commitments and support asset growth, while satisfying the withdrawal
          demands of customers and any borrowing requirements. The Bank’s principle
          sources of liquidity are core deposits and loan and investment payments
          and
          prepayments. Providing a secondary source of liquidity is the available-for
          sale
          investment portfolio. As a final source of liquidity, the Bank can exercise
          existing credit arrangements.
 
 The
          Company’s primary source of liquidity on a stand-alone basis is dividends from
          the Bank. As discussed in Part I (Item 1) of this Annual Report on Form
          10-K,
          dividends from the Bank are subject to regulatory restrictions.
 
 As
          discussed in Part I (Item 1) of this Annual Report on Form 10-K, the Bank
          experiences seasonal swings in deposits, which impact liquidity. Management
          has
          adjusted to these seasonal swings by scheduling investment maturities and
          developing seasonal credit arrangements with the Federal Reserve Bank and
          Federal Funds lines of credit with correspondent banks. In addition, the
          ability
          of the Bank’s real estate department to originate and sell loans into the
          secondary market has provided another tool for the management of liquidity. As
          of
          December 31, 2005, the Company has not created any special purpose entities
          to
          securitize assets or to obtain off-balance sheet funding.
 
 The
          liquidity position of the Bank is managed daily, thus enabling the Bank
          to adapt
          its position according to market fluctuations. Liquidity is measured by
          various
          ratios, the most common of which is the ratio of net loans (including loans
          held-for-sale) to deposits. This ratio was 79.2% on December 31, 2005,
          77.8% on
          December 31, 2004, and 76.0% on December 31, 2003. At December 31, 2005
          and
          2004, the Bank’s ratio of core deposits to total assets was 78.1% and 77.2%,
          respectively. Core deposits are important in maintaining a strong liquidity
          position as they represent a stable and relatively low cost source of funds.
          The
          Bank’s liquidity position decreased slightly in 2005; however management
          believes that it remains adequate. This is best illustrated by the change
          in the
          Bank’s net non-core and net short-term non-core funding dependence ratio, which
          explain the degree of reliance on non-core liabilities to fund long-term
          assets.
          At December 31, 2005, the Bank’s net core funding dependence ratio, the
          difference between non-core funds, time deposits $100,000 or more and brokered
          time deposits under $100,000, and short-term investments to long-term assets,
          was -3.54%, compared to -2.83% in 2004. The Bank’s net short-term non-core
          funding dependence ratio, non-core funds maturing within one year, including
          borrowed funds, less short-term investments to long-term assets equaled
          -6.32%
          at the end of 2005, compared to -6.73% at year-end 2004. These ratios indicated
          at December 31, 2005, the Bank had minimal reliance on non-core deposits
          and
          borrowings to fund the Bank’s long-term assets, namely loans and investments.
          The Bank believes that by maintaining adequate volumes of short-term investments
          and implementing competitive pricing strategies on deposits, it can ensure
          adequate liquidity to support future growth. The Bank also believes that
          its
          liquidity position remains strong to meet both present and future financial
          obligations and commitments, events or uncertainties that have resulted
          or are
          reasonably likely to result in material changes with respect to the Bank’s
          liquidity.
 
 The
          Company has various financial obligations, including contractual obligations
          and
          commitments that may require future cash payments. The following table
          presents,
          as of December 31, 2005, the Company’s significant fixed and determinable
          contractual obligations to third parties by payment date:
 
 **Payments
                    due by period****Contractual
                    Obligations**
                
                **Total**
                
                **Less
                    than 1 year**
                
                **1-3
                    years**
                
                **3-5
                    years**
                
                **More
                    than 5 years**Deposits
                    without a stated maturity (a)
                
                $
                463,874
                
                
                463,874
                
                
                —
                
                
                —
                
                
                —Certificates
                    of Deposit (a)
                
                
                117,907
                
                
                110,286
                
                
                5,872
                
                
                1,708
                
                
                41Short-Term
                    Borrowings (a)
                
                
                1,476
                
                
                1,476
                
                
                —
                
                
                —
                
                
                —Long-Term
                    Borrowings (b)
                
                
                14,355
                
                
                3,701
                
                
                5,943
                
                
                4,711
                
                
                —Operating
                    Leases
                
                
                6,130
                
                
                1,040
                
                
                1,778
                
                
                1,436
                
                
                1,876Purchase
                    Obligations
                
                
                1,253
                
                
                1,253
                
                
                —
                
                
                —
                
                
                —Total
                
                $
                604,995
                
                
                581,630
                
                
                13,593
                
                
                7,855
                
                
                1,917
 
 (a)
                Excludes
                    interest
 (b)
                Includes
                    interest on fixed rate
                    obligations.
  38
 
 The
          Company’s operating lease obligations represent short and long-term lease and
          rental payments for facilities, certain software and data processing and
          other
          equipment. Purchase obligations represent obligations under agreements
          to
          purchase goods or services that are enforceable and legally binding on
          the
          Company and that specify all significant terms, including: fixed or minimum
          quantities to be purchase; fixed, minimum or variable price provisions;
          and the
          approximate timing of the transaction. The purchase obligation amounts
          presented
          above primarily relate to certain contractual payments for services provided
          for
          informative technology, capital expenditures, and the outsourcing of certain
          operational activities.
 
 The
          Company’s long-term borrowing consists of FHLB fixed-rate obligations. FHLB
          advances are collateralized by qualifying residential real estate loans.
  The
          Company’s borrowed funds consist of secured borrowings from the U.S. Treasury.
          These borrowings are collateralized by qualifying securities. The funds
          are
          placed at the discretion of the U.S. Treasury and are callable on demand
          by the
          U.S. Treasury.
 
 The
          following table details the amounts and expected maturities of commitments
          as of
          December 31, 2005:
 
 **Maturities
                    by period****Commitments**
                
                **Total**
                
                **Less
                    than 1 year**
                
                **1-3
                    years**
                
                **3-5
                    years**
                
                **More
                    than 5 years**Commitments
                    to extend creditCommercial
                
                $
                65,249
                
                
                53,111
                
                
                11,064
                
                
                855
                
                
                219Agriculture
                
                
                26,951
                
                
                26,951
                
                
                —
                
                
                —
                
                
                —Real
                    Estate Mortgage
                
                
                63,791
                
                
                7,451
                
                
                4,133
                
                
                18,098
                
                
                34,109Real
                    Estate Construction
                
                
                44,543
                
                
                38,123
                
                
                1,213
                
                
                —
                
                
                5,207Installment
                
                
                2,567
                
                
                1,470
                
                
                1,067
                
                
                30
                
                
                —Standby
                    Letters of Credit
                
                
                14,077
                
                
                7,936
                
                
                6,139
                
                
                2
                
                
                —Total
                
                $
                217,178
                
                
                135,042
                
                
                23,616
                
                
                18,985
                
                
                39,535
 
 Commitments
          to extend credit are agreements to lend to a customer as long as there
          is no
          violation of any condition established in the contract. Commitments generally
          have fixed expiration dates or other termination clauses and may require
          payment
          of a fee. Since many of the commitments are expected to expire without
          being
          drawn upon the total commitment amounts do not necessarily represent future
          cash
          requirements.
 
 The
          Company is a party to financial instruments with off-balance sheet risk
          in the
          normal course of business to meet the financing needs of its customers.
          These
          financial instruments include commitments to extend credit in the form
          of loans
          or through standby letters of credit. These instruments involve, to varying
          degrees, elements of credit and interest rate risk in excess of the amounts
          recognized in the balance sheet. The contract amounts of those instruments
          reflect the extent of involvement the Company has in particular classes
          of
          financial instruments. These loans have been sold to third parties without
          recourse, subject to customary default, representations and warranties,
          recourse
          for breaches of the terms of the sales contracts and payment default
          recourse.
 
  Financial
          instruments, whose contract amounts represent credit risk at December 31 of
          the indicated years, are as follows:
  2005
                
                2004Undisbursed
                    loan commitments
                
                $
                203,101
                
                $
                173,205Standby
                    letters of credit
                
                
                14,077
                
                
                9,378Commitments
                    to sell loans
                
                
                —
                
                
                —$
                217,178
                
                $
                182,583
 39
  The
          Bank
          expects its liquidity position to remain strong in 2006 as the Bank expects
          to
          continue to grow into existing and new markets. The stock market has rebounded
          this past year and while the Bank did not experience a significant outflow
          of
          deposits, the potential of additional outflows still exists as the stock
          market
          continues to improve. Regardless of the outcome, the Bank believes that
          it has
          the means to provide adequate liquidity for funding normal operations in
          2006.
 
 The
          Bank
          believes a strong capital position is essential to the Bank’s continued growth
          and profitability. A solid capital base provides depositors and shareholders
          with a margin of safety, while allowing the Bank to take advantage of profitable
          opportunities, support future growth and provide protection against any
          unforeseen losses.
 
 At
          December 31, 2005, stockholders’ equity totaled $56.8 million, an increase of
          $4.9 million from $51.9 million at December 31, 2004. An important source
          of
          capital is earnings retention. Net income of $8.7 million, in 2005, offset
          by
          stock repurchases of $3.9 million was the primary factor contributing to
          the
          increase. Also affecting capital in 2005 was paid in capital in the amount
          of
          $0.4 million resulting from a tax benefit on stock options exercised and
          a
          decrease in other comprehensive income of $0.9 million, consisting of unrealized
          losses on investment securities available-for-sale and directors’ and employees’
retirement plan equity adjustment. The Bank’s Tier 1 Leverage Capital ratio at
          year end 2005 was 8.3% and 8.0% for 2004.
 
 On
          April
          16, 2004, the Company approved a stock repurchase program effective April
          30,
          2004 to replace the Company’s previous stock purchase plan that expired on April
          30, 2004. The stock repurchase program, which will remain in effect until
          April
          30, 2006, allows repurchases by the Company in an aggregate of up to 3%
          of the
          Company’s outstanding shares of common stock over each rolling twelve-month
          period. During 2005, the Bank paid $3.5 million in dividends to the Company
          to
          fund the repurchase of 174,979 shares of the Company’s outstanding common stock.
          During 2004, the Bank paid $1.0 million in dividends to the Company to
          fund the
          repurchase of 123,062 shares of the Company’s outstanding common stock. The
          purpose of the stock repurchase program is to give management the ability
          to
          more effectively manage capital and create liquidity for shareholders who
          want
          to sell their stock. Management believes that the stock repurchase program
          has
          been a prudent use of excess capital.
 
 The
          capital of the Bank historically has been maintained at a level that is
          in
          excess of regulatory guidelines. The policy of annual stock dividends has,
          over
          time, allowed the Bank to match capital and asset growth through retained
          earnings and a managed program of geographic growth.
  40
 
 **ITEM
          7A** - **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 Market
          risk is the risk to a bank’s financial position resulting from adverse changes
          in market rates or prices, such as interest rates, foreign exchange rates
          or
          equity prices. The Bank has no exposure to foreign currency exchange risk
          or any
          specific exposure to commodity price risk. The Bank’s major area of market risk
          exposure is interest rate risk (“IRR”). The Bank’s exposure to IRR can be
          explained, as the potential for change in the Bank’s reported earnings and/or
          the market value of its net worth. Variations in interest rates affect
          earnings
          by changing net interest income and the level of other interest-sensitive
          income
          and operating expenses. Interest rate changes also affect the underlying
          economic value of the Bank’s assets, liabilities and off-balance sheet items.
          These changes arise because the present value of future cash flows, and
          often
          the cash flows themselves, changes with the interest rates. The effects
          of the
          changes in these present values reflect the change in the Bank’s underlying
          economic value and provide a basis for the expected change in future earnings
          related to the interest rate. IRR is inherent in the role of banks as financial
          intermediaries, however a bank with a high IRR level may experience lower
          earnings, impaired liquidity and capital positions, and most likely, a
          greater
          risk of insolvency. Therefore, banks must carefully evaluate IRR to promote
          safety and soundness in their activities.
 
 The
          responsibility for the Bank’s market risk sensitivity management has been
          delegated to the Asset/Liability Committee (“ALCO”). Specifically, ALCO utilizes
          computerized modeling techniques to monitor and attempt to control the
          influence
          that market changes have on rate sensitive assets and rate sensitive
          liabilities.
 
 Market
          risk continues to be a major focal point of regulatory emphasis. In accordance
          with regulation, each bank is required to develop an IRR management program
          depending on its structure, including certain fundamental components, which
          are
          mandatory to ensure IRR management. These elements include appropriate
          board and
          management oversight as well a comprehensive risk management process that
          effectively identifies, measures, monitors and controls risk. Should a
          bank have
          material weaknesses in its risk management process or high exposure relative
          to
          its capital, the bank regulatory agencies will take action to remedy these
          shortcomings. Moreover, the level of a bank’s IRR exposure and the quality of
          its risk management process is a determining factor when evaluating a bank’s
          capital adequacy.
  41
 
 The
          Bank
          utilizes the tabular presentation alternative in complying with quantitative
          and
          qualitative disclosure rules.
 
 The
          following tables summarize the expected maturity, principal repricing,
          principal
          repayment and fair value of the financial instruments that are sensitive
          to
          changes in interest rates.
 
 **Interest
          Rate Sensitivity Analysis at December 31, 2005**
 
 **Expected
                    Maturity/Repricing/Principal Payment****In
                    Thousands**
                
                **Within
                    1 Year**
                
                **1
                    Year to 3 Years**
                
                **3
                    Years to 5 Years**
                
                **After
                    5 Years**
                
                **Total
                    Balance**
                
                **Fair
                    Value****Interest-Sensitive
                    Assets:**Federal
                    funds sold
                
                
                87,185
                
                
                —
                
                
                —
                
                
                —
                
                
                87,185
                
                
                87,185Average
                    interest rate
                
                
                4.00
                %
                
                —
                
                
                —
                
                
                —
                
                
                4.00
                %
                
                —Fixed
                    rate investments
                
                
                12,376
                
                
                21,310
                
                
                9,133
                
                
                5,969
                
                
                48,788
                
                
                48,788Average
                    interest rate
                
                
                5.02
                %
                
                5.66
                %
                
                5.66
                %
                
                6.58
                %
                
                5.61
                %
                
                —Fixed
                    rate loans(1)
                
                
                39,566
                
                
                28,860
                
                
                16,436
                
                
                18,527
                
                
                103,389
                
                
                103,284Average
                    interest rate
                
                
                6.29
                %
                
                7.21
                %
                
                7.55
                %
                
                6.94
                %
                
                6.86
                %
                
                —Variable
                    rate loans(1)
                
                
                160,465
                
                
                45,282
                
                
                35,862
                
                
                111,063
                
                
                352,672
                
                
                354,574Average
                    interest rate
                
                
                8.23
                %
                
                7.51
                %
                
                7.79
                %
                
                7.61
                %
                
                7.90
                %
                
                —Loans
                    held-for-sale
                
                
                4,440
                
                
                —
                
                
                —
                
                
                —
                
                
                4,440
                
                
                4,440Average
                    interest rate
                
                
                6.16
                %
                
                —
                
                
                —
                
                
                —
                
                
                6.16
                %
                
                —**Interest-Sensitive
                    Liabilities:**NOW
                    account deposits(2)
                
                
                22,506
                
                
                8,258
                
                
                5,394
                
                
                49,402
                
                
                85,560
                
                
                72,380Average
                    interest rate
                
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                —Money
                    market deposits(2)
                
                
                37,584
                
                
                6,443
                
                
                5,369
                
                
                57,988
                
                
                107,384
                
                
                92,067Average
                    interest rate
                
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                —Savings
                    deposits(2)
                
                
                27,473
                
                
                10,204
                
                
                7,849
                
                
                32,968
                
                
                78,494
                
                
                68,572Average
                    interest rate
                
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                1.15
                %
                
                —Certificates
                    of deposit
                
                
                110,286
                
                
                5,872
                
                
                1,708
                
                
                41
                
                
                117,907
                
                
                116,342Average
                    interest rate
                
                
                2.61
                %
                
                2.58
                %
                
                3.30
                %
                
                2.50
                %
                
                2.62
                %
                
                —Borrowed
                    funds(3)
                
                
                4,633
                
                
                5,000
                
                
                5,336
                
                
                —
                
                
                14,969
                
                
                14,416Average
                    interest rate
                
                
                4.94
                %
                
                2.67
                %
                
                3.14
                %
                
                —
                
                
                3.54
                %
                
                —**Interest-Sensitive
                    Off-Balance Sheet Items:**Commitments
                    to lend
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                203,101
                
                
                1,523Standby
                    letters of credit
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                14,077
                
                
                141
 
 (1)
                Based
                    upon contractual maturity dates and interest rate
                    repricing.
 (2)
                NOW,
                    money market and savings deposits do not carry contractual maturity
                    dates.
                    The actual maturities of NOW, money market, and savings deposits
                    could
                    vary substantially if future withdrawals differ from the Company’s
                    historical experience.
 (3)
                Excludes
                    interest on fixed rate obligations.
 
 
 At
          December 31, 2005, federal funds sold of $87.2 million with a yield of
          4.00% and
          investments of $12.4 million with a weighted-average, tax equivalent yield
          of
          5.02% were scheduled to mature within one year. In addition, net loans
          (including loans held-for-sale) of $204.5 million with a weighted-average
          yield
          of 7.81% were scheduled to mature or reprice within the same timeframe.
          Overall,
          interest-earning assets scheduled to mature within one year totaled $304.0
          million with a weighted-average, tax-equivalent yield of 6.71%. With respect
          to
          interest-bearing liabilities, based on historical withdrawal patterns,
          NOW
          accounts, money market and savings deposits, of $87.6 million with a
          weighted-average cost of 1.15% were scheduled to mature within one year.
          Certificates of deposit totaling $110.3 million with a weighted-average
          cost of
          2.61% were scheduled to mature in the same timeframe. In addition, borrowed
          funds totaling $4.6 million with a weighted-average cost of 4.94% were
          scheduled
          to mature within one year. Total interest-bearing liabilities scheduled
          to
          mature within one year equaled $202.5 million with a weighted-average cost
          of
          2.03%.
  42
 
 Historical
          withdrawal patterns with respect to interest-bearing and non-interest-bearing
          transaction accounts are not necessarily indicative of future performance
          as the
          volume of cash flows may increase or decrease. Loan information is presented
          based on payment due dates and repricing dates, which may differ materially
          from
          actual results due to prepayments.
 
 The
          Bank
          seeks to control IRR by matching assets and liabilities. One tool used
          to ensure
          market rate return is variable rate loans. Loans totaling $204.5 million
          or
          44.4% of the total loan portfolio at December 31, 2005 (including loans
          held-for-sale) are subject to repricing within one year. Loan maturities
          in the
          after five-year category decreased slightly to $129.6 million at December
          31,
          2005 from $131.4 million at December 31, 2004.
 
 The
          Bank
          is required by FASB 115 to mark to market the Available for Sale investments
          at
          the end of each quarter. Mark to market adjustments resulted in a reduction
          of
          $914,000 in other comprehensive income as reflected in the December 31,
          2005
          consolidated balance sheet. Mark to market adjustments during the year
          ended
          December 31, 2004 resulted in a reduction of $768,000. These adjustments
          were
          the result of fluctuating interest rates.
 
 **ITEM
          8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
 
 In
          response to this Item, the information set forth on pages 47 through 77
          in the
          Annual Report is incorporated herein by reference.
 
 **Financial
          Statements Filed:**
 
 Management’s
                    Report
                Page
                    44Independent
                    Registered Public Accounting Firm’s Reports
                Page
                    45Consolidated
                    Balance Sheets as of December 31, 2005 and 2004
                Page
                    47Consolidated
                    Statements of Operations for years ended December 31, 2005, 2004,
                    and
                    2003
                Page
                    48Consolidated
                    Statements of Stockholders' Equity and Comprehensive Income for
                    years
                    ended December 31, 2005, 2004, and 2003
                Page
                    49Consolidated
                    Statements of Cash Flows for years ended December 31, 2005, 2004,
                    and
                    2003
                Page
                    50Notes
                    to Consolidated Financial Statements
                Page
                    51
  43
 
 **Management’s
          Report**
   **FIRST
          NORTHERN COMMUNITY BANCORP AND SUBSIDIARY**
 **MANAGEMENT’S
          REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**
 
 
 Management
          of First Northern Community Bancorp and subsidiary (the "Company") is
          responsible for establishing and maintaining effective internal control
          over
          financial reporting. Internal control over financial reporting is a process
          designed to provide reasonable assurance regarding the reliability of financial
          reporting and the preparation of financial statements for external purposes
          in
          accordance with U.S. generally accepted accounting principles.
 
 Under
          the
          supervision and with the participation of management, including the principal
          executive officer and principal financial officer, the Company conducted
          an
          evaluation of the effectiveness of internal control over financial reporting
          based on the framework in Internal Control - Integrated Framework issued
          by the
          Committee of Sponsoring Organizations of the Treadway Commission. Based
          on this
          evaluation under the framework in Internal Control - Integrated Framework,
          management of the Company has concluded the Company maintained effective
          internal control over financial reporting, as such term is defined in Securities
          Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2005.
 
 Internal
          control over financial reporting cannot provide absolute assurance of achieving
          financial reporting objectives because of its inherent limitations. Internal
          control over financial reporting is a process that involves human diligence
          and
          compliance and is subject to lapses in judgment and breakdowns resulting
          from
          human failures. Internal control over financial reporting can also be
          circumvented by collusion or improper management override. Because of such
          limitations, there is a risk that material misstatements may not be prevented
          or
          detected on a timely basis by internal control over financial reporting.
          However, these inherent limitations are known features of the financial
          reporting process. Therefore, it is possible to design into the process
          safeguards to reduce, though not eliminate, this risk.
 
 Management
          is also responsible for the preparation and fair presentation of the
          consolidated financial statements and other financial information contained
          in
          this report. The accompanying consolidated financial statements were prepared
          in
          conformity with U.S. generally accepted accounting principles and include,
          as
          necessary, best estimates and judgments by management. KPMG LLP, an independent
          registered public accounting firm, has audited the Company’s consolidated
          financial statements as of and for the year ended December 31, 2005, and
          the
          Company’s assertion as to the effectiveness of internal control over financial
          reporting as of December 31, 2005, as stated in their reports, which are
          included herein.
 
  /s/
                    Owen J. OnsumOwen
                    J. OnsumPresident/Chief
                    Executive Officer/Director(Principal
                    Executive Officer)/s/
                    Louise A. WalkerLouise
                    A. WalkerSenior
                    Executive Vice President/Chief Financial Officer(Principal
                    Financial Officer)
  March
          16,
          2006
  44
  **Report
          of Independent Registered Public Accounting Firm**
  
 The
          Board
          of Directors and Stockholders
 First
          Northern Community Bancorp:
 
 
 We
          have
          audited management’s assessment, included in the accompanying Management’s
          Report on Internal Control over Financial Reporting, that First Northern
          Community Bancorp and subsidiary (the Company) maintained effective internal
          control over financial reporting as of December 31, 2005, based on criteria
          established in *Internal
          Control—Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO). ** The
          Company’s management is responsible for maintaining effective internal control
          over financial reporting and for its assessment of the effectiveness of
          internal
          control over financial reporting. Our responsibility is to express an opinion
          on
          management's assessment and an opinion on the effectiveness of the Company’s
          internal control over financial reporting based on our audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether effective
          internal control over financial reporting was maintained in all material
          respects. Our audit included obtaining an understanding of internal control
          over
          financial reporting, evaluating management’s assessment, testing and evaluating
          the design and operating effectiveness of internal control, and performing
          such
          other procedures as we considered necessary in the circumstances. We believe
          that our audit provides a reasonable basis for our opinion.
 
 A
          company’s internal control over financial reporting is a process designed to
          provide reasonable assurance regarding the reliability of financial reporting
          and the preparation of financial statements for external purposes in accordance
          with generally accepted accounting principles. A company’s internal control over
          financial reporting includes those policies and procedures that (1) pertain
          to the maintenance of records that, in reasonable detail, accurately and
          fairly
          reflect the transactions and dispositions of the assets of the company;
          (2) provide reasonable assurance that transactions are recorded as
          necessary to permit preparation of financial statements in accordance with
          generally accepted accounting principles, and that receipts and expenditures
          of
          the company are being made only in accordance with authorizations of management
          and directors of the company; and (3) provide reasonable assurance regarding
          prevention or timely detection of unauthorized acquisition, use, or disposition
          of the company’s assets that could have a material effect on the financial
          statements.
  Because
          of its inherent limitations, internal control over financial reporting
          may not
          prevent or detect misstatements. Also, projections of any evaluation of
          effectiveness to future periods are subject to the risk that controls may
          become
          inadequate because of changes in conditions, or that the degree of compliance
          with the policies or procedures may deteriorate.
 
 In
          our
          opinion, management's assessment that First Northern Community Bancorp
          and
          subsidiary maintained effective internal control over financial reporting
          as of
          December 31, 2005, is fairly stated, in all material respects, based on
          criteria established in *Internal
          Control—Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO). ** Also,
          in
          our opinion, First Northern Community Bancorp and subsidiary maintained,
          in all
          material respects, effective internal control over financial reporting
          as of
          December 31, 2005, based on criteria
          established in *Internal
          Control—Integrated Framework* issued
          by the Committee of
          Sponsoring Organizations of the Treadway Commission (COSO) .
 
 We
          also
          have audited, in accordance with the standards of the Public Company Accounting
          Oversight Board (United States), the consolidated balance sheets of First
          Northern Community Bancorp and subsidiary as of December 31, 2005 and 2004,
          and the related consolidated statements of operations, stockholders’ equity and
          comprehensive income, and cash flows for each of the years in the three-year
          period ended December 31, 2005, and our report dated March 15, 2006,
          expressed an unqualified opinion on those consolidated financial
          statements.
   /s/ **KPMG
          LLP**
 
 Sacramento, California
 March 15,
          2006
  45
  **Report
          of Independent Registered Public Accounting Firm**
  
 The
          Board
          of Directors and Stockholders
 First
          Northern Community Bancorp:
 
 
 We
          have
          audited the accompanying consolidated balance sheets of First Northern
          Community
          Bancorp and subsidiary (the Company) as of December 31, 2005 and 2004, and
          the related consolidated statements of operations, stockholders’ equity and
          comprehensive income, and cash flows for each of the years in the three-year
          period ended December 31, 2005. These consolidated financial statements are
          the responsibility of the Company’s management. Our responsibility is to express
          an opinion on these consolidated financial statements based on our
          audits.
  We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
  In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of First Northern Community
          Bancorp and subsidiary as of December 31, 2005 and 2004, and the results of
          their operations and their cash flows for each of the years in the three-year
          period ended December 31, 2005, in conformity with U.S. generally accepted
          accounting principles.
  As
          discussed in Note 1 to the consolidated financial statements, the Company
          adopted the provisions of Statement of Financial Accounting Standards
          No. 148, *Accounting
          for Stock-Based Compensation - Transition and Disclosure, an amendment of
          FASB Statement No. 123* ,
          under
          the prospective method of adoption as of January 1, 2003.
 We
          also
          have audited, in accordance with the standards of the Public Company Accounting
          Oversight Board (United States), the effectiveness of First Northern Community
          Bancorp and subsidiary’s internal control over financial reporting as of
          December 31, 2005, based on criteria established in *Internal
          Control—Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO),
          and our report dated March 15, 2006, expressed an unqualified opinion on
          management’s assessment of, and the effective operation of, internal control
          over financial reporting.
   
  /s/ **KPMG
          LLP**
 
 Sacramento, California
 March 15,
          2006
  46
 **FIRST
                      NORTHERN COMMUNITY BANCORP****AND
                      SUBSIDIARY**Consolidated
                      Balance SheetsDecember
                      31, 2005 and 2004(in
                      thousands, except share amounts)**2005**
                  
                  **2004****Assets**Cash
                      and due from banks
                  
                  $
                  35,507
                  
                  $
                  25,399Federal
                      funds sold
                  
                  
                  87,185
                  
                  
                  91,305Investment
                      securities - available-for-sale (includes securities pledged
                      to creditors
                      with the right to sell or repledge of $3,963 and $4,095, respectively)
                  
                  
                  48,788
                  
                  
                  55,154Loans,
                      net
                  
                  
                  456,061
                  
                  
                  429,702Loans
                      held-for-sale
                  
                  
                  4,440
                  
                  
                  3,719Premises
                      and equipment, net
                  
                  
                  8,311
                  
                  
                  7,435Other
                      real estate owned
                  
                  
                  268
                  
                  
                  —Other
                      assets
                  
                  
                  20,087
                  
                  
                  16,789Total
                      assets
                  
                  $
                  660,647
                  
                  $
                  629,503**Liabilities
                      and Stockholders' Equity**Deposits:Demand
                  
                  $
                  192,436
                  
                  $
                  169,266Interest-bearing
                      transaction deposits
                  
                  
                  85,560
                  
                  
                  65,008Savings
                      and MMDAs
                  
                  
                  185,878
                  
                  
                  193,658Time,
                      under $100,000
                  
                  
                  51,921
                  
                  
                  57,468Time,
                      $100,000 and over
                  
                  
                  65,986
                  
                  
                  71,786Total
                      Deposits
                  
                  
                  581,781
                  
                  
                  557,186FHLB
                      advances and other borrowings
                  
                  
                  14,969
                  
                  
                  15,456
 Accrued
                      interest payable and other liabilities
                  
                  
                  7,095
                  
                  
                  4,960Total
                      Liabilities
                  
                  
                  603,845
                  
                  
                  577,602Stockholders'
                      Equity:Common
                      stock, no par value; 16,000,000 shares authorized; 7,558,759
                      and 7,202,334
                      shares issued and outstanding in 2005 and 2004,
                      respectively;
                  
                  
                  36,100
                  
                  
                  32,848Additional
                      paid-in capital
                  
                  
                  977
                  
                  
                  977Retained
                      earnings
                  
                  
                  19,606
                  
                  
                  17,091Accumulated
                      other comprehensive income, net
                  
                  
                  119
                  
                  
                  985Total
                      stockholders’ equity
                  
                  
                  56,802
                  
                  
                  51,901Commitments
                      and contingenciesTotal
                      liabilities and stockholders’ equity
                  
                  $
                  660,647
                  
                  $
                  629,503
 
 See
          accompanying notes to consolidated financial statements.
  47
  **FIRST
                    NORTHERN COMMUNITY BANCORP****AND
                    SUBSIDIARY**Consolidated
                    Statements of OperationsYears
                    Ended December 31, 2005, 2004 and 2003
                  (in
                    thousands, except share amounts)**2005**
                
                **2004**
                
                **2003**Interest
                    income:Interest
                    and fees on loans
                
                $
                35,838
                
                $
                27,873
                
                $
                26,538Federal
                    funds sold
                
                
                2,587
                
                
                972
                
                
                275Investment
                    securities:Taxable
                
                
                1,915
                
                
                2,164
                
                
                2,820Non-taxable
                
                
                562
                
                
                610
                
                
                693Total
                    interest income
                
                
                40,902
                
                
                31,619
                
                
                30,326Interest
                    expense:Time
                    deposits $100,000 and over
                
                
                1,452
                
                
                1,122
                
                
                1,027Other
                    deposits
                
                
                3,782
                
                
                1,863
                
                
                1,815Other
                    borrowings
                
                
                495
                
                
                441
                
                
                267Total
                    interest expense
                
                
                5,729
                
                
                3,426
                
                
                3,109Net
                    interest income
                
                
                35,173
                
                
                28,193
                
                
                27,217Provision
                    for loan losses
                
                
                600
                
                
                207
                
                
                2,153Net
                    interest income after provisionfor
                    loan losses
                
                
                34,573
                
                
                27,986
                
                
                25,064Other
                    operating income:Service
                    charges on deposit accounts
                
                
                2,400
                
                
                2,203
                
                
                1,772Net
                    realized gains on available-for-sale securities
                
                
                15
                
                
                3
                
                
                793Net
                    realized gains on loans held-for-sale
                
                
                763
                
                
                742
                
                
                2,391Net
                    realized gains on other real estate owned
                
                
                323
                
                
                32
                
                
                59Other
                    income
                
                
                2,219
                
                
                2,234
                
                
                2,145Total
                    other operating income
                
                
                5,720
                
                
                5,214
                
                
                7,160Other
                    operating expenses:Salaries
                    and employee benefits
                
                
                15,916
                
                
                13,545
                
                
                13,760Occupancy
                    and equipment
                
                
                3,236
                
                
                3,042
                
                
                2,796Data
                    processing
                
                
                1,209
                
                
                1,079
                
                
                1,040Stationery
                    and supplies
                
                
                481
                
                
                486
                
                
                521Advertising
                
                
                736
                
                
                416
                
                
                409Directors
                    fees
                
                
                128
                
                
                127
                
                
                120Other
                
                
                5,107
                
                
                4,248
                
                
                4,222Total
                    other operating expenses
                
                
                26,813
                
                
                22,943
                
                
                22,868Income
                    before income tax expense
                
                
                13,480
                
                
                10,257
                
                
                9,356Provision
                    for income tax expense
                
                
                4,792
                
                
                3,550
                
                
                3,245Net
                    income
                
                $
                8,688
                
                $
                6,707
                
                $
                6,111Basic
                    income per share
                
                $
                1.08
                
                $
                0.79
                
                $
                0.75Diluted
                    income per share
                
                $
                1.04
                
                $
                0.77
                
                $
                0.74
 
 See
          accompanying notes to consolidated financial statements.
  48
  **FIRST
                    NORTHERN COMMUNITY BANCORP****AND
                    SUBSIDIARY**Consolidated
                    Statements of Stockholders' Equity and Comprehensive
                    IncomeYears
                    Ended December 31, 2005, 2004 and 2003(in
                    thousands, except share amounts)**Accumulated****Additional**
                
                
                
                **Other****Common
                    Stock**
                
                **Comprehensive**
                
                **Paid-in**
                
                **Retained**
                
                **Comprehensive****Description**
                
                **Shares**
                
                **Amounts**
                
                **Income**
                
                **Capital**
                
                **Earnings**
                
                **Income**
                
                **Total**Balance
                    at December 31, 2002
                
                
                6,475,572
                
                $
                24,527
                
                
                
                
                $
                977
                
                $
                14,581
                
                $
                3,357
                
                $
                43,442Comprehensive
                    income:Net
                    income
                
                
                
                
                
                
                
                $
                6,111
                
                
                
                
                
                6,111
                
                
                
                
                
                6,111Other
                    comprehensive loss:Unrealized
                    holding losses arising during the current period, net of tax
                    effect of
                    $1,309
                
                
                
                
                
                
                
                
                (1,962
                )Reclassification
                    adjustment due to losses realized, net of tax effect of
                    $317
                
                
                
                
                
                
                
                
                474Total
                    other comprehensive loss, net of tax effect of $992
                
                
                
                
                
                
                
                
                (1,488
                )
                
                
                
                
                
                
                
                (1,488
                )
                
                (1,488
                )Comprehensive
                    income
                
                
                
                
                
                
                
                $
                4,6236%
                    stock dividend
                
                
                387,402
                
                
                4,746
                
                
                
                
                
                
                
                
                (4,746
                )
                
                
                
                
                —Cash
                    in lieu of fractional shares
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (13
                )
                
                
                
                
                (13
                )Stock-based
                    compensation and related tax benefits
                
                
                
                
                
                182
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                182Common
                    shares issued, including tax benefits
                
                
                107,190
                
                
                418
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                418Stock
                    repurchase and retirement
                
                
                (135,650
                )
                
                (1,680
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,680
                )Balance
                    at December 31, 2003
                
                
                6,834,514
                
                $
                28,193
                
                
                
                
                $
                977
                
                $
                15,933
                
                $
                1,869
                
                $
                46,972Comprehensive
                    income:Net
                    income
                
                
                
                
                
                
                
                $
                6,707
                
                
                
                
                $
                6,707
                
                
                
                
                $
                6,707Other
                    comprehensive loss:Unrealized
                    holding losses arising during the current period, net of tax
                    effect of
                    $513
                
                
                
                
                
                
                
                
                (770
                )Reclassification
                    adjustment due to gains realized, net of tax effect of $1
                
                
                
                
                
                
                
                
                2Directors’
                    and officers’ retirement plan equity adjustments
                
                
                
                
                
                
                
                
                (116
                )Total
                    other comprehensive loss, net of tax effect of $512
                
                
                
                
                
                
                
                
                (884
                )
                
                
                
                
                
                
                
                (884
                )
                
                (884
                )Comprehensive
                    income
                
                
                
                
                
                
                
                $
                5,8236%
                    stock dividend
                
                
                410,214
                
                
                5,537
                
                
                
                
                
                
                
                
                (5,537
                )
                
                
                
                
                —Cash
                    in lieu of fractional shares
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (12
                )
                
                
                
                
                (12
                )Stock-based
                    compensation and related tax benefits
                
                
                
                
                
                360
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                360Common
                    shares issued, including tax benefits
                
                
                80,668
                
                
                398
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                398Stock
                    repurchase and retirement
                
                
                (123,062
                )
                
                (1,640
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,640
                )Balance
                    at December 31, 2004
                
                
                7,202,334
                
                $
                32,848
                
                
                
                
                $
                977
                
                $
                17,091
                
                $
                985
                
                $
                51,901Comprehensive
                    income:Net
                    income
                
                
                
                
                
                
                
                $
                8,688
                
                
                
                
                $
                8,688
                
                
                
                
                $
                8,688Other
                    comprehensive loss:Unrealized
                    holding losses arising during the current period, net of tax
                    effect of
                    $615
                
                
                
                
                
                
                
                
                (923
                )Reclassification
                    adjustment due to gains realized, net of tax effect of $6
                
                
                
                
                
                
                
                
                9Directors’
                    and officers’ retirement plan equity adjustments
                
                
                
                
                
                
                
                
                48Total
                    other comprehensive loss, net of tax effect of $609
                
                
                
                
                
                
                
                
                (866
                )
                
                
                
                
                
                
                
                (866
                )
                
                (866
                )Comprehensive
                    income
                
                
                
                
                
                
                
                $
                7,8226%
                    stock dividend
                
                
                432,132
                
                
                6,158
                
                
                
                
                
                
                
                
                (6,158
                )
                
                
                
                
                —Cash
                    in lieu of fractional shares
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (15
                )
                
                
                
                
                (15
                )Stock-based
                    compensation and related tax benefits
                
                
                
                
                
                554
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                554Common
                    shares issued, including tax benefits
                
                
                99,262
                
                
                394
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                394Stock
                    repurchase and retirement
                
                
                (174,969
                )
                
                (3,854
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,854
                )Balance
                    at December 31, 2005
                
                
                7,558,759
                
                $
                36,100
                
                
                
                
                $
                977
                
                $
                19,606
                
                $
                119
                
                $
                56,802
  See
          accompanying notes to consolidated financial statements.
   49
  **FIRST
                    NORTHERN COMMUNITY BANCORP****AND
                    SUBSIDIARY**Consolidated
                    Statements of Cash FlowsYears
                    Ended December 31, 2005, 2004 and 2003(in
                    thousands, except share amounts)**2005**
                
                **2004**
                
                **2003**Cash
                    flows from operating activities:Net
                    income
                
                $
                8,688
                
                $
                6,707
                
                $
                6,111Adjustments
                    to reconcile net income to net cash provided byoperating
                    activities:Provision
                    for loan losses
                
                
                600
                
                
                207
                
                
                2,153Depreciation
                    and amortization
                
                
                1,016
                
                
                1,283
                
                
                1,262Accretion
                    and amortization, net
                
                
                25
                
                
                60
                
                
                91Net
                    realized gains on available-for-sale securities
                
                
                (15
                )
                
                (3
                )
                
                (793
                )Net
                    realized gains on loans held-for-sale
                
                
                (763
                )
                
                (742
                )
                
                (2,391
                )Gain
                    on sale of OREO
                
                
                (323
                )
                
                (32
                )
                
                (59
                )Gain
                    on sale of bank premises and equipment
                
                
                (5
                )
                
                —
                
                
                —(Benefit
                    from) provision for deferred income taxes
                
                
                (666
                )
                
                (625
                )
                
                610Proceeds
                    from sales of loans held-for-sale
                
                
                62,428
                
                
                58,387
                
                
                188,879Originations
                    of loans held-for-sale
                
                
                (62,386
                )
                
                (56,694
                )
                
                (154,187
                )(Decrease)
                    increase in deferred loan origination fees and costs, net
                
                
                (372
                )
                
                325
                
                
                (8
                )(Increase)
                    decrease in accrued interest receivable and other assets
                
                
                (1,421
                )
                
                626
                
                
                (1,175
                )Increase
                    (decrease) in accrued interest payable and other
                    liabilities
                
                
                2,135
                
                
                913
                
                
                (1,087
                )Net
                    cash provided by operating activities
                
                
                8,941
                
                
                10,412
                
                
                39,406Cash
                    flows from investing activities:Proceeds
                    from maturities of available-for-sale securities
                
                
                10,755
                
                
                8,715
                
                
                10,593Proceeds
                    from sales of available-for-sale securities
                
                
                405
                
                
                —
                
                
                5,002Principal
                    repayments on available-for-sale securities
                
                
                655
                
                
                836
                
                
                2,730Purchase
                    of available-for-sale securities
                
                
                (6,982
                )
                
                (15,807
                )
                
                (379
                )Net
                    increase in loans
                
                
                (26,855
                )
                
                (54,464
                )
                
                (58,595
                )Purchases
                    of bank premises and equipment
                
                
                (1,892
                )
                
                (745
                )
                
                (807
                )Proceeds
                    from bank premises and equipment
                
                
                5
                
                
                —
                
                
                —Proceeds
                    from sale of other real estate owned
                
                
                323
                
                
                32
                
                
                59Net
                    cash used in investing activities
                
                
                (23,586
                )
                
                (61,433
                )
                
                (41,397
                )Cash
                    flows from financing activities:Net
                    increase in deposits
                
                
                24,595
                
                
                58,337
                
                
                56,608Net
                    (decrease) increase in FHLB advances and other borrowings
                
                
                (487
                )
                
                5,883
                
                
                4,514Cash
                    dividends paid in lieu of fractional shares
                
                
                (15
                )
                
                (12
                )
                
                (13
                )Common
                    stock issued
                
                
                394
                
                
                398
                
                
                418Repurchase
                    of common stock
                
                
                (3,854
                )
                
                (1,640
                )
                
                (1,680
                )Net
                    cash provided by financing activities
                
                
                20,633
                
                
                62,966
                
                
                59,847Net
                    change in cash and cash equivalents
                
                
                5,988
                
                
                11,945
                
                
                57,856Cash
                    and cash equivalents at beginning of year
                
                
                116,704
                
                
                104,759
                
                
                46,903Cash
                    and cash equivalents at end of year
                
                $
                122,692
                
                $
                116,704
                
                $
                104,759
 See
            accompanying notes to consolidated financial statements.
  50
 **FIRST
          NORTHERN COMMUNITY BANCORP**
 **AND
          SUBSIDIARY**
 Notes
          to
          Consolidated Financial Statements
 Years
          Ended December 31, 2005, 2004 and 2003
 (in
          thousands, except share amounts)
 
  **(1)**
                **Summary
                    of Significant Accounting
                    Policies**
  First
          Northern Community Bancorp (the “Company”) is a bank holding company whose only
          subsidiary, First Northern Bank of Dixon (the “Bank”), a California state
          chartered bank, conducts general banking activities, including collecting
          deposits and originating loans, and serves Solano, Yolo, Sacramento, Placer
          and
          El Dorado Counties. All intercompany transactions between the Company and
          the
          Bank have been eliminated in consolidation.
  The
          accounting and reporting policies of the Company conform with accounting
          principles generally accepted in the United States of America. In preparing
          the
          consolidated financial statements, management is required to make estimates
          and
          assumptions that affect the reported amounts of assets and liabilities
          as of the
          date of the balance sheet and revenues and expenses for the period. Actual
          results could differ from those estimates applied in the preparation of
          the
          accompanying consolidated financial statements. For the Bank the significant
          accounting estimate is the allowance for loan losses. *See* footnote
          (1)(e). A summary of the significant accounting policies applied in the
          preparation of the accompanying consolidated financial statements
          follows.
  ***(a)***
                ***Cash
                    Equivalents***
  For
          purposes of the consolidated statements of cash flows, the Company considers
          due
          from banks, federal funds sold for one-day periods and short-term bankers
          acceptances to be cash equivalents.
  ***(b)***
                ***Investment
                    Securities***
  Investment
          securities consist of U.S. Treasury securities, U.S. Agency securities,
          obligations of states and political subdivisions, obligations of U.S.
          Corporations, mortgage backed securities and other securities. At the time
          of
          purchase of a security the Company designates the security as held-to-maturity
          or available-for-sale, based on its investment objectives, operational
          needs and
          intent to hold. The Company does not purchase securities with the intent
          to
          engage in trading activity.
  Held-to-maturity
          securities are recorded at amortized cost, adjusted for amortization or
          accretion of premiums or discounts. Available-for-sale securities are recorded
          at fair value with unrealized holding gains and losses, net of the related
          tax
          effect, reported as a separate component of stockholders’ equity until
          realized.
  A
          decline
          in the market value of any available-for-sale or held-to-maturity security
          below
          cost that is deemed other than temporary results in a charge to earnings
          and the
          corresponding establishment of a new cost basis for the security. Premiums
          and
          discounts are amortized or accreted over the life of the related
          held-to-maturity or available-for-sale security as an adjustment to yield
          using
          the effective interest method. Dividend and interest income are recognized
          when
          earned. Realized gains and losses for securities classified as
          available-for-sale and held-to-maturity are included in earnings and are
          derived
          using the specific identification method for determining the cost of securities
          sold.
  Derivative
          instruments, including certain derivative instruments embedded in other
          contracts, (collectively referred to as derivatives) and hedging activities,
          are
          recognized as either assets or liabilities in the statement of financial
          position and measured at fair value. The Company did not hold any derivatives
          at
          December 31, 2005 and 2004.
   51
  
 ***(c)***
                ***Loans***
  Loans
          are
          reported at the principal amount outstanding, net of deferred loan fees
          and the
          allowance for loan losses. A loan is considered impaired when, based on
          current
          information and events; it is probable that the Company will be unable
          to
          collect all amounts due according to the contractual terms of the loan
          agreement, including scheduled interest payments. For a loan that has been
          restructured, the contractual terms of the loan agreement refer to the
          contractual terms specified by the original loan agreement, not the contractual
          terms specified by the restructuring agreement. An impaired loan is measured
          based upon the present value of future cash flows discounted at the loan’s
          effective rate, the loan’s observable market price, or the fair value of
          collateral if the loan is collateral dependent. Interest on impaired loans
          is
          recognized on a cash basis. If the measurement of the impaired loan is
          less than
          the recorded investment in the loan, an impairment is recognized by a charge
          to
          the allowance for loan losses.
  Unearned
          discount on installment loans is recognized as income over the terms of
          the
          loans by the interest method. Interest on other loans is calculated by
          using the
          simple interest method on the daily balance of the principal amount
          outstanding.
  Loan
          fees
          net of certain direct costs of origination, which represent an adjustment
          to
          interest yield are deferred and amortized over the contractual term of
          the loan
          using the interest method.
  Loans
          on
          which the accrual of interest has been discontinued are designated as
          non-accrual loans. Accrual of interest on loans is discontinued either
          when
          reasonable doubt exists as to the full and timely collection of interest
          or
          principal or when a loan becomes contractually past due by ninety days
          or more
          with respect to interest or principal. When a loan is placed on non-accrual
          status, all interest previously accrued but not collected is reversed against
          current period interest income. Interest accruals are resumed on such loans
          only
          when they are brought fully current with respect to interest and principal
          and
          when, in the judgment of management, the loans are estimated to be fully
          collectible as to both principal and interest. Restructured loans are loans
          on
          which concessions in terms have been granted because of the borrowers’ financial
          difficulties. Interest is generally accrued on such loans in accordance
          with the
          new terms.
  ***(d)***
                ***Loans
                    Held-for-Sale***
  Loans
          originated and held-for-sale are carried at the lower of cost or estimated
          market value in the aggregate. Net unrealized losses are recognized through
          a
          valuation allowance by charges to income.
  ***(e)***
                ***Allowance
                    for Loan Losses***
  The
          allowance for loan losses is established through a provision charged to
          expense.
          Loans are charged off against the allowance for loan losses when management
          believes that the collectibility of the principal is unlikely. The allowance
          is
          an amount that management believes will be adequate to absorb losses inherent
          in
          existing loans, standby letters of credit, overdrafts and commitments to
          extend
          credit based on evaluations of collectibility and prior loss experience.
          The
          evaluations take into consideration such factors as changes in the nature
          and
          volume of the portfolio, overall portfolio quality, loan concentrations,
          specific problem loans, commitments, and current and anticipated economic
          conditions that may affect the borrowers’ ability to pay. While management uses
          these evaluations to recognize the provision for loan losses, future provisions
          may be necessary based on changes in the factors used in the
          evaluations.
  Material
          estimates relating to the determination of the allowance for loan losses
          are
          particularly susceptible to significant change in the near term. Management
          believes that the allowance for loan losses is adequate. While management
          uses
          available information to recognize losses on loans, future additions to
          the
          allowance may be necessary based on changes in economic conditions. In
          addition,
          the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of its
          examination process, periodically reviews the Bank’s allowance for loan losses.
          The FDIC may require the Bank to recognize additions to the allowance based
          on
          their judgment about information available to them at the time of their
          examination.
  52
  ***(f)***
                ***Premises
                    and Equipment***
  Premises
          and equipment are stated at cost, less accumulated depreciation. Depreciation
          is
          computed substantially by the straight-line method over the estimated useful
          lives of the related assets. Leasehold improvements are depreciated over
          the
          estimated useful lives of the improvements or the terms of the related
          leases,
          whichever is shorter. The useful lives used in computing deprecation are
          as
          follows:
  Buildings
                    and improvements
                15
                    to 50 yearsFurniture
                    and equipment
                3
                    to 10 years
 
 ***(g)***
                ***Other
                    Real Estate Owned***
  Other
          real estate acquired by foreclosure, is carried at the lower of the recorded
          investment in the property or its fair value less estimated selling costs.
          Prior
          to foreclosure, the value of the underlying loan is written down to the
          fair
          value of the real estate to be acquired by a charge to the allowance for
          loan
          losses, if necessary. Fair value of other real estate owned is generally
          determined based on an appraisal of the property. Any subsequent operating
          expenses or income, reduction in estimated values and gains or losses on
          disposition of such properties are included in other operating
          expenses.
  Revenue
          recognition on the disposition of real estate is dependent upon the transaction
          meeting certain criteria relating to the nature of the property sold and
          the
          terms of the sale. Under certain circumstances, revenue recognition may
          be
          deferred until these criteria are met.
  ***(h)***
                ***Impairment
                    of Long-Lived Assets and Long-Lived Assets to Be Disposed
                    Of***
  Long-lived
          assets and certain identifiable intangibles are reviewed for impairment
          whenever
          events or changes in circumstances indicate that the carrying amount of
          an asset
          may not be recoverable. Recoverability of assets to be held and used is
          measured
          by a comparison of the carrying amount of an asset to future net cash flows
          expected to be generated by the asset. If such assets are considered to
          be
          impaired, the impairment to be recognized is measured by the amount by
          which the
          carrying amount of the assets exceeds the fair value of the assets. Assets
          to be
          disposed of are reported at the lower of the carrying amount or fair value
          less
          costs to sell.
  ***(i)***
                ***Gain
                    or Loss on Sale of Loans and Servicing
                    Rights***
  Retained
          interests in loans sold are measured by allocating the previous carrying
          amount
          of the transferred assets between the loans sold and retained interests,
          if any,
          based on their relative fair value at the date of transfer. Fair values
          are
          estimated using discounted cash flows based on a current market interest
          rate.
 
 A
          sale is
          recognized when the transaction closes and the proceeds are other than
          beneficial interests in the assets sold. A gain or loss is recognized to
          the
          extent that the sales proceeds and the fair value of the servicing asset
          exceed
          or are less than the book value of the loan. Additionally, a normal cost
          for
          servicing the loan is considered in the determination of the gain or
          loss.
  When
          servicing rights are sold, a gain or loss is recognized at the closing
          date to
          the extent that the sales proceeds, less costs to complete the sale, exceed
          or
          are less than the carrying value of the servicing rights held.
  Transfers
          and servicing of financial assets and extinguishments of liabilities are
          accounted for and reported based on consistent application of a
          financial-components approach that focuses on control. Transfers of financial
          assets that are sales are distinguished from transfers that are secured
          borrowings. Retained interests (mortgage servicing rights) in loans sold
          are
          measured by allocating the previous carrying amount of the transferred
          assets
          between the loans sold and retained interest, if any, based on their relative
          fair value at the date of transfer. Fair values are estimated using discounted
          cash flows based on a current market interest rate.
 
 The
          Company recognizes a gain and a related asset for the fair value of the
          rights
          to service loans for others when loans are sold. The Company sold substantially
          all of its conforming long-term residential mortgage loans originated during
          the
          years ended December 31, 2005, 2004 and 2003 for cash proceeds equal to
          the fair
          value of the loans.
  53
 
 The
          recorded value of mortgage servicing rights is included in other assets,
          and is
          amortized in proportion to, and over the period of, estimated net servicing
          revenues. The Company assesses capitalized mortgage servicing rights for
          impairment based upon the fair value of those rights at each reporting
          date. For
          purposes of measuring impairment, the rights are stratified based upon
          the
          product type, term and interest rates. Fair value is determined by discounting
          estimated net future cash flows from mortgage servicing activities using
          discount rates that approximate current market rates and estimated prepayment
          rates, among other assumptions. The amount of impairment recognized, if
          any, is
          the amount by which the capitalized mortgage servicing rights for a stratum
          exceeds their fair value. Impairment, if any, is recognized through a valuation
          allowance for each individual stratum.
 
 The
          Company had mortgage loans held-for-sale of $4,440 and $3,719 at December
          31,
          2005 and 2004, respectively. At December 31, 2005 and 2004, the Company
          serviced
          real estate mortgage loans for others of $112,743 and $105,183, respectively.
 
 Mortgage
          servicing rights as of December 31, 2005 were $973. The balance as of December
          31, 2004 was $787.
 
 **(j)**
                **Income
                    Taxes**
  The
          Company accounts for income taxes under the asset and liability method.
          Under
          the asset and liability method, deferred tax assets and liabilities are
          recognized for the future tax consequences attributable to differences
          between
          the financial statement carrying amounts of existing assets and liabilities
          and
          their respective tax bases and operating loss and tax credit carry forwards.
          Deferred tax assets and liabilities are measured using enacted tax rates
          expected to apply to taxable income in the years in which those temporary
          differences are expected to be recovered or settled. The effect on deferred
          tax
          assets and liabilities of a change in tax rates is recognized in income
          in the
          period that includes the enactment date.
  On
          July
          15, 2002, the Bank made a $2,355 equity investment in a partnership, which
          owns
          low-income affordable housing projects that generate tax benefits in the
          form of
          federal and state housing tax credits. On December 31, 2004, the Bank
          transferred the amortized cost of the equity investment to a similar equity
          investment partnership which owns low income affordable housing projects
          that
          generate tax benefits in the form of federal and state tax credits. As
          a limited
          partner investor in this partnership, the Company receives tax benefits
          in the
          form of tax deductions from partnership operating losses and federal and
          state
          income tax credits. The federal and state income tax credits are earned
          over a
          10-year period as a result of the investment property meeting certain criteria
          and are subject to recapture for non-compliance with such criteria over
          a
          15-year period. The expected benefit resulting from the low-income housing
          tax
          credits is recognized in the period for which the tax benefit is recognized
          in
          the Company’s consolidated tax returns. This investment is accounted for using
          the effective yield method and is recorded in other assets on the balance
          sheet.
          Under the effective yield method, the Company recognizes tax credits as
          they are
          allocated and amortizes the initial cost of the investment to provide a
          constant
          effective yield over the period that tax credits are allocated to the Company.
          The effective yield is the internal rate of return on the investment, based
          on
          the cost of the investment and the guaranteed tax credits allocated to
          the
          Company. Any expected residual value of the investment was excluded from
          the
          effective yield calculation. Cash received from operations of the limited
          partnership or sale of the property, if any, will be included in earnings
          when
          realized or realizable.
  54
 
 ***(k)***
                ***Stock
                    Option Plan***
  During
          the first quarter of fiscal 2003, the Company adopted the fair value recognition
          provisions of Financial Accounting Standards Board (“FASB”) Statement No. 148, *Accounting
          for Stock-Based* *Compensation-Transition
          and Disclosure* *,
          an
          amendment of FASB Statement No. 123* ,
          for
          stock-based employee compensation, effective as of the beginning of the
          fiscal
          year. Under the prospective method of adoption selected by the Company,
          stock-based employee compensation recognized for all stock options granted
          after
          January 1, 2003 is based on the fair value recognition provisions of Statement
          123. For stock options issued prior to January 1, 2003, the Company is
          using the
          intrinsic value method, under which compensation expense is recorded on
          the date
          of grant only if the current market price of the underlying stock exceeds
          the
          exercise price. The following table illustrates the effect on net income
          and
          earnings per share as if the fair value based method had been applied to
          all
          outstanding and unvested awards in each period.
  The
          following table presents basic and diluted EPS for the years ended December
          31,
          2005, 2004 and 2003, respectively:
  **2005**
                
                **2004**
                
                **2003**Net
                    income as reported
                
                $
                8,688
                
                $
                6,707
                
                $
                6,111Add:
                    Stock-based employee compensation included in reported net income,
                    net of
                    related tax effects
                
                
                286
                
                
                204
                
                
                109Deduct:
                    Total stock-based employee compensation expense determined under
                    fair
                    value based method for all awards, net of related tax
                    effects
                
                
                (367
                )
                
                (363
                )
                
                (238
                )Net
                    income Pro forma under SFAS No. 123
                
                $
                8,607
                
                $
                6,548
                
                $
                5,982Basic
                    earnings per share:As
                    reported
                
                $
                1.08
                
                $
                0.79
                
                $
                0.75Pro
                    forma under SFAS No. 123
                
                $
                1.07
                
                $
                0.77
                
                $
                0.74Diluted
                    earnings per share:As
                    reported
                
                $
                1.04
                
                $
                0.77
                
                $
                0.74Pro
                    forma under SFAS No. 123
                
                $
                1.03
                
                $
                0.75
                
                $
                0.72
 
  The
          weighted average fair value at date of grant for options granted during
          the
          years ended December 31, 2005, 2004 and 2003, was $4.47, $3.82 and $3.37
          per
          share, respectively. The fair value of each option grant was estimated
          on the
          date of the grant using a Black-Scholes option-pricing model with the following
          assumptions:
  **2005**
                
                **2004**
                
                **2003**Expected
                    dividend yield
                
                
                0.00
                %
                
                0.00
                %
                
                0.00
                %Expected
                    volatility
                
                
                23.04
                %
                
                23.80
                %
                
                23.80
                %Risk-free
                    interest rate
                
                
                3.73
                %
                
                3.65
                %
                
                3.43
                %Expected
                    term in years
                
                
                6.00
                
                
                5.70
                
                
                5.73
 
  **(l)**
                **Earnings
                    Per Share (EPS)**
  Basic
          EPS
          includes no dilution and is computed by dividing income available to common
          stockholders by the weighted-average number of common shares outstanding
          for the
          period. Diluted EPS reflects the potential dilution of securities that
          could
          share in the earnings of an entity. *See* “Outstanding
          Shares and Earnings Per Share” Note 9 of
          Notes to Consolidated Financial Statements (page 67).
  55
 
 ***(m)***
                ***Comprehensive
                    Income***
  Accounting
          principles generally accepted in the United States require that recognized
          revenue, expenses, gains and losses be included in net income. Although
          certain
          changes in assets and liabilities, such as unrealized gain and losses on
          available-for-sale securities, are reported as a separate component of
          the
          equity section of the balance sheet, such items, along with net income,
          are
          components of comprehensive income.
  ***(n)***
                ***Fiduciary
                    Powers***
  On
          July
          1, 2002, the Bank received trust powers from applicable regulatory agencies
          and
          on that date began to offer fiduciary services for individuals, businesses,
          governments and charitable organizations in the Solano, Yolo, Sacramento,
          Placer
          and El Dorado County areas. The Bank’s full-service asset management and trust
          department, which offers and manages such fiduciary services, is located
          in
          downtown Sacramento.
 
 ***(o)***
                ***Impact
                    of Recently Issued Accounting
                    Standards***
  FASB
          Statement 154, *Accounting
          Changes and Error Corrections* ,
          replaces APB No. 20, *Accounting
          Changes* ,
          and
          FASB Statement No. 3, *Reporting
          Changes in Interim Financial Statements* . 
          The Statement changes the accounting for, and reporting of, a change in
          accounting principle.  Statement 154 requires retrospective application to
          prior periods’ financial statements of voluntary changes in accounting principle
          and changes required by new accounting standards when the standard does
          not
          include specific transition provisions, unless it is impracticable to do
          so.
  Statement 154 is effective for accounting changes and corrections of
          errors in fiscal years beginning after December 15, 2005. The Company will
          apply
          the requirements of Statement 154 on any future accounting changes or error
          corrections.
 
 ***(p)***
                ***Reclassifications***
  Certain
          reclassifications have been made to the prior years’ financial statements to
          conform to the current year’s presentation.
  56
 
 **(2)**
                **Cash
                    and Due from Banks**
  The
          Bank
          is required to maintain reserves with the Federal Reserve Bank based on
          a
          percentage of deposit liabilities. No aggregate reserves were required
          at
          December 31, 2005 and 2004. The Bank has met its average reserve requirements
          during 2005 and 2004 and the minimum required balance at December 31, 2005
          and
          2004.
  **(3)**
                **Investment
                    Securities**
  The
          amortized cost, unrealized gains and losses and estimated market values
          of
          investments in debt and other securities at December 31, 2005 are summarized
          as
          follows:
  **Amortized
                    cost**
                
                **Unrealized
                    gains**
                
                **Unrealized
                    losses**
                
                **Estimated
                    market value**Investment
                    securities available for sale:U.S.
                    Treasury securities
                
                $
                250
                
                $
                —
                
                $
                —
                
                $
                250Securities
                    of U.S. government agencies and corporations
                
                
                21,924
                
                
                16
                
                
                (384
                )
                
                21,556Obligations
                    of states and political subdivisions
                
                
                22,377
                
                
                678
                
                
                (8
                )
                
                23,047Mortgage
                    backed securities
                
                
                1,795
                
                
                8
                
                
                —
                
                
                1,803Total
                    debt securities
                
                
                46,346
                
                
                702
                
                
                (392
                )
                
                46,656Other
                    securities
                
                
                2,132
                
                
                —
                
                
                —
                
                
                2,132$
                48,478
                
                $
                702
                
                $
                (392
                )
                $
                48,788
 
  The
          amortized cost, unrealized gains and losses and estimated market values
          of
          investments in debt and other securities at December 31, 2004 are
          summarized as follows:
  **Amortized
                    cost**
                
                **Unrealized
                    gains**
                
                **Unrealized
                    losses**
                
                **Estimated
                    market value**Investment
                    securities available for sale:U.S.
                    Treasury securities
                
                $
                250
                
                $
                6
                
                $
                —
                
                $
                256Securities
                    of U.S. government agencies and corporations
                
                
                21,005
                
                
                153
                
                
                (95
                )
                
                21,063Obligations
                    of states and political subdivisions
                
                
                29,009
                
                
                1,738
                
                
                —
                
                
                30,747Mortgage
                    backed securities
                
                
                1,227
                
                
                33
                
                
                —
                
                
                1,260Total
                    debt securities
                
                
                51,491
                
                
                1,930
                
                
                (95
                )
                
                53,326Other
                    securities
                
                
                1,828
                
                
                —
                
                
                —
                
                
                1,828$
                53,319
                
                $
                1,930
                
                $
                (95
                )
                $
                55,154
   Gross
          realized gains from sales of available-for-sales securities were $15, $3
          and
          $793 for the years ended December 31, 2005, 2004 and 2003, respectively.
          Gross
          realized losses from sales of available-for-sale securities were $-0- for
          each
          of the years ended December 31, 2005, 2004 and 2003.
  57
  The
          amortized cost and estimated market value of debt and other securities
          at
          December 31, 2005, by contractual maturity, are shown in the following
          table:
  **Amortized**
                  **cost**
                
                **Estimated
                    market**
                  **value**Due
                    in one year or less
                
                $
                12,427
                
                
                12,376Due
                    after one year through five years
                
                
                30,221
                
                
                30,443Due
                    after five years through ten years
                
                
                2,490
                
                
                2,569Due
                    after ten years
                
                
                1,208
                
                
                1,268Other
                
                
                2,132
                
                
                2,132$
                48,478
                
                
                48,788
 
 
 Expected
          maturities may differ from contractual maturities because borrowers may
          have the
          right to call or prepay obligations with or without call or prepayment
          penalties. Securities
          due after one year through five years included mortgage-backed securities
          totaling $1,750. The maturities on these securities were based on the average
          lives of the securities.
  
 An
          analysis of gross unrealized losses of the available-for-sale investment
          securities portfolio as of December 31, 2005, follows:
  **Less
                    than 12 months**
                
                **12
                    months or more**
                
                **Total****Fair
                    Value**
                
                **Unrealized
                    losses**
                
                **Fair
                    Value**
                
                **Unrealized
                    losses**
                
                **Fair
                    Value**
                
                **Unrealized
                    losses**Securities
                    of U.S. government agencies and corporations
                
                $
                8,797
                
                $
                (117
                )
                $
                10,746
                
                $
                (267
                )
                $
                19,543
                
                $
                (384
                )Obligations
                    of states and political subdivisions
                
                
                267
                
                
                (8
                )
                
                —
                
                
                —
                
                
                267
                
                
                (8
                )Subtotal,
                    debt securities
                
                
                9,064
                
                
                (125
                )
                
                10,746
                
                
                (267
                )
                
                19,810
                
                
                (392
                )Other
                    securities
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Total
                
                $
                9,064
                
                $
                (125
                )
                $
                10,746
                
                $
                (267
                )
                $
                19,810
                
                $
                (392
                )
 
 No
          decline in value was considered “other than temporary” during 2005. The
          unrealized losses on investments in U.S. government agency securities were
          caused by market interest rate increases that occurred after these securities
          were purchased. Ten securities that had a fair market value of $9,064 and
          a
          total unrealized loss of $125 have been in an unrealized loss position
          for less
          than twelve months as of December 31, 2005. In addition, eleven securities
          with
          a fair market value of $10,746 and a total unrealized loss of $267 that
          have
          been in an unrealized loss position for more than twelve months as of December
          31, 2005. Due to the fact the Company has the ability and intent to hold
          these
          investments until a market price recovery or maturity, these investments
          are not
          considered other-than-temporarily impaired.
 
 Investment
          securities carried at $22,042 and $22,918 at December 31, 2005 and 2004,
          respectively, were pledged to secure public deposits or for other purposes
          as
          required or permitted by law.
  The
          Bank
          is a member of the Federal Home Loan Bank (“FHLB”) and holds stock, which is
          included in other securities, carried at cost of $2,022 and $1,718 at December
          31, 2005 and 2004, respectively.
  58




**(4)**
              **Loans**
  The
        composition of the Bank’s loan portfolio at December 31, is as follows:
  **2005**
              
              **2004**Commercial
              
              $
              88,816
              
              
              91,588Agriculture
              
              
              33,458
              
              
              33,598Real
                  estate:Mortgage
              
              
              233,049
              
              
              221,348Commercial
                  and Construction
              
              
              105,472
              
              
              87,361Installment
                  and other loans
              
              
              4,297
              
              
              4,739465,092
              
              
              438,634Allowance
                  for loan losses
              
              
              (7,917
              )
              
              (7,445
              )Net
                  deferred origination fees and costs
              
              
              (1,114
              )
              
              (1,487
              )Loans,
                  net
              
              $
              456,061
              
              
              429,702
 
 As
        of
        December 31, 2005, approximately 23% of the Bank’s loans are for real estate
        construction. Additionally approximately 50% of the Bank’s loans are mortgage
        type loans which are secured by residential real estate. Approximately 26%
        of
        the Bank’s loans are for general commercial uses including professional, retail,
        agricultural and small businesses. Generally, real estate loans are secured
        by
        real property and other loans are secured by funds on deposit, business or
        personal assets. Repayment is generally expected from the proceeds of the
        sales
        of property for real estate construction loans, and from cash flows of the
        borrower for other loans. The Bank’s access to this collateral is through
        foreclosure and/or judicial procedures. The Bank’s exposure to credit loss if
        the real estate or other security proved to be of no value is the outstanding
        loan balance.
  Loans
        that were sold and were being serviced by the Bank totaled approximately
        $112,743 and $105,183 at December 31, 2005 and 2004, respectively.
  Non-accrual
        loans totaled approximately $2,073, $4,907, and $3,877 at December 31, 2005,
        2004 and 2003, respectively. If interest on these non-accrual loans had been
        accrued, such income would have approximated $101, $280, and $228 during
        the
        years ended December 31, 2005, 2004 and 2003, respectively.
  Loans
        90
        days past due and still accruing totaled approximately $178, $55, and $4
        at
        December 31, 2005, 2004 and 2003, respectively.
  The
        Bank
        did not restructure any loans in 2005 or 2004.
  Impaired
        loans are loans for which it is probable that the Bank will not be able to
        collect all amounts due. Impaired loans totaled approximately $2,073 and
        $4,907
        at December 31, 2005 and 2004, respectively, and had related valuation
        allowances of approximately $201, and $284 at December 31, 2005 and 2004,
        respectively. The average outstanding balance of impaired loans was
        approximately $3,221, $2,108, and $4,701, on which $100, $64, and $164 of
        interest income was recognized for the years ended December 31, 2005, 2004
        and
        2003, respectively.
 
 Loans
        in
        the amount of $163,385 and $201,276 at December 31, 2005 and 2004, respectively,
        were pledged under a blanket collateral lien to secure actual and potential
        borrowings from the Federal Home Loan Bank.
  **2005**
              
              **2004**
              
              **2003**Balance,
                  beginning of year
              
              $
              7,445
              
              
              7,006
              
              
              6,630Provision
                  for loan losses
              
              
              600
              
              
              207
              
              
              2,153Loans
                  charged-off
              
              
              (855
              )
              
              (382
              )
              
              (1,909
              )Recoveries
                  of loans previously charged-off
              
              
              727
              
              
              614
              
              
              132Balance,
                  end of year
              
              $
              7,917
              
              
              7,445
              
              
              7,006
  Changes
        in the allowance for loan losses for the following years ended December 31,
        are
        summarized as follows:
  59
  **(5)**
              **Premises
                  and Equipment**
  Premises
        and equipment consist of the following at December 31 of the indicated
        years:
  **2005**
              
              **2004**Land
              
              $
              2,718
              
              $
              1,478Buildings
              
              
              4,454
              
              
              4,454Furniture
                  and equipment
              
              
              9,639
              
              
              8,885Leasehold
                  improvements
              
              
              1,465
              
              
              1,58218,276
              
              
              16,399Less
                  accumulated depreciation
              
              
              9,965
              
              
              8,964$
              8,311
              
              $
              7,435
 
 Depreciation
        and amortization expense, included in occupancy and equipment expense, is
        $1,016, $1,016 and $968 for the years ended December 31, 2005, 2004 and 2003,
        respectively.
  **(6)**
              **Other
                  Assets**
  Other
        assets consisted of the following at December 31 of the indicated
        years:
  **2005**
              
              **2004**Accrued
                  interest
              
              $
              3,119
              
              $
              2,636Software,
                  net of amortization
              
              
              421
              
              
              326Officer’s
                  Life Insurance
              
              
              9,159
              
              
              8,895Prepaid
                  and other
              
              
              2,872
              
              
              1,577Investment
                  in Limited Partnerships
              
              
              1,875
              
              
              1,989Deferred
                  tax assets, net (see note 8)
              
              
              2,641
              
              
              1,366$
              20,087
              
              $
              16,789
 
 The
        Company amortizes capitalized software costs on a straight-line basis using
        a
        useful life from three to five years.
  Software
        amortization expense, included in other operating expense, is $248, $267
        and
        $294 for the years ended December 31, 2005, 2004 and 2003,
        respectively.
  The
        Bank
        held other real estate owned (OREO) in the amount of $268 as of December
        31,
        2005. The Bank did not hold any OREO as of December 31, 2004 and 2003. The
        Bank
        had no allowance for loan losses on OREO recorded for these
        years.
  60
 
 **(7)**
              **Supplemental
                  Compensation Plans**
  SALARY
        CONTINUATION AND RELATED SPLIT DOLLAR PLAN FOR CERTAIN OFFICERS FOR THE
        PROVISION OF DEATH, DISABILITY AND RETIREMENT BENEFITS.
 
 EXECUTIVE
        SALARY CONTINUATION PLAN
  **Pension
        Benefit Plans**
 
 On
        July
        19, 2001, the Company and the Bank approved an unfunded non-contributory
        defined
        benefit pension plan ("Salary Continuation Plan") and related split dollar
        plan
        for a select group of highly compensated employees. The plan provides defined
        benefit levels between $50 and $125 depending on responsibilities at the
        Bank.
        The retirement benefits are paid for 10 years following retirement at age
        65.
        Reduced retirement benefits are available after age 55 and 10 years of service.
 
 The
        Bank
        uses a December 31 measurement date for this plan.
  **For
                  the Year Ended December 31,****2005**
              
              **2004**
              
              **2003****Change
                  in benefit obligation**Benefit
                  obligation at beginning of year
              
              $
              885
              
              $
              596
              
              $
              380Service
                  cost
              
              
              160
              
              
              156
              
              
              160Interest
                  cost
              
              
              53
              
              
              47
              
              
              36Amendments
              
              
              —
              
              
              —
              
              
              —Actuarial
                  loss
              
              
              (19
              )
              
              86
              
              
              20Benefit
                  obligation at end of year
              
              $
              1,079
              
              $
              885
              
              $
              596**Change
                  in plan assets**Fair
                  value of plan assets at end of year
              
              $
              —
              
              $
              —
              
              $
              —**Reconciliation
                  of funded status**Funded
                  status
              
              
              (1,079
              )
              
              (885
              )
              
              (596
              )Unrecognized
                  net actuarial loss/(gain) *
              
              
              21
              
              
              40
              
              
              (46
              )Unrecognized
                  prior service cost
              
              
              148
              
              
              161
              
              
              174Net
                  amount recognized
              
              $
              (910
              )
              $
              (684
              )
              $
              (468
              )**Amounts
                  recognized in the consolidatedbalance sheets consist
                  of:**Accrued
                  benefit liability
              
              
              (1,079
              )
              
              (885
              )
              
              (596
              )Intangible
                  asset
              
              
              148
              
              
              161
              
              
              128Accumulated
                  other comprehensive income
              
              
              21
              
              
              40
              
              
              —Net
                  amount recognized
              
              $
              (910
              )
              $
              (684
              )
              $
              (468
              )
    ·
              In
                  fiscal 2003, the Bank expensed amounts less than required by SFAS
                  No. 87
                  by $43. The effect of these amounts is reflected in this line
                  item.
  61
  **For
                  the Year Ended December 31,****2005**
              
              **2004**
              
              **2003****Components
                  of net periodic benefit cost**Service
                  cost
              
              $
              160
              
              $
              156
              
              $
              160Interest
                  cost
              
              
              54
              
              
              47
              
              
              36Amortization
                  of prior service cost
              
              
              13
              
              
              13
              
              
              13Net
                  periodic benefit cost
              
              
              227
              
              
              216
              
              
              209Additional
                  amounts recognized
              
              
              —
              
              
              —
              
              
              43Total
                  benefit cost
              
              $
              227
              
              $
              216
              
              $
              252**Additional
                  Information**Accumulated
                  benefit obligation at year end
              
              $
              1,079
              
              $
              885
              
              $
              596Increase
                  in minimum liability included in other comprehensive loss
              
              
              (19
              )
              
              40
              
              
              —
 
 **Assumptions
                  used to determine benefit obligations at December
                  31**
              
              **2005**
              
              **2004**
              
              **2003**Discount
                  rate used to determine net periodic benefit cost for years ended
                  December
                  31
              
              
              5.10
              %
              
              6.25
              %
              
              6.75
              %Discount
                  rate used to determine benefit obligations at December 31
              
              
              5.30
              %
              
              5.10
              %
              
              6.25
              %
 
 **Plan
        Assets**
 
 The
        Bank
        informally funds the liabilities of this plan through life insurance purchased
        on the lives of plan participants. This informal funding does not meet the
        definition of plan assets within the meaning of pension accounting standards.
        Therefore, assets held for this purpose are not disclosed as part of the
        Salary
        Continuation Plan.
 
 **Cash
        Flows**
 
 **Contributions
        and Estimated Benefit Payments**
 
 For
        unfunded plans, contributions to the plan are the benefit payments made to
        participants. The Bank made no benefit payments during fiscal 2005. The
        following benefit payments, which reflect expected future service, are expected
        to be paid in future fiscal years:
 
 Year
                  ending December 31,
              
              Pension
                  Benefits2006
              
              $
              502007
              
              
              542008
              
              
              542009
              
              
              852010
              
              
              1792011-2015
              
              
              895
 
 ***Disclosure
        of settlements and curtailments:***
 
 There
        were no events during fiscal 2005 that would constitute a curtailment or
        settlement within the meaning of SFAS No. 88.
  62
 
 DIRECTOR
        RETIREMENT PLAN WITH RELATED SPLIT DOLLAR PLAN FOR ALL DIRECTORS FOR THE
        PROVISION OF DEATH, DISABILITY AND RETIREMENT BENEFITS.
 
 DIRECTORS’
        RETIREMENT PLAN
  **Pension
        Benefit Plans**
 
 On
        July
        19, 2001, the Company and the Bank approved an unfunded non-contributory
        defined
        benefit pension plan ("Directors’ Retirement Plan") and related split dollar
        plan for the directors of the bank. The plan provides a retirement benefit
        equal
        to $1 per year of service as a director, up to a maximum benefit amount of
        $15.
        The retirement benefit is payable for 10 years following retirement at age
        65.
        Reduced retirement benefits are available after age 55 and 10 years of service.
 
 The
        Bank
        uses a December 31 measurement date for this plan.
 
 **For
                  the Year Ended December 31,****2005**
              
              **2004**
              
              **2003****Change
                  in benefit obligation**Benefit
                  obligation at beginning of year
              
              $
              347
              
              $
              244
              
              $
              172Service
                  cost
              
              
              73
              
              
              71
              
              
              63Interest
                  cost
              
              
              21
              
              
              19
              
              
              16Actuarial
                  loss
              
              
              (23
              )
              
              28
              
              
              8Benefits
                  paid
              
              
              (15
              )
              
              (15
              )
              
              (15
              )Benefit
                  obligation at end of year
              
              $
              403
              
              $
              347
              
              $
              244**Change
                  in plan assets**Employer
                  contribution
              
              
              15
              
              
              15
              
              
              15Benefits
                  paid
              
              
              (15
              )
              
              (15
              )
              
              (15
              )Fair
                  value of plan assets at end of year
              
              $
              —
              
              $
              —
              
              $
              —**Reconciliation
                  of funded status**Funded
                  status
              
              
              (403
              )
              
              (347
              )
              
              (244
              )Unrecognized
                  net actuarial loss *
              
              
              47
              
              
              76
              
              
              51Net
                  amount recognized
              
              $
              (356
              )
              $
              (271
              )
              $
              (193
              )**Amounts
                  recognized in the consolidated balance sheets consist
                  of:**Accrued
                  benefit liability
              
              
              (403
              )
              
              (347
              )
              
              (244
              )Accumulated
                  other comprehensive income
              
              
              47
              
              
              76
              
              
              51Net
                  amount recognized
              
              $
              (356
              )
              $
              (271
              )
              $
              (193
              )
   ·
              In
                  fiscal 2003, the Bank expensed amounts less than required by SFAS
                  No. 87
                  by $16. The effect of these amounts is reflected in this line
                  item.
  63
  **For
                  the Year Ended December 31,****2005**
              
              **2004**
              
              **2003****Components
                  of net periodic benefit cost**Service
                  cost
              
              $
              73
              
              $
              71
              
              $
              63Interest
                  cost
              
              
              21
              
              
              19
              
              
              16Recognized
                  actuarial (gain)/loss
              
              
              5
              
              
              3
              
              
              1Net
                  periodic benefit cost
              
              
              99
              
              
              93
              
              
              80Additional
                  amounts recognized
              
              
              —
              
              
              —
              
              
              (16
              )Total
                  benefit cost
              
              $
              99
              
              $
              93
              
              $
              64**Additional
                  Information**Accumulated
                  benefit obligation at year end
              
              $
              403
              
              $
              347
              
              $
              244Increase
                  in minimum liability included in other comprehensive loss
              
              
              (
                  28
              )
              
              25
              
              
              23
 
 **Assumptions
                  used to determine benefit obligations at December
                  31**
              
              **2005**
              
              **2004**
              
              **2003**Discount
                  rate used to determine net periodic benefit cost for years ended
                  December
                  31
              
              
              5.10
              %
              
              6.25
              %
              
              6.75
              %Discount
                  rate used to determine benefit obligations at December 31
              
              
              5.30
              %
              
              5.10
              %
              
              6.25
              %
 
 **Plan
        Assets**
 
 The
        Bank
        informally funds the liabilities of this plan through life insurance purchased
        on the lives of plan participants. This informal funding does not meet the
        definition of plan assets within the meaning of pension accounting standards.
        Therefore, assets held for this purpose are not disclosed as part of the
        Director’s Retirement Plan.
 
 **Cash
        Flows**
 
 **Contributions
        and Estimated Benefit Payments**
 
 For
        unfunded plans, contributions to the plan are the benefit payments made to
        participants. The Bank paid $15 in benefit payments during fiscal 2005. The
        following benefit payments, which reflect expected future service, are expected
        to be paid in future fiscal years:
 
 Year
                  ending December 31,
              
              Pension
                  Benefits2006
              
              $
              152007
              
              
              152008
              
              
              212009
              
              
              452010
              
              
              592011-2015
              
              
              349
 
 ***Disclosure
        of settlements and curtailments:***
 
 There
        were no events during fiscal 2005 that would constitute a curtailment or
        settlement within the meaning of SFAS No. 88.
  64
 
 EXECUTIVE
        ELECTIVE DEFERRED COMPENSATION PLAN—2001 EXECUTIVE DEFERRAL PLAN.
 
 On
        July
        19, 2001, the Bank approved a revised Executive Elective Deferred Compensation
        Plan, — the 2001 Executive Deferral Plan previously called “1995 Executive
        Deferral Plan”, for certain officers to provide them the ability to make
        elective deferrals of compensation due to tax-law limitations on benefit
        levels
        under qualified plans. Deferred amounts earn interest at an annual rate
        determined by the Bank’s Board. The plan is a non-qualified plan funded with
        bank owned life insurance policies taken on the life of the officer. During
        the
        year ended December 31, 2001, the Bank purchased insurance making a
        single-premium payment aggregating $1,125, which is reported in other assets.
        The Bank is the beneficiary and owner of the policies. The cash surrender
        value
        of the related insurance policies as of December 31, 2005 and 2004 totaled
        $1,699 and $1,645, respectively. The accrued liability for the plan as of
        December 31, 2005 and 2004 totaled $91 and $211, respectively. The expenses
        for
        the plan for the years ended December 31, 2005, 2004 and 2003 totaled $30,
        $32
        and $22, respectively.
 
 DIRECTOR
        ELECTIVE DEFERRED FEE PLAN-2001 DIRECTOR DEFERRAL PLAN.
 
 On
        July
        19, 2001, the Bank approved a Director Elective Deferred Fee Plan, — the 2001
        Director Deferral Plan for directors to provide them the ability to make
        elective deferrals of fees. Deferred amounts earn interest at annual rate
        determined by the Bank’s Board. The plan is a non-qualified plan funded with
        bank owned life insurance policies taken on the life of the director. The
        Bank
        is the beneficiary and owner of the policies. The cash surrender value of
        the
        related insurance policies as of December 31, 2005 and 2004 totaled $90 and
        $87,
        respectively. The accrued liability for the plan as of December 31, 2005
        and
        2004 totaled $4 and $4, respectively. The expenses for the plan for the years
        ended December 31, 2005, 2004 and 2003 totaled $705 dollars, $681 dollars
        and
        $443 dollars, respectively.
  65
 
 **(8)**
              **Income
                  Taxes**
  The
        provision for income tax expense consists of the following for the years
        ended
        December 31:
  **2005**
              
              **2004**
              
              **2003**Current:Federal
              
              $
              4,076
              
              $
              3,193
              
              $
              1,868State
              
              
              1,382
              
              
              982
              
              
              7675,458
              
              
              4,175
              
              
              2,635Deferred:Federal
              
              
              (488
              )
              
              (495
              )
              
              665State
              
              
              (178
              )
              
              (130
              )
              
              (55
              )(666
              )
              
              (625
              )
              
              610$
              4,792
              
              $
              3,550
              
              $
              3,245
 
 The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and deferred tax liabilities at December 31, 2005 and
        2004
        consist of:
  **2005**
              
              **2004**Deferred
                  tax assets:Allowance
                  for loan losses
              
              $
              3,326
              
              $
              2,868Deferred
                  compensation
              
              
              230
              
              
              191Retirement
                  compensation
              
              
              521
              
              
              388Stock
                  option compensation
              
              
              276
              
              
              159Current
                  state franchise taxes
              
              
              454
              
              
              382Non-accrual
                  interest
              
              
              13
              
              
              80Other
              
              
              —
              
              
              13Deferred
                  tax assets
              
              
              4,820
              
              
              4,081Less
                  valuation Allowance
              
              
              (83
              )
              
              (83
              )Total
                  deferred tax assets
              
              
              4,737
              
              
              3,998Deferred
                  tax liabilities:Fixed
                  assets
              
              
              1,683
              
              
              1,722FHLB
                  Dividends
              
              
              141
              
              
              —Other
              
              
              148
              
              
              176Investment
                  securities unrealized gains
              
              
              124
              
              
              734Total
                  deferred tax liabilities
              
              
              2,096
              
              
              2,632Net
                  deferred tax assets (see note 6)
              
              $
              2,641
              
              $
              1,366
 
 A
        valuation allowance is provided when it is more likely than not that some
        portion of the deferred tax assets will not be realized. Management believes
        that the valuation allowance is sufficient to cover that portion that may
        not be
        fully realized. There was no change to the valuation allowance for the year
        ended 2005.
  Based
        upon the level of historical taxable income and projections for future taxable
        income over the periods during which the deferred tax assets are deductible,
        management believes it is more likely than not the Company will realize the
        benefits of these deductible differences.
  A
        reconciliation of income taxes computed at the
        federal statutory rate of 34% and the provision for income taxes is as
        follows:
  **2005**
              
              **2004**
              
              **2003**Income
                  tax expense at statutory rates
              
              $
              4,583
              
              $
              3,487
              
              $
              3,181Reduction
                  for tax exempt interest
              
              
              (205
              )
              
              (207
              )
              
              (236
              )State
                  franchise tax, net of federal income tax benefit
              
              
              750
              
              
              734
              
              
              669CSV
                  of life insurance
              
              
              (90
              )
              
              (119
              )
              
              (126
              )Other
              
              
              (246
              )
              
              (345
              )
              
              (243
              )$
              4,792
              
              $
              3,550
              
              $
              3,245
  66
  **(9)**
              **Outstanding
                  Shares and Earnings Per
                  Share**
  On
        January 26, 2005, the Board of Directors of the Company declared a 6% stock
        dividend payable as of March 31, 2005. Additionally, on April 21, 2005, the
        Board of Directors of the Company declared a two-for-one stock split. The
        stock
        split doubled the outstanding common stock recorded on the books of the Company
        as of the record date, May 10, 2005. All income per share amounts have been
        adjusted to give retroactive effect to stock dividends and stock
        splits.
 
 Earnings
        Per Share (“EPS”)
  Basic
          and
          diluted earnings per share for the years ended December 31, were computed
          as
          follows:
  **2005**
              
              **2004**
              
              **2003**Basic
                  earnings per share:Net
                  income
              
              $
              8,688
              
              $
              6,707
              
              $
              6,111Weighted
                  average common shares outstanding
              
              
              8,053,023
              
              
              8,536,738
              
              
              8,127,406Basic
                  EPS
              
              $
              1.08
              
              $
              0.79
              
              $
              0.75Diluted
                  earnings per share:Net
                  income
              
              $
              8,688
              
              $
              6,707
              
              $
              6,111Weighted
                  average common shares outstanding
              
              
              8,053,023
              
              
              8,536,738
              
              
              8,127,406Effect
                  of dilutive options
              
              
              311,246
              
              
              188,500
              
              
              168,7968,364,269
              
              
              8,725,238
              
              
              8,296,202Diluted
                  EPS
              
              $
              1.04
              
              $
              0.77
              
              $
              0.74
  67
 
 **(10)**
              **Related
                  Party Transactions**
  The
        Bank,
        in the ordinary course of business, has loan and deposit transactions with
        directors and executive officers. In management’s opinion, these transactions
        were on substantially the same terms as comparable transactions with other
        customers of the Bank. The amount of such deposits totaled approximately
        $2,339
        and $3,120 at December 31, 2005 and 2004, respectively.
 
 The
        following is an analysis of the activity of loans to executive officers and
        directors for the years ended December 31:
  **2005**
              
              **2004**
              
              **2003**Outstanding
                  balance, beginning of year
              
              $
              217
              
              $
              1,187
              
              $
              887Credit
                  granted
              
              
              626
              
              
              578
              
              
              1,501Repayments
              
              
              (539
              )
              
              (1,548
              )
              
              (1,201
              )Outstanding
                  balance, end of year
              
              $
              304
              
              $
              217
              
              $
              1,187
 
 **(11)**
              **Profit
                  Sharing Plan**
  The
        Bank
        maintains a profit sharing plan for the benefit of its employees. Employees
        who
        have completed 12 months and 1,000 hours of service are eligible. Under the
        terms of this plan, a portion of the Bank’s profits, as determined by the Board
        of Directors, will be set aside and maintained in a trust fund for the benefit
        of qualified employees. Contributions to the plan, included in salaries and
        employee benefits in the consolidated statements of operations, were $1,569,
        $1,207 and $1,097 in 2005, 2004 and 2003, respectively.
 
 **(12)**
              **Stock
                  Compensation Plans**
  ***Fixed
        Stock Option Plans***
  The
        Company has two fixed stock option plans. Under the 2000 Employee Stock Option
        Plan, the Company may grant options to an employee for an amount up to 25,000
        shares of common stock each year. There are 1,563,912 shares authorized under
        the plan. The plan will terminate February 27, 2007. The Compensation Committee
        of the Board of Directors is authorized to prescribe the terms and conditions
        of
        each option, including exercise price, vestings or duration of the option.
        Options are granted at the fair value of the related common stock on the
        date of
        grant.
  Under
        the
        2000 Outside Directors Non-statutory Stock Option Plan, the Company may grant
        options to an outside director for an amount up to 18,764 shares of common
        stock
        during the director’s lifetime. There are 469,166 shares authorized under the
        Plan. The Plan will terminate February 27, 2007. The exercise price of each
        option equals the fair value of the Company’s stock on the date of grant, and an
        option’s maximum term is five years. Options vest at the rate of 20% per year
        beginning on the grant date. Other than a grant of 18,764 shares to a new
        director, any future grants require shareholder approval.
  68
 
 Stock
        option activity for the employee and outside director’s stock option plans
        during the years indicated is as follows:
  **Employee
                  stock**
                **option
                  plan**
              
              **Outside
                directors****stock
                option plan****Number
                  of**
                **shares**
              
              **Weighted**
                **average**
                **exercise
                  price**
              
              **Number
                of****shares**
              
              **Weighted**
                **average**
                **exercise
                  price**Balance
                  at December 31, 2002
              
              
              604,080
              
              $
              6.26
              
              
              18,760
              
              $
              5.02Granted
              
              
              113,147
              
              
              9.87
              
              
              —
              
              
              —Exercised
              
              
              (123,081
              )
              
              4.82
              
              
              (15,010
              )
              
              5.02Balance
                  at December 31, 2003
              
              
              594,146
              
              
              7.25
              
              
              3,750
              
              
              5.02Granted
              
              
              89,888
              
              
              11.68
              
              
              —
              
              
              —Exercised
              
              
              (76,464
              )
              
              4.79
              
              
              (3,750
              )
              
              5.02Balance
                  at December 31, 2004
              
              
              607,570
              
              
              8.22
              
              
              —
              
              
              —Granted
              
              
              81,316
              
              
              14.27
              
              
              —
              
              
              —Exercised
              
              
              (119,332
              )
              
              6.88
              
              
              —
              
              
              —Cancelled
              
              
              (952
              )
              
              9.87
              
              
              —
              
              
              —Balance
                  at December 31, 2005
              
              
              568,602
              
              $
              9.36
              
              
              —
              
              $
              —
 
 The
        2000
        Employee Stock Option Plan permits stock-for-stock exercises of shares. During
        2005, employees tendered 37,789 (adjusted for stock options exercised before
        stock dividend and stock split) mature shares in stock-for-stock exercises.
        Matured shares are those held by employees longer than six months.
  At
        December 31, 2005, the range of exercise prices for all outstanding options
        ranged from $4.53 to $23.50. The following table provides certain information
        with respect to stock options outstanding at December 31, 2005:
  **Range
                  of exercise**
                **prices**
              
              **Stock
                  options**
                **outstanding**
              
              **Weighted
                  average**
                **exercise
                  price**
              
              **Weighted
                  average**
                **remaining**
                **contractual
                  life**Under
                  $ 6.00
              
              
              108,422
              
              $
              4.73
              
              
              3.41$
                  6.00 to $ 9.00
              
              
              84,569
              
              
              6.35
              
              
              5.01$
                  9.00 to $13.00
              
              
              294,295
              
              
              10.59
              
              
              6.95$13.00
                  to $19.00
              
              
              76,316
              
              
              13.66
              
              
              9.02$19.00
                  and over
              
              
              5,000
              
              
              23.50
              
              
              9.68568,602
              
              $
              9.36
              
              
              6.29
 
 Options
        exercisable as of December 31 were 351,357 in 2005, 370,370 in 2004, and
        343,412
        shares in 2003, at a weighted-average exercise price of $7.66, $6.96, and
        $6.26,
        respectively.
  The
        following table provides certain information with respect to stock options
        exercisable at December 31, 2005:
  **Range
                  of exercise prices**
              
              **Stock
                  options**
                **exercisable**
              
              **Weighted
                  average exercise price**Under
                  $6.00
              
              
              108,422
              
              $
              4.73$6.00
                  to $9.00
              
              
              84,569
              
              
              6.35$9.00
                  and over
              
              
              158,366
              
              
              10.36351,357
              
              $
              7.66
  **Employee
        Stock Purchase Plan**
  Under
        the
        2000 Employee Stock Purchase Plan, the Company is authorized to issue to
        an
        eligible employee shares of common stock. There are 1,563,912 shares authorized
        under the Plan. The Plan will terminate February 27, 2007. The Plan is
        implemented by participation periods of not more than twenty-seven months
        each.
        The Board of Directors determines the commencement date and duration of each
        participation period. An eligible employee is one who has been continually
        employed for at least ninety (90) days prior to commencement of a participation
        period. Under the terms of the Plan, employees can choose to have up to 10
        percent of their compensation withheld to purchase the Company’s common stock
        each participation period. The purchase price of the stock is 85 percent
        of the
        lower of the fair market value on the last trading day before the Date of
        Participation or the fair market value on the last trading day during the
        participation period. Approximately 68 percent of eligible employees are
        participating in the Plan in the current participation period, which began
        November 24, 2004 and will end November 23, 2006. At the annual stock
        purchase date, November 23, 2005, there were $212 in contributions, and
        19,069 shares were purchased at an average price of $11.06, totaling
        $211.
  69
 
 **(13)**
              **Short-Term
                  and Long-Term Borrowings**
  Short-term
        borrowings at December 31, 2005 and 2004, consisted of secured borrowings
        from
        the U.S. Treasury in the amounts of $1,476 and $1,677, respectively. The
        funds
        are placed at the discretion of the U.S. Treasury and are callable on demand
        by
        the U.S. Treasury.
 
 Additional
        short-term borrowings available to the Company consist of a line of credit
        and
        advances with the Federal Home Loan Bank (“FHLB”) secured under terms of a
        blanket collateral agreement by a pledge of FHLB stock and certain other
        qualifying collateral such as commercial and mortgage loans. At December
        31,
        2005, the Company had a current collateral borrowing capacity with the FHLB
        of
        $94,037. The Company also has unsecured formal lines of credit totaling $20,700
        with correspondent banks and borrowing capacity of $2,000 with the Federal
        Reserve Bank (loans and discounts), which is fully collateralized, with a
        pledge
        of U.S. Agency Notes.
 
 Long-term
        borrowings consisted of Federal Home Loan Bank advances, totaling $13,493
        and
        $13,779, respectively, at December 31, 2005 and 2004. Such advances ranged
        in
        maturity from 0.3 years to 3.3 years at a weighted average interest rate
        of
        3.48% at December 31, 2005. Maturity ranged from 1.3 years to 4.3 years at
        a
        weighted average interest rate of 3.47% at December 31, 2004. Average
        outstanding balances were $13,628 and $12,753, respectively, during 2005
        and
        2004. The weighted average interest rate paid was 3.48% in 2005 and 3.36%
        in
        2004.
 
 **(14)**
              **Commitments
                  and Contingencies**
  The
        Company is obligated for rental payments under certain operating lease
        agreements, some of which contain renewal options. Total rental expense for
        all
        leases included in net occupancy and equipment expense amounted to approximately
        $1,058, $921, and $808 for the years ended December 31, 2005, 2004 and 2003,
        respectively. At December 31, 2005, the future minimum payments under
        non-cancelable operating leases with initial or remaining terms in excess
        of one
        year are as follows:
  Year
                  ending December 31:2006
              
              $
              1,1872007
              
              
              1,0462008
              
              
              9882009
              
              
              9072010
              
              
              627Thereafter
              
              
              1,449$
              6,204
 
 At
        December 31, 2005, the aggregate maturities for time deposits are as
        follows:
  Year
                  ending December 31:2006
              
              $
              110,2862007
              
              
              4,6442008
              
              
              1,2282009
              
              
              1,2962010
              
              
              412Thereafter
              
              
              41$
              117,907
 
 The
        Company is subject to various legal proceedings in the normal course of its
        business. In the opinion of management, after having consulted with legal
        counsel, the outcome of the legal proceedings should not have a material
        effect
        on the consolidated financial condition or results of operations of the
        Company.
  70
  **(15)**
              **Financial
                  Instruments with Off-Balance Sheet
                  Risk**
  The
        Company is a party to financial instruments with off-balance sheet risk in
        the
        normal course of business to meet the financing needs of its customers. These
        financial instruments include commitments to extend credit in the form of
        loans
        or through standby letters of credit. These instruments involve, to varying
        degrees, elements of credit and interest rate risk in excess of the amounts
        recognized in the balance sheet. The contract amounts of those instruments
        reflect the extent of involvement the Company has in particular classes of
        financial instruments.
  The
        Bank’s exposure to credit loss in the event of non-performance by the other
        party to the financial instrument for commitments to extend credit and standby
        letters of credit is represented by the contractual notional amount of those
        instruments. The Bank uses the same credit policies in making commitments
        and
        conditional obligations as it does for on-balance sheet
        instruments.
  Financial
        instruments, whose contract amounts represent credit risk at December 31 of
        the indicated periods, are as follows:
  **2005**
              
              **2004**Undisbursed
                  loan commitments
              
              $
              203,101
              
              
              173,205Standby
                  letters of credit
              
              
              14,077
              
              
              9,378$
              217,178
              
              
              182,583
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Since many of the commitments are expected to expire without being
        drawn upon the total commitment amounts do not necessarily represent future
        cash
        requirements. The Bank evaluates each customer’s creditworthiness on a
        case-by-case basis. The amount of collateral obtained, if deemed necessary
        by
        the Bank upon extension of credit, is based on management’s credit evaluation.
        Collateral held varies but may include accounts receivable, inventory, property,
        plant and equipment, and income-producing commercial properties.
  The
        Bank
        issues both financial and performance standby letters of credit. The financial
        standby letters of credit are primarily to guarantee payment to third parties.
        At December 31, 2005 there were no financial standby letters of credit
        outstanding. The performance standby letters of credit are typically issued
        to
        municipalities as specific performance bonds. At December 31, 2005, there
        was
        $14,077 issued in performance standby letters of credit and the Bank carried
        no
        liability. The terms of the guarantees will expire primarily in 2006. The
        Bank
        has experienced no draws on these letters of credit, and does not expect
        to in
        the future; however, should a triggering event occur, the Bank either has
        collateral in excess of the letter of credit or imbedded agreements of recourse
        from the customer. The Bank has set aside a reserve for unfunded commitments
        in
        the amount of $911, which is recorded in “accrued interest payable and other
        liabilities.”
  Standby
        letters of credit are conditional commitments issued by the Bank to guarantee
        the performance of a customer to a third party. The credit risk involved
        in
        issuing letters of credit is essentially the same as that involved in extending
        loan facilities to customers.
  Commitments
        to extend credit and standby letters of credit bear similar credit risk
        characteristics as outstanding loans. As of December 31, 2005, the Company
        has
        no off-balance sheet derivatives requiring additional
        disclosure.
  71
 
 **(16)**
              **Capital
                  Adequacy and Restriction on
                  Dividends**
 
 The
        Company is subject to various regulatory capital requirements administered
        by
        the federal banking agencies. Failure to meet minimum capital requirements
        can
        initiate mandatory and possibly additional discretionary actions by regulators
        that, if undertaken, could have a direct material effect on the Company’s
        consolidated financial statements. Under capital adequacy guidelines and
        the
        regulatory framework for prompt corrective action, the Company must meet
        specific capital guidelines that involve quantitative measures of the Company’s
        assets, liabilities, and certain off-balance-sheet items as calculated under
        regulatory accounting practices. The Company’s capital amounts and
        classification are also subject to qualitative judgments by the regulators
        about
        components, risk weightings, and other factors.
  Quantitative
        measures established by regulation to ensure capital adequacy require the
        Bank
        to maintain minimum amounts and ratios (set forth in the table
        below).
  First,
        a
        bank must meet a minimum Tier I Capital ratio (as defined in the regulations)
        ranging from 3% to 5% based upon the bank’s CAMELS (capital adequacy, asset
        quality, management, earnings, liquidity and sensitivity to market risk)
        rating.
  Second,
        a
        bank must meet minimum Total Risk-Based Capital to risk-weighted assets ratio
        of
        8%. Risk-based capital and asset guidelines vary from Tier I capital guidelines
        by redefining the components of capital, categorizing assets into different
        risk
        classes, and including certain off-balance sheet items in the calculation
        of the
        capital ratio. The effect of the risk-based capital guidelines is that banks
        with high exposure will be required to raise additional capital while
        institutions with low risk exposure could, with the concurrence of regulatory
        authorities, be permitted to operate with lower capital ratios. In addition,
        a
        bank must meet minimum Tier I Capital to average assets ratio.
  Management
        believes, as of December 31, 2005, that the Bank meets all capital adequacy
        requirements to which it is subject. As of December 31, 2005, the most recent
        notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized
        the Bank as well capitalized under the regulatory framework for prompt
        corrective action. To be categorized as well capitalized the Bank must meet
        the
        minimum ratios as set forth above. There are no conditions or events since
        that
        notification that management believes have changed the institution’s
        category.
  The
        Company and the Bank had Tier I, total capital and Tier I leverage above
        the
        well capitalized levels at December 31, 2005 and 2004, respectively, as set
        forth in the following tables:
  **The
                  Company****2005**
              
              **2004****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**Total
                  Risk-Based Capital (to Risk Weighted Assets)
              
              $
              62,824
              
              
              11.8
              %
              $
              56,978
              
              
              11.4
              %Tier
                  I Capital (to Risk Weighted Assets)
              
              
              56,438
              
              
              10.6
              %
              
              50,676
              
              
              10.1
              %Tier
                  I Leverage Capital (to Average Assets)
              
              
              56,438
              
              
              8.5
              %
              
              50,676
              
              
              8.1
              %
  **The
                  Bank****2005**
              
              **2004****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**Total
                  Risk-Based Capital (to Risk Weighted Assets)
              
              $
              61,672
              
              
              11.6
              %
              $
              56,350
              
              
              11.2
              %Tier
                  I Capital (to Risk Weighted Assets)
              
              
              55,287
              
              
              10.4
              %
              
              50,048
              
              
              10.0
              %Tier
                  I Leverage Capital (to Average Assets)
              
              
              55,287
              
              
              8.3
              %
              
              50,048
              
              
              8.0
              %
  Cash
        dividends declared by the Bank are restricted under California State banking
        laws to the lesser of the Bank’s retained earnings or the Bank’s net income for
        the latest three fiscal years, less dividends previously declared during
        that
        period.
  72
  
 **(17)**
              **Fair
                  Values of Financial
                  Instruments**
  The
        following methods and assumptions were used by the Company in estimating
        its
        fair value disclosures for financial instruments:
 ***Cash
        and Cash Equivalents***
  The
        carrying amounts reported in the balance sheet for cash and short-term
        instruments are a reasonable estimate of fair value.
  ***Investment
        Securities***
  Fair
        values for investment securities are based on quoted market prices, where
        available. If quoted market prices are not available, fair values are based
        on
        quoted market prices of comparable instruments.
  ***Loans
        Receivable***
  For
        variable-rate loans that reprice frequently and with no significant change
        in
        credit risk, fair values are based on carrying values. The fair values for
        other
        loans (e.g., commercial real estate and rental property mortgage loans,
        commercial and industrial loans, and agricultural loans) are estimated using
        discounted cash flow analyses, using interest rates currently being offered
        for
        loans with similar terms to borrowers of similar credit quality. The carrying
        amount of accrued interest receivable approximates its fair value.
  ***Commitments
        to Extend Credit and Standby Letters of Credit***
  The
        fair
        value of commitments is estimated using the fees currently charged to enter
        into
        similar agreements, taking into account the remaining terms of the agreements
        and the present creditworthiness of the counterparties. For fixed-rate loan
        commitments, fair value also considers the difference between current levels
        of
        interest rates and the committed rates. The fair value of letters of credit
        is
        based on fees currently charged for similar agreements or on the estimated
        cost
        to terminate them or otherwise settle the obligation with the counterparties
        at
        the reporting date.
  ***Deposit
        Liabilities***
  The
        fair
        values disclosed for demand deposits (e.g., interest and non-interest checking,
        passbook savings, and money market accounts) are, by definition, equal to
        the
        amount payable on demand at the reporting date (i.e., their carrying amounts).
        The fair values for fixed-rate certificates of deposit are estimated using
        a
        discounted cash flow calculation that applies interest rates currently being
        offered on certificates to a schedule of aggregated expected monthly maturities
        on time deposits. The carrying amount of accrued interest payable approximates
        its fair value.
  ***FHLB
        Advances and Other Borrowings***
  The
        fair
        values of borrowed funds were estimated by discounting future cash flows
        related
        to these financial instruments using current market rates for financial
        instruments with similar characteristics.
  ***Limitations***
  Fair
        value estimates are made at a specific point in time, based on relevant market
        information and information about the financial instrument. These estimates
        do
        not reflect any premium or discount that could result from offering for sale
        at
        one time the Company’s entire holdings of a particular financial instrument.
        Because no market exists for a significant portion of the Company’s financial
        instruments, fair value estimates are based on judgments regarding future
        expected loss experience, current economic conditions, risk characteristics
        of
        various financial instruments, and other factors. These estimates are subjective
        in nature and involve uncertainties and matters of significant judgment and
        therefore cannot be determined with precision. Changes in assumptions could
        significantly affect the estimates.
  73
 
 Fair
        value estimates are based on existing on-and off-balance sheet financial
        instruments without attempting to estimate the value of anticipated future
        business and the value of assets and liabilities that are not considered
        financial instruments. Other significant assets and liabilities that are
        not
        considered financial assets or liabilities include deferred tax liabilities
        and
        premises and equipment. In addition, the tax ramifications related to the
        realization of the unrealized gains and losses can have a significant effect
        on
        fair value estimates and have not been considered in many of the
        estimates.
 
 The
        estimated fair values of the Company’s financial instruments for the years ended
        December 31 are approximately as follows:
  **2005**
              
              **2004****Carrying
                  amount**
              
              **Fair**
                **value**
              
              **Carrying
                  amount**
              
              **Fair**
                **value**Financial
                  assets:Cash
                  and federal funds sold
              
              $
              122,692
              
              $
              122,692
              
              $
              116,704
              
              $
              116,704Investment
                  securities
              
              
              48,788
              
              
              48,788
              
              
              55,154
              
              
              55,154Loans:Net
                  loans
              
              
              456,061
              
              
              457,858
              
              
              429,702
              
              
              435,100Loans
                  held-for-sale
              
              
              4,440
              
              
              4,440
              
              
              3,719
              
              
              3,719Financial
                  liabilities:Deposits
              
              
              581,781
              
              
              496,881
              
              
              557,186
              
              
              503,473FHLB
                  advances and other borrowings
              
              
              14,969
              
              
              14,416
              
              
              15,456
              
              
              15,352
  **2005****Contract
                  amount**
              
              **Carrying
                  amount**
              
              **Fair**
                **value**Unrecognized
                  financial instruments:Commitments
                  to extend credit
              
              $
              203,101
              
              $
              975
              
              $
              1,523Standby
                  letters of credit
              
              $
              14,077
              
              $
              —
              
              $
              141
 
 **2004****Contract
                  amount**
              
              **Carrying
                  amount**
              
              **Fair**
                **value**Unrecognized
                  financial instruments:Commitments
                  to extend credit
              
              $
              173,205
              
              $
              831
              
              $
              1,299Standby
                  letters of credit
              
              $
              9,378
              
              $
              —
              
              $
              94
  74
 
 **(18)**
              **Supplemental
                  Consolidated Statements of Cash Flows
                  Information**
 
 Supplemental
        disclosures to the Consolidated Statements of Cash Flows for the years ended
        December 31, are as follows:
  **2005**
              
              **2004**
              
              **2003**Supplemental
                  disclosure of cash flow information:Cash
                  paid during the year for:Interest
              
              $
              5,641
              
              $
              3,417
              
              $
              3,166Income
                  taxes
              
              $
              6,946
              
              $
              3,931
              
              $
              4,755Supplemental
                  disclosure of non-cash investing and financing activities:Stock
                  dividend distributed
              
              $
              6,158
              
              $
              5,537
              
              $
              4,746Loans
                  held-for-sale transferred to loans
              
              $
              —
              
              $
              6,002
              
              $
              3,697Loans
                  held-for-investment transferred to other real estate owned
              
              $
              268
              
              $
              —
              
              $
              —Tax
                  Benefit for Stock Options
              
              $
              268
              
              $
              156
              
              $
              —
  **(19)**
              **Quarterly
                  Financial Information
                  (Unaudited)**
 
 **March 31,**
              
              **June 30,**
              
              **September 30,**
              
              **December 31,**2005:Interest
                  income
              
              $
              9,154
              
              $
              10,022
              
              $
              10,590
              
              $
              11,136Net
                  interest income
              
              
              8,086
              
              
              8,731
              
              
              9,022
              
              
              9,334Provision
                  for loan losses
              
              
              519
              
              
              (450
              )
              
              (69
              )
              
              600Other
                  operating income
              
              
              1,218
              
              
              1,346
              
              
              1,506
              
              
              1,650Other
                  operating expense
              
              
              6,368
              
              
              6,829
              
              
              6,760
              
              
              6,856Income
                  before taxes
              
              
              2,417
              
              
              3,698
              
              
              3,837
              
              
              3,528Net
                  income
              
              
              1,692
              
              
              2,323
              
              
              2,418
              
              
              2,255Basic
                  earnings per share
              
              
              .21
              
              
              .29
              
              
              .30
              
              
              .28Diluted
                  earnings per share
              
              
              .20
              
              
              .28
              
              
              .29
              
              
              .272004:Interest
                  income
              
              $
              7,262
              
              $
              7,500
              
              $
              8,194
              
              $
              8,663Net
                  interest income
              
              
              6,488
              
              
              6,640
              
              
              7,311
              
              
              7,754Provision
                  for loan losses
              
              
              207
              
              
              —
              
              
              —
              
              
              —Other
                  operating income
              
              
              1,140
              
              
              1,310
              
              
              1,420
              
              
              1,344Other
                  operating expense
              
              
              5,295
              
              
              5,456
              
              
              6,043
              
              
              6,149Income
                  before taxes
              
              
              2,126
              
              
              2,494
              
              
              2,688
              
              
              2,949Net
                  income
              
              
              1,397
              
              
              1,611
              
              
              1,727
              
              
              1,972Basic
                  earnings per share
              
              
              .17
              
              
              .19
              
              
              .20
              
              
              .23Diluted
                  earnings per share
              
              
              .16
              
              
              .18
              
              
              .20
              
              
              .23
  75
 
 **(20)**
              **Parent
                  Company Financial
                  Information**
  This
        information should be read in conjunction with the other notes to the
        consolidated financial statements. The following presents summary balance
        sheets
        and summary statements of operations and cash flows information for the years
        ended December 31:
  **Balance
                  Sheets**
              
              **2005**
              
              **2004**AssetsCash
              
              $
              1,151
              
              $
              618Investment
                  in wholly owned subsidiary
              
              
              55,651
              
              
              51,273Other
                  assets
              
              
              —
              
              
              10Total
                  assets
              
              $
              56,802
              
              $
              51,901Liabilities
                  and stockholders’ equityStockholders’
                  equity
              
              
              56,802
              
              
              51,901Total
                  liabilities and stockholders’ equity
              
              $
              56,802
              
              $
              51,901
 
 **Statements
                  of Operations**
              
              **2005**
              
              **2004**
              
              **2003**Dividends
                  from subsidiary
              
              $
              3,500
              
              $
              1,000
              
              $
              500Other
                  operating expenses
              
              
              (97
              )
              
              (68
              )
              
              (59
              )Income
                  tax benefit
              
              
              40
              
              
              28
              
              
              24Income
                  before undistributed earnings of subsidiary
              
              
              3,443
              
              
              960
              
              
              465Equity
                  in undistributed earnings of subsidiary
              
              
              5,245
              
              
              5,747
              
              
              5,646Net
                  income
              
              $
              8,688
              
              $
              6,707
              
              $
              6,111
 
 **Statements
                  of Cash Flows**
              
              **2005**
              
              **2004**
              
              **2003**Net
                  income
              
              $
              8,688
              
              $
              6,707
              
              $
              6,111Adjustments
                  to reconcile net income to net cash provided by operating
                  activitiesDecrease
                  (increase) in other assets
              
              
              11
              
              
              (10
              )
              
              (1
              )Equity
                  in undistributed earnings of subsidiary
              
              
              (5,245
              )
              
              (5,747
              )
              
              (5,646
              )Net
                  cash provided by operating activities
              
              
              3,454
              
              
              950
              
              
              464Cash
                  flows from financing activities:Common
                  stock issued
              
              
              948
              
              
              758
              
              
              600Stock
                  repurchases
              
              
              (3,854
              )
              
              (1,640
              )
              
              (1,680
              )Cash
                  in lieu of fractional shares
              
              
              (15
              )
              
              (12
              )
              
              (13
              )Net
                  cash used in financing activities
              
              
              (2,921
              )
              
              (894
              )
              
              (1,093
              )Net
                  change in cash
              
              
              533
              
              
              56
              
              
              (629
              )Cash
                  at beginning of year
              
              
              618
              
              
              562
              
              
              1,191Cash
                  at end of year
              
              $
              1,151
              
              $
              618
              
              $
              562
  76
 
 **ITEM
        9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  None.
 
 
 **ITEM
        9A - CONTROLS AND PROCEDURES**
 
 **(a)**
              **Disclosure
                  controls and procedures**
 
 The
        Company maintains “disclosure controls and procedures,” as such term is defined
        in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of
        1934
        (the “Exchange Act”), that are designed to ensure that information required to
        be disclosed in reports that the Company files or submits under the Exchange
        Act
        is recorded, processed, summarized, and reported within the time periods
        specified in Securities and Exchange Commission rules and forms, and that
        such
        information is accumulated and communicated to management, including the
        Company’s chief executive officer and chief financial officer, as appropriate,
        to allow timely decisions regarding required disclosure. The Company’s
        disclosure controls and procedures have been designed to meet and management
        believes that they meet reasonable assurance standards. Based on their
        evaluation as of the end of the period covered by this Annual Report on Form
        10-K, the chief executive officer and chief financial officer have concluded
        that the Company’s disclosure controls and procedures were effective to ensure
        that material information relating to the Company, including its consolidated
        subsidiary, is made known to them by others within those entities.
  **(b)**
              **Internal
                  controls over financial
                  reporting**
 
 The
        management of the Company is responsible for the preparation, integrity and
        fair
        presentation of its published financial statements and all other information
        presented in the Company’s consolidated financial statements. The Company’s
        consolidated financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America
        (“US
        GAAP”) and, as such, include amounts based on informed judgments and estimates
        made by management.
 
 Management
        maintains a system of internal accounting controls to provide reasonable
        assurance that assets are safeguarded and transactions are executed in
        accordance with management’s authorization and recorded properly to permit the
        preparation of consolidated financial statements in accordance with US GAAP.
        Management recognizes that even a highly effective internal control system
        has
        inherent risks, including the possibility of human error and the circumvention
        or overriding of controls, and that the effectiveness of an internal control
        system can change with circumstances. Management has assessed the effectiveness
        of the Company’s internal control over financial reporting as of December 31,
        2005. In making this assessment, management used the following criteria:
        criteria established in Internal Control - Integrated Framework issued by
        Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based
        on Management’s assessment, they believe that, as of December 31, 2005, the
        Company’s internal control system over financial reporting is effective based on
        those criteria. “Management’s Report on Internal Control over Financial
        Reporting” is presented on page 44.
 
 The
        Audit
        Committee of the Board of Directors is comprised entirely of directors who
        are
        independent of the Company’s Management. It includes an audit committee
        technical expert and members with banking or related financial management
        expertise and who are not large customers of the Bank. The Audit Committee
        has
        access to outside counsel. The Audit Committee is responsible for selecting
        the
        independent registered public accounting firm subject to ratification by
        the
        shareholders. It meets periodically with management, the independent registered
        public accounting firm, and the internal auditors to provide a reasonable
        basis
        for concluding that the Audit Committee is carrying out its responsibilities.
        The Audit Committee is also responsible for performing an oversight role
        by
        reviewing and monitoring Management’s financial, accounting, and auditing
        procedures in addition to reviewing Management’s financial reports. The
        independent registered public accounting firm and internal auditors have
        full
        and free access to the Audit Committee, with or without the presence of
        management; to discuss the adequacy of internal controls for financial reporting
        and any other matters which they believe should be brought to the attention
        of
        the Audit Committee.
  77
 
 The
        Company’s assessment of the effectiveness of internal control over financial
        reporting and the Company’s consolidated financial statements have been audited
        by KPMG LLP, an independent registered public accounting firm, which was
        given
        unrestricted access to all financial records and related data, including
        minutes
        of all meetings of shareholders, the Board of Directors and committees of
        the
        Board. Management believes that all representations made to the independent
        registered public accounting firm during their audit were valid and appropriate.
        The independent registered public accounting firm’s reports are presented on
        pages 45 and 46 .
 
 During
        the quarter ended December 31, 2005, there were no changes in the Company's
        internal control over financial reporting that have materially affected,
        or are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
 
 
 **ITEM
        9B - OTHER INFORMATION**
 
 None.
 
 
  **PART
        III**
 
 
 **ITEM
        10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**
 
 The
        information called for by this item with respect to director and executive
        officer information is incorporated by reference herein from the sections
        of the
        Company’s proxy statement for the 2006 Annual Meeting of Shareholders entitled
“Security Ownership of Certain Beneficial Owners and Management,” “Executive
        Compensation” “Report of Audit Committee,” “Section 16(a) Beneficial Ownership
        Compliance” and “Nomination and Election of Directors”.
  The
        Company has adopted a Code of Conduct, which complies with the Code of Ethics
        requirements of the Securities and Exchange Commission. A copy of the Code
        of
        Conduct is posted on the “Investor Relations” page of the Company’s website, or
        is available, without charge, upon the written request of any shareholder
        directed to Lynn Campbell, Corporate Secretary, First Northern Community
        Bancorp, 195 North First Street, Dixon, California 95620. The Company intends
        to
        disclose promptly any amendment to, or waiver from any provision of, the
        Code of
        Conduct applicable to senior financial officers, and any waiver from any
        provision of the Code of Conduct applicable to directors, on the “Investor
        Relations” page of its website.
  The
        Company’s website address is www.thatsmybank.com .
 
 **ITEM
        11 - EXECUTIVE COMPENSATION**
 
 The
        information called for by this item is incorporated by reference herein from
        the
        sections of the Company’s proxy statement for the 2006 Annual Meeting of
        Shareholders entitled “Nomination and Election of Directors,” “Report of
        Compensation Committee of the Board of Directors on Executive Compensation,” and
“Executive Compensation.”
  78
 
 **ITEM
        12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
        STOCKHOLDER MATTERS**
 
 Information
        concerning ownership of the equity stock of the Company by certain beneficial
        owners and management is incorporated herein by reference from the sections
        of
        the Company’s proxy statement for the 2006 Annual Meeting of Shareholders
        entitled “Security Ownership of Management” and “Nomination and Election of
        Directors”.
 
 **Stock
        Purchase Equity Compensation Plan Information**
  The
        following table shows the Company’s equity compensation plans approved by
        security holders. The table also indicates the number of securities to be
        issued
        upon exercise of outstanding options, weighted average exercise price of
        outstanding options and the number of securities remaining available for
        future
        issuance under the Company’s equity compensation plans as of December 31, 2005.
        The plans included in this table are the Company’s 2000 Stock Option Plan and
        the Company’s Outside Director 2000 Non-statutory Stock Option Plan. *See* “Stock
        Compensation Plans” Note 12 of Notes to Consolidated Financial Statements (page
        68).
  Plan
                  category
              
              Number
                  of securities to be
                issued
                  upon exercise of
                outstanding
                  options, warrants
                and
                  rights (a)
              
              Weighted-average
                exercise
                  price of
                outstanding
                  options,
                warrants
                  and rights
                (b)
              
              Number
                  of securities
                remaining
                  available for
                future
                  issuance under
                equity
                  compensation
                plans
                  excluding
                securities
                  reflected in
                column
                  (a)Equity
                  compensation
                plans
                  approved by
                security
                  holders
              
              568,602
              
              $9.36
              
              765,544Equity
                  compensation
                plans
                  not approved by
                security
                  holders
              
              —
              
              —
              
              —Total
              
              568,602
              
              $9.36
              
              765,544
  **ITEM
        13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 The
        information called for by this item is incorporated herein by reference from
        the
        sections of the Company’s proxy statement for the 2006 Annual Meeting of
        Shareholders entitled “Report of Compensation Committee of the Board of
        Directors on Executive Compensation”, “Indebtedness of Management,”
“Indebtedness of Certain Directors” and “Transactions with
        Management.”
 
 **ITEM
        14 -** **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
 
 The
        information called for by this item is incorporated herein by reference from
        the
        section of the Company’s proxy statement for the 2006 Annual Meeting of
        Shareholders entitled “Audit and Non-Audit Fees.”
  79
 
 **PART
        IV**
 
 **ITEM
        15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
 
 (a)(1)
              Financial
                  Statements:
 
 Reference
        is made to the Index to Financial Statements under Item 8 in Part II of this
        Form 10-K
 
 (a)(2)
              Financial
                  Statement Schedules:
 
 All
        schedules to the Company’s Consolidated Financial Statements are omitted because
        of the absence of the conditions under which they are required or because
        the
        required information is included in the Consolidated Financial Statements
        or
        accompanying notes.
 
 (a)(3)
              Exhibits:
 
 The
        following is a list of all exhibits filed as part of this Annual Report on
        Form
        10-K
 
 **Exhibit****Exhibit**
                **Number**3.1
              Articles
                  of Incorporation of the Company - incorporated herein by reference
                  to
                  Exhibit 3(i) of Registrant’s Current Report on Form 8-K 12(g)(3) on May
                  24, 2000; Amendment to Articles of Incorporation - incorporated
                  by
                  reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K on
                  May 11, 20053.3
              Amended
                  and Restated Bylaws of the Company - incorporated by reference
                  to Exhibit
                  3.1 of the Registrant’s Current Report on Form 8-K on September 15,
                  200510.1
              First
                  Northern Community Bancorp 2000 Stock Option Plan - incorporated
                  herein by
                  reference to Exhibit 4.1 of Registrant’s Registration Statement on Form
                  S-8 on May 25, 2000 *10.2
              First
                  Northern Community Bancorp Outside Directors 2000 Non-statutory
                  Stock
                  Option Plan - incorporated herein by reference to Exhibit 4.3 of
                  Registrant’s Registration Statement on Form S-8 on May 25, 2000
                  *10.3
              First
                  Northern Community Bancorp 2000 Employee Stock Purchase Plan -
                  incorporated herein by Reference to Exhibit 4.5 of Registrant’s
                  Registration Statement on Form S-8 on May 25, 2000 *10.4
              First
                  Northern Community Bancorp 2000 Stock Option Plan Forms “Incentive Stock
                  Option Agreement” and “Notice of Exercise of Stock Option” - incorporated
                  herein by reference to Exhibit 4.2 of Registration Statement on
                  Form S-8
                  on May 25, 2000 *10.5
              First
                  Northern Community Bancorp 2000 Outside Directors 2000 Non-statutory
                  Stock
                  Option Plan Forms “Non-statutory Stock Option Agreement” and “Notice of
                  Exercise of Stock Option” - incorporated herein by reference to Exhibit
                  4.4 of Registrant’s Registration Statement on Form S-8 May 25, 2000
                  *10.6
              First
                  Northern Community Bancorp 2000 Employee Stock Purchase Plan Forms
                  “Participation Agreement” and “Notice of Withdrawal” - incorporated herein
                  by reference to Exhibit 4.6 of Registration Statement on Form S-8
                  on May
                  25, 2000 *10.7
              Amended
                  and Restated Employment Agreement entered into as of July 23, 2001
                  by and
                  between First Northern Bank of Dixon and Don Fish - incorporated
                  herein by
                  reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for
                  the quarter
                  ended September 30, 2001 *10.8
              Employment
                  Agreement entered into as of July 23, 2001 by and between First
                  Northern
                  Bank of Dixon and Owen J. Onsum - incorporated herein by reference
                  to
                  Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2001 *t
  80
 
 10.9
              Employment
                  Agreement entered into as of July 23, 2001 by and between First
                  Northern
                  Bank of Dixon and Louise Walker - incorporated herein by reference
                  to
                  Exhibit 10.3 of Registrant’s Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2001 *10.10
              Employment
                  Agreement entered into as of July 23, 2001 by and between First
                  Northern
                  Bank of Dixon and Robert Walker - incorporated herein by reference
                  to
                  Exhibit 10.4 of Registrant’s Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 2001 *10.11
              Form
                  of Director Retirement and Split Dollar Agreements between Lori
                  J.
                  Aldrete, Frank J. Andrews Jr., John M. Carbahal, Gregory DuPratt,
                  John F.
                  Hamel, Diane P. Hamlyn, Foy S. McNaughton, William Jones, Jr. and
                  David
                  Schulze - incorporated herein by reference to Exhibit 10.11 to
                  Registrant’s Annual Report on Form 10-K for the year ended December 31,
                  2001 *10.12
              Form
                  of Salary Continuation and Split Dollar Agreement between Owen
                  J. Onsum,
                  Louise A. Walker, Don Fish, and Robert Walker - incorporated herein
                  by
                  reference to Exhibit 10.12 to Registrant’s Annual Report on Form 10-K for
                  the year ended December 31, 2001 *10.13
              Amended
                  Form of Director Retirement and Split Dollar Agreements between
                  Lori J.
                  Aldrete, Frank J. Andrews Jr., John M. Carbahal, Gregory DuPratt,
                  John F.
                  Hamel, Diane P. Hamlyn, Foy S. McNaughton, William Jones, Jr. and
                  David
                  Schulze - provided herewith *10.14
              Amended
                  Form of Salary Continuation and Split Dollar Agreement between
                  Owen J.
                  Onsum, Louise A. Walker, Don Fish, and Robert Walker - provided
                  herewith
                  *11
              Statement
                  of Computation of Per Share Earnings (*See*Page 55 of this Form 10-K)21
              Subsidiaries
                  of the Company - Provided herewith23.1
              Consent
                  of independent registered public accounting firm - Provided
                  herewith31.1
              Rule
                  13(a) - 14(a) / 15(d) -14(a) Certification of the Company’s Chief
                  Executive Officer - Provided herewith31.2
              Rule
                  13(a) - 14(a) / 15(d) -14(a) Certification of the Company’s Chief
                  Financial Officer - Provided herewith32.1
              Section
                  1350 Certification of the Chief Executive Officer - Provided
                  herewith32.2
              Section
                  1350 Certification of the Chief Financial Officer - Provided
                  herewith
  81
  **SIGNATURES**
  
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, as amended, the registrant has duly caused this report to be signed
        on its
        behalf by the undersigned, thereunto duly authorized, on March 16,
        2006.
  FIRST
                  NORTHERN COMMUNITY BANCORPBy:
              /s/
                  Owen J. OnsumOwen
                  J. OnsumPresident/Chief
                  Executive Officer/Director(Principal
                  Executive Officer)By:
              /s/
                  Louise A. WalkerLouise
                  A. WalkerSenior
                  Executive Vice President/Chief Financial Officer(Principal
                  Financial Officer)By:
              /s/
                  Stanley R. BeanStanley
                  R. BeanSenior
                  Vice President/Controller
   Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
  Name
              Title
              Date/s/
                  LORI J. ALDRETE
              Director
              March
                  16, 2006Lori
                  J. Aldrete/s/
                  FRANK J. ANDREWS, JR.
              Director
                  and Chairman of the Board
              March
                  16, 2006Frank
                  J. Andrews, Jr./s/
                  JOHN M. CARBAHAL
              Director
              March
                  16, 2006John
                  M. Carbahal/s/
                  GREGORY DUPRATT
              Director
                  and Vice Chairman of the Board
              March
                  16, 2006Gregory
                  DuPratt/s/
                  JOHN F. HAMEL
              Director
              March
                  16, 2006John
                  F. Hamel/s/
                  DIANE P. HAMLYN
              Director
              March
                  16, 2006Diane
                  P. Hamlyn/s/
                  FOY S. MCNAUGHTON
              Director
              March
                  16, 2006Foy
                  S. McNaughton/s/
                  DAVID W. SCHULZE
              Director
              March
                  16, 2006David
                  W. Schulze
   82