FIRST NORTHERN COMMUNITY BANCORP - 10-K Annual Report

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.

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 an accelerated filer (as defined in Rule 12b-2 of the Act).

The aggregate market value of the Common Stock held by non-affiliates of the Registrant on June 30, 2003 (based upon the last reported sales price of such stock on the OTC Bulletin Board on June 30, 2003) was $75,718,176.

The number of shares of Common Stock outstanding as of March 10, 2004 was 3,423,402.

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 2004 Annual Meeting of Shareholders to be held on April 22, 2004.

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 under “Risk Factors That May Affect Results” on pages 13 through 17 herein 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 stock dividends and a two-for-one stock split effected by the Bank in September 1998.

First Northern Bank of Dixon (“First Northern” or the “Bank”) was established in 1910 under 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 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 Bank of Dixon approved a corporate reorganization, which provided for the creation of a bank holding company, First Northern Community Bancorp (the “Company”) in which the Bank would become a wholly owned subsidiary. This reorganization, which was effected May 19, 2000, has the objective of enabling 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 Solano and Yolo Counties, and parts of Sacramento County.

The Company’s and the Bank’s Administrative Offices are located in Dixon. Also located in Dixon are the back office functions of the Data Processing/Central Operations Department and the Central Loan Department.

The Bank has ten full service Branches. Five are located in the Solano County cities of Dixon, Fairfield, Suisun City, and Vacaville. 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. In 2001, the Bank opened 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 an SBA Loan Office and an Asset Management and 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.

The Bank offers equipment leasing and limited international banking services through third parties.

The operating policy of the Bank since 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. The economy of the Dixon area was primarily dependent upon agricultural related sources of income and most employment opportunities were also related to agriculture.

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 depository 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 has 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 (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.

A Small Business Administration (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 10.5 square mile 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 Davis at Covell Gardens and University Retirement Community, senior living communities.

In December of 2001, Roseville became the site of the Bank’s fourth Real Estate Loan Production Office. This office will serve 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.

Also 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 and 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 for 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.

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, 2003, the Company and its subsidiary employed 214 full-time equivalent staff. The Company and its subsidiary 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 the agricultural economy. Deposits have typically hit lows in February or March and peaked in November or December. Loans typically peak in the late spring and hit lows in the fall as crops are harvested and sold. More recent experience shows the same deposit and loan swings, since the real estate and agricultural economies tend to follow the same seasonal cycle.

The Company’s internet address is www.thatsmybank.com and the Company makes available free of charge on www.thatsmybank.com 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 practical 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 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 and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth 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.

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.

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 now 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.

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 is authorized to approve an interstate acquisition or merger which would result in a deposit concentration 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. See the section entitled “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 a depository institution subsidiary.

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).

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

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.

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.

Part of the USA Patriot Act requires covered financial institutions 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. The USA Patriot Act also expands penalties for violation of the anti-money laundering laws, including expanding the circumstances under which funds in a bank account may be forfeited. The USA Patriot Act also requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

The 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 the 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.

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.

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 leverage 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, 2003, 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, 2003 (amounts in thousands except percentage amounts).

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.

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, undercapitalized, significantly undercapitalized and critically undercapitalized.

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:

An institution that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” 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.

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.

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 noncompliance with one or more standards.

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.

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.

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. The FDIC charges an annual assessment for the insurance of deposits, which as of December 31, 2003, ranged from 0 to 27 basis points per $100 of insured deposits, based on the results of examinations, findings by the Company’s primary federal regulator and other information deemed relevant by the FDIC to the Company’s financial condition and the risk posed to the BIF. No assurance can be given at this time as to what the future level of insurance premiums will be.

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.

On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002. This new legislation addresses accounting oversight and corporate governance matters, including:

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.

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 the GLB Act 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 FSA’s 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 have allowed the Bank to satisfactorily manage its liquidity.

This Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Bank 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. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including the risks discussed below and elsewhere in this Report. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values, including those below, are beyond the Company’s ability to control or predict. 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.

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.

At December 31, 2003, approximately 67% 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
“—Economic Conditions and Geographic Concentration.”

The Bank’s primary lending focus has historically been commercial (including agricultural), construction and real estate mortgage. At December 31, 2003, real estate mortgage (excluding loans held for sale) and construction loans comprised approximately 47% and 19%, respectively, of the total loans in the Bank’s portfolio. At December 31, 2003, all of the Bank’s real estate mortgage and construction loans and approximately 45% 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 Economic Conditions Could Adversely Affect the Bank’s Business.”

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, 2003, approximately 67% of the Bank’s loan portfolio (excluding loans held for sale) consisted of real estate-related loans, all of which were related to collateral located in Northern California. As a result, poor economic conditions in 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 continue to 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 crises 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.

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.”

At December 31, 2003, 12% 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.

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 Financial Code 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.”

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 and credit unions, 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 money market funds, brokerage firms, and even retail stores seeking to penetrate the financial services market. 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.”

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.”

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.

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 recent war in Iraq has also generated various political and economic uncertainties affecting the global and U.S. economies.

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 and lease 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.

Our most significant estimates are approved by our Management team, which is comprised of our most senior officers. At each financial reporting period, a review of these estimates is then presented to our Board of Directors. As of December 31, 2003, we have not created any special purpose entities to securitize assets or to obtain off-balance sheet funding. Although we have sold a number of loans in the past two years, those loans have been sold to third parties without recourse, subject to customary default, representations and warranties breach recourse and first several payment default recourse.

The Bank’s allowance for estimated losses on loans was approximately $7.7 million, or 2.05% of total loans at December 31, 2003 compared to $7.3 million or 2.27% of total loans in 2002 and 199% of total nonperforming loans at December 31, 2003 compared to 1,301% in 2002. 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.”

As of December 31, 2003, the Company had 3,417,257 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 6% of the unissued authorized shares of Common Stock at exercise prices ranging from $10.18 to $23.14 have been issued to directors and employees of the Company under the Company’s 2000 Stock Option Plan and Outside Directors 2000 Nonstatutory 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 Company’s Common Stock and Related Stockholder Matters.”

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 UBS Financial Services 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.

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.

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.

As of December 31, 2003, the Company had outstanding options to purchase an aggregate of 266,104 shares of Common Stock at exercise prices ranging from $10.18 to $23.14 per share, or a weighted average exercise price per share of $16.27. To the extent such options are exercised, shareholders of the Company will experience dilution. See “Market for the Company’s Common Stock and Related Stockholder Matters.”

Dixon Branch—Consists of a two-story building with approximately 16,600 square feet of space situated in the central business district in the city of Dixon in northern Solano County. The Bank owns this property with no encumbrances.

Regency Park Branch—Approximately 5,000 square feet of space situated in a shopping center in the city of Vacaville in north central Solano County. The property is subject to a lease expiring in December 2005. The term of the lease is fifteen years with options to extend this lease for an additional nineteen years.

Fairfield Branch—Approximately 3,800 square feet of space situated in an office complex in the city of Fairfield in western Solano County. Property is subject to a lease expiring in November 2006 with options to extend this lease for an additional ten years.

Operations Center—Consists of a one-story building with approximately 33,500 square feet of space situated in the central business district in the city of Dixon in northern Solano County. The Bank owns the property with no encumbrances.

Future Bank Site—Vacant lot situated in the city of Dixon in northern Solano County. The Bank owns the property with no encumbrances.

Winters Branch—Consists of a two-story building with approximately 2,800 square feet of space situated in the central business district in the city of Winters in southern Yolo County. The Bank owns the property with no encumbrances.

Davis Branch—Approximately 5,000 square feet of space situated in the central business district in the city of Davis in southern Yolo County. The property is subject to a lease expiring in March 2004. This lease has been renegotiated to expire in March 2014.

Real Estate Loan Office—Approximately 2,200 square feet of space situated in the central business district in the city of Davis in southern Yolo County. The property is subject to a lease expiring March 2005. There are no options to renew this lease.

West Sacramento Branch—Consists of a one-story building with approximately 5,000 square feet of space situated in the Port of Sacramento industrial park in the city of West Sacramento in southern Yolo County. The Bank owns the property with no encumbrances.

Woodland Branch—Approximately 3,640 square feet of space situated in the central business district in the city of Woodland in central Yolo County. The property is subject to a lease expiring in October 2007. The Bank has options to extend this lease an additional ten years.

El Dorado Hills Loan Office—Approximately 800 square feet of space situated in an office complex in the city of El Dorado Hills in El Dorado County. The property is subject to a month-to-month lease.

SBA Loan Production Office—Approximately 1,800 square feet of space situated in the north central business district, in an office complex, in the city of Sacramento in Sacramento County. This property is subject to a month-to-month lease. In April 2004, this office will relocate to a downtown office complex in the city of Sacramento in Sacramento County. The lease expires in January 2009 with options to extend an additional ten years.

Vacaville Financial Center Branch—Approximately 5,000 square feet of space situated in the central business district in the city of Vacaville in north central Solano County. The property is subject to a lease expiring in April 2005. The term of the lease is five years with options to extend this lease for an additional ten years.

Covell Gardens Branch—Approximately 200 square feet of space situated in the Covell Gardens Assisted Living Retirement Center in the City of Davis in Yolo County. The lease is subject to annual renewals in June.

University Retirement Center Branch—Approximately 500 square feet of space situated in the University Retirement Community in the City of Davis in Yolo County. The term of the lease is three years expiring October 2004. There are no options to renew this lease.

Roseville Loan Office—Approximately 1,600 square feet located in an office complex in the City of Roseville in Placer County. The term of the lease is five years expiring August 2006.

Suisun City Branch—Approximately 2,800 square feet located in an office complex in the City of Suisun City in Solano County. The term of the lease is five years expiring March 2007 with options to extend this lease for an additional ten years.

Downtown Sacramento Branch—Approximately 4,700 square feet located in a downtown office complex in the City of Sacramento in Sacramento County. The term of the lease is seven years expiring January 2009 with options to extend this lease for an additional ten years.

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 condition or results of operations.

No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of the fiscal year covered by this report.

ITEM 5—MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

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:

As of December 31, 2003, there were approximately 1,020 holders of record of the Company’s common stock, no par value, which is the only class of equity securities authorized or issued.

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, 2000, and 1999 have been derived from the Bank’s historical financial statements not included in this Report. The financial information for 2003, 2002 and 2001 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.

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

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 under “Risk Factors That May Affect Results” on pages 13 through 17 herein 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.

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 2003 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, (3) growth in other operating income related to the increase in loans and (4) the increase in low cost deposits which helped to support the increase in loans and mortgage originations and sales. Financial highlights for 2003 include:

Looking forward to 2004, the Company intends to continue its long-term strategy of maintaining deposit growth to fund growth in loans and other earning assets and will continue to seek to identify opportunities for growing other operating income in areas such as Asset Management and Trust and Investment and Brokerage Services, while remaining conscious of the need to maintain appropriate expense levels. We expect improvement in credit quality, continued strong commercial and real estate loan volumes and deposit growth, assuming that the economic recovery which began in late 2003 continues in 2004. If the current low interest rate environment continues, the Company’s net interest income and net interest margin are expected to decrease due to a decline in the Company’s mortgage warehouse (mortgage loans closed, but not yet sold into the secondary market) during the latter part of 2003. This decline was the result of a rapid rise in interest rates in the third quarter of 2003, which resulted in a decrease in mortgage originations and a corresponding decrease in the Company’s mortgage warehouse. If the number warehoused mortgages continues to decline, both net interest income and net interest margin are expected to be lower in 2004, as the carrying spread on the warehoused mortgages is wider than most other assets on the Company’s balance sheet. If interest rates rise in 2004 from current historical lows, net interest income may increase, unless accompanied by a disproportionate decrease in loan volume due to increased interest rates.

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 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 and lease 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 represents 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 earning or financial position in future periods.

In December 2003, the FASB issued FASB Interpretation No. 46 (FIN 46R) (revised December 2003), Consolidation of Variable Interest Entities (VIE), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003.

The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interest of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The adoption of FIN 46R did not have a material impact on the financial statements.

FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement.

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 table summarizes the distribution, by amount (dollars in thousands) and percentage, of the daily average assets, liabilities, and stockholders’ equity of the Company for 2003, 2002 and 2001. Average balances have been computed using daily balances. Tax-exempt income is not shown on a tax equivalent basis.

Following is an analysis of changes in interest income and expense (dollars in thousands) for 2003 over 2002 and 2002 over 2001. Changes not solely due to rate or volume have been allocated proportionately to rate and volume.

The mix of investment securities at December 31, for the previous three fiscal years is as follows (dollars in thousands):

The following table is a summary of the relative maturities (dollars in thousands) and yields of the Company’s investment securities as of December 31, 2003. The yields on tax-exempt securities are shown on a tax equivalent basis.

The Company held no investment securities of a single issuer that had an aggregate book value that exceeded ten percent of shareholder’s equity at December 31, 2003.

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 (dollars in thousands):

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 2003, total loans increased as a result of increases in commercial loans, agricultural loans, real estate mortgage and real estate construction loans, which were partially offset by a decrease in installment loans. During 2002, total loans increased as a result of increases in commercial loans, agricultural loans real estate mortgage loans, real estate construction loans and installment loans.

Loan maturities of the loan portfolio at December 31, 2003 are as follows (dollars in thousands) includes loans held for sale:

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 (dollars in thousands) in each category at December 31, for the years indicated:

If interest on non-accrual loans had been accrued, such income would have approximated $228,000, $76,000, and $52,000 during the years ended December 31, 2003, 2002 and 2001, respectively. Income actually recognized for these loans approximated $164,000, $1,000 and $22,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

There was a $3,321,000 increase in non-performing assets for 2003 over 2002. At December 31, 2003, non-performing assets included nine agricultural loans totaling $3,482,000 and six non-accrual commercial loans totaling $395,000. Additional non-performing assets included two loans past due more than 90 days totaling $4,000. There were no Other Real Estate Owned (“OREO”) properties at December 31, 2003. The Bank’s management believes that nearly $3,453,000 of the non-accrual loans are adequately collateralized or guaranteed by a governmental entity, the remaining $424,000 may have some potential loss which management believes is sufficiently covered by the Bank’s existing loan loss reserve (Allowance for Loan Losses).

In addition to the nonperforming 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 classified loans and those loans that are past due over sixty days. 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. The Asset Quality Committee of the Bank reviewed the report, dated December 31, 2003, on January 27, 2004. This report included any non-performing loan reported in the table on the previous page and all other potential problem loans. Excluding the non-performing loans cited above, a total of 27 loans with an aggregate balance of $5,684,000 were reported. Sixteen of the 27 loans totaling $5,259,000 were deemed by management to have the same collection risk as the general loan portfolio. Eleven loans totaling $394,000 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, 2003 was 2.05%.

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.

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 (dollars in thousands):

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 of actual charge-offs that may ultimately occur.

The following table sets forth the average amount and the average rate paid on each of the listed deposit categories (dollars in thousands):

The following table sets forth by time remaining to maturity the Bank’s time deposits in the amount of $100,000 or more (dollars in thousands) as of December 31, 2003:

Short-term borrowings at December 31, 2003 and 2002 consisted of secured borrowings from the U.S. Treasury in the amounts of $1,260,000 and $1,675,000, respectively. The funds are placed at the discretion of the U.S. Treasury and are callable on demand by the U.S. Treasury.

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 investment and mortgage-backed securities and mortgage loans. The line is limited to the Company’s maximum borrowing capacity (“MBC”) with the FHLB, which is based on a percentage of qualifying collateral assets. At December 31, 2003, the MBC was approximately $125,100,000 with $12,287,147 current borrowing capacity. Interest accrues daily on the line based on the rate of FHLB discount notes. This rate resets each day. Short-term advances are issued with maturities less than one year based on the FHLB’s current cost of funds rate. There are no prepayment or commitment fees; however, the FHLB has the right to reduce or terminate the line at any time without prior notice. 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. Treasury Securities.

Long-term debt at December 31, 2003, consisted entirely of a 5.29 percent fixed-rate, amortizing advance of $3,313,000 and a 2.67 percent fixed-rate advance of $5,000,000 from the Federal Home Loan Bank (FHLB). The 5.29 percent advance matures on March 15, 2006. The scheduled principal payments on the note for the next three years total, $75,709 in 2004, $80,180 in 2005 and $3,143,155 in 2006. The prepayment fee applicable to the advance is equal to the present value of the cash flow differences between the initial matched maturity rate and the current matched maturity rate, plus the present value of 5 basis points per annum, with both applied against the remaining principal balance amortization schedule of the Advance amount being repaid. The note is secured under terms of a blanket collateral agreement by pledge of qualifying residential mortgage loans. The purpose of the advance was to offset the interest rate risk associated with a loan with similar payment characteristics. The 2.67 percent fixed-rate advance matures May 27, 2008. The scheduled payments on the note for the next five years are monthly interest and principal of $5,000,000 due at maturity. The prepayment fee applicable to the advance is the greater of zero or the amount equal to the sum of the present value of the change in the FHLB’s cost of funding the advance applied against the principal amount being prepaid through the scheduled maturity date, plus the present value of 10 basis points per annum applied against the principal amount being prepaid through the scheduled maturity date. The note is secured under terms of a blanket collateral agreement by a pledge of qualifying residential mortgage loans.

Long-term debt at December 31, 2002, consisted entirely of a 5.29 percent fixed-rate, amortizing advance of $3,384,000 from the Federal Home Loan Bank (FHLB).

Net income for the year ended December 31, 2003, was $6,111,000, representing an increase of $393,000, or 7% over net income of $5,718,000 for the year ended December 31, 2002. The increase in net income is principally attributable to a $2,513,000 increase in net interest income, and an increase of $2,188,000 in other operating income, which was partially offset by an increase of $1,709,000 in the provision for loan losses, a $1,123,000 increase in salaries and employee benefits, a $248,000 increase in occupancy and equipment and a $273,000 increase in data processing.

Net income for the year ended December 31, 2002, was $5,718,000, representing an increase of $389,000, or 7% over net income of $5,329,000 for the year ended December 31, 2001. The increase in net income is principally attributable to a $3,498,000 increase in net interest income, and an increase of $1,447,000 in other operating income, which was partially offset by an increase of $829,000 in the provision for loan losses, a $2,283,000 increase in salaries and employee benefits, a $464,000 increase in occupancy and equipment and a $173,000 increase in data processing.

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 $2,513,000 increase in the Bank’s net interest income in 2003 from 2002, and the $3,498,000 increase in 2002 from 2001 were due to the combined effects of lower funding costs, a higher level of core deposits and strong commercial and real estate loan volumes. The “Analysis of Changes in Interest Income and Interest Expense” set forth on Page 27 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 earning asset to total asset ratio. This ratio was 88.7% in 2003, 89.8% in 2002 and 91.7% in 2001.

Interest income on loans (including loan fees) was $26,538,000 for 2003, representing an increase of $2,804,000, or 11.81% from $23,734,000 for 2002. This compared to an increase in 2002 of $1,550,000 or 7% more than loan interest income earned in 2001. The increased interest income on loans in 2003 over 2002 was the result of a 21.29% increase in loan volume and a 58 basis point decrease in loan interest rates, which was partially offset by an increase of approximately $422,000 in loan fees. As noted, loan fee comparisons were impacted by net increases in deferred loan fees of $316,000 in 2003, $127,000 in 2002, and $340,000 in 2001.

Average outstanding federal funds sold fluctuated during this period, ranging from $30,164,000 in 2003 to $24,825,000 in 2002 and $22,507,000 in 2001. At year-end 2003 federal funds sold were $70,915,000. Federal funds are used primarily as a short-term investment to provide liquidity for funding of loan commitments or to accommodate seasonal deposit fluctuations. Interest rates on federal funds sold in 2003 generally provided lower yields, compared to investment securities rates, than in 2002. Federal funds sold yields were .91% and 1.57% for 2003 and 2002, respectively. Investment securities yields were 5.61% and 5.79% for 2003 and 2002, respectively.

The average total level of investment securities decreased $20,630,000 in 2003. The level of securities interest income attributable to investment securities decreased to $3,513,000 in 2003 from $4,818,000 in 2002, 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 high cash flow for reinvestment in a higher interest rate instrument.

Total interest expense decreased to $3,109,000 in 2003 from $4,237,000 in 2002, and decreased to $4,237,000 in 2002 from $8,318,000 in 2001, representing a 26.62% decrease in 2003 over 2002 and a 49.06% decrease in 2002 over 2001. Changes in interest expense in 2003 from 2002 were primarily from changes in rates and volume of total deposits, and changes in the mix of deposits. The decrease in total interest expense from 2003 to 2002 and 2002 to 2001 was primarily due to decreases in interest rates paid on deposits.

The mix of deposits for the previous three years is as follows (dollars in thousands):

The three years ended December 31, 2003 have been characterized by fluctuating interest rates. Loan rates and deposit rates both decreased in 2003, 2002 and 2001. The net spread between the rate for total earning assets and the rate for total deposits and borrowed funds increased 2 basis points in the period from 2003 to 2002 and increased 83 basis points in the period from 2002 to 2001.

The Bank’s net interest margin (net interest income divided by average earning assets) was 5.91% in 2003, 6.01% in 2002, and 5.64% in 2001. The net interest margin, which had benefited from declining interest rates mainly due to increased loan volume and lower cost of funds, was unfavorably affected in 2003 by the sustained low rate environment, which served to narrow the spread. Going forward into the first half of 2004, it is anticipated that net interest income and net interest margin will be lower as a result of the continued decline in the warehouse of mortgage loans held for sale which was at its peak in the second quarter 2003 of $42,265,000 and on December 31, 2003 $10,672,000. This reduction was a result of increased loan sales to mitigate interest rate risk.

The provision for loan losses increased to $2,230,000 in 2003 from $521,000 in 2002, primarily as a result of loan growth and charge offs. The amount of loans charged-off increased in 2003 to $1,909,000 from $329,000 in 2002, and recoveries decreased to $132,000 in 2003 from $167,000 in 2002. The increase in charge offs was the result, for the most part, of the declining loan quality of two agricultural borrowing relationships. The ratio of the Allowance for Loan Losses to total loans at December 31, 2003 was 2.05%. The ratio of the Allowance for Loan Losses to total non-accrual loans and loans past due 90 days or more at December 31, 2003 was 199% compared to 1,301% at December 31, 2002.

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 increased to $521,000 in 2002 and a portion of the allowance was reversed in 2001. The ($308,000) adjustment in 2001 was made because of improved market conditions and loan quality in the Bank’s loan portfolio. The amount of loans charged-off increased in 2002 to $329,000 from $154,000 in 2001 and recoveries increased to $167,000 in 2002 from $160,000 in 2001. The ratio of the Allowance for Loan Losses to total loans at December 31, 2002 was 2.27%. The ratio of the Allowance for Loan Losses to total non-accrual loans and loans past due 90 days or more at December 31, 2001 was 1,301% compared to 1,186% at December 31, 2001.

Other operating income consisted primarily of service charges on deposit accounts, net realized gains on available for sale securities and loans held for sale, and other miscellaneous income. Service charges on deposit accounts increased $115,000 in 2003 over 2002 and $43,000 in 2002 over 2001. The increase in 2003 was due, for the most part, to increased service charges on business analysis checking accounts. Net realized gains on loans held for sale increased $1,617,000 in 2003 over 2002 and increased $34,000 in 2002 over 2001. The increase in 2003 was due, for the most part, to record mortgage loan volumes and sales and a reduction in the Bank’s mortgage loan warehouse through increased loan sales. Other miscellaneous income increased $70,000 in 2003 over 2002 and increased $668,000 in 2002 over 2001.

The Bank realized net gains of $793,000 on sale of investment securities in 2003 and $462,000 in 2002 compared to net losses of $236,000 in 2001 (primarily attributable to an other than temporary market value decline in a Pacific Gas and Electric Company security). The increase in 2003 realized net gains on the sale of investment securities was primarily attributable to the gain on the sale of the Pacific Gas and Electric Company security of $310,623.

Other operating expenses consist of salaries and employee benefits, occupancy and equipment expense and other operating expenses. Other operating expenses increased to $22,791,000 in 2003 from $20,566,000 in 2002, and increased to $20,566,000 in 2002 from $16,936,000 in 2001, representing an increase of $2,225,000, or 10.8% in 2003 over 2002, and an increase of $3,630,000, or 21.4% in 2002 over 2001.

Following is an analysis of the increase or decrease in the components of other operating expenses (dollars in thousands):

In 2003, salaries and employee benefits increased $1,123,000 to $13,760,000 from $12,637,000 for 2002. This increase was due, for the most part, commissions paid for increased real estate loan originations, and profit sharing. In addition, the Company recorded stock option compensation expense of $182,000 in 2003. 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.

In 2002, salaries and employee benefits increased $2,283,000 to $12,637,000 from $10,354,000 for 2001. This increase was due, for the most part, to increases in the number of employees associated with opening new branches and offices, commissions paid for increased real estate loan originations, incentive compensation and profit sharing. Increases in occupancy and equipment were also 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.

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 nontaxable earnings. In 2003, taxes increased $374,000 to $3,245,000 from $2,871,000 for 2002. In 2002, taxes increased $97,000 to $2,871,000 from $2,774,000 for 2001. The Bank’s effective tax rate was 35%, 33%, and 34% for the years ended December 31, 2003, 2002 and 2001, respectively. Nontaxable municipal bond income was $693,000, $939,000, and $1,105,000 for the years ended December 31, 2003, 2002, and 2001, respectively.

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. Dividends from the Bank are subject to regulatory restrictions.

As discussed in Part 1 (Item 1) of this Annual Report of Form 10-K, the Bank does experience seasonal swings in deposits, which impact liquidity. Management has adjusted to this seasonal swing 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.

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 76.0% on December 31, 2003, 80.3% on December 31, 2002, and 68.7% on December 31, 2001. At December 31, 2003 and 2002, the Bank’s ratio of core deposits to total assets was 79%. 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 2003; 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, 2003, 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 –2.11%, compared to 8.10% in 2002. 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 –5.78% at the end of 2003, compared to 6.93% at year-end 2002. These ratios indicated at December 31, 2003, 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, 2003, significant fixed and determinable contractual obligations to third parties by payment date:

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 service provided for informative technology, capital expenditures, and the outsourcing of certain operational activities.

The Company’s long-term debt consists of Federal Home Loan Bank (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, 2003:

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.

Financial instruments, whose contract amounts represent credit risk at December 31, are as follows:

The Bank expects its liquidity position to remain strong in 2004 as the Bank continues to grow into existing and new markets. However, the recent drops in the U.S. stock markets did strengthen the Bank’s liquidity position by generating an inflow of deposits. 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 2004.

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, 2003, stockholders’ equity totaled $47.0 million, an increase of $3.6 million from $43.4 million at December 31, 2002. An important source of capital is earnings retention. Net income of $6.1 million, in 2003, offset by stock repurchases of $1.7 million was the primary factor contributing to the increase. Also affecting capital in 2003 was paid in capital in the amount of $0.2 million resulting from a tax benefit on stock options exercised and a decrease in other comprehensive income of $1.5 million, consisting entirely of unrealized gains on investment securities available-for-sale. The Bank’s Tier 1 Leverage Capital ratio for 2003 is 8.1% and 7.9% in 2002.

In 2001, the Board of Directors approved a stock repurchase program for the retirement of shares equivalent to 10% of the Company’s equity over a rolling 12 month period. The stock repurchase program expired April 30, 2002. During 2001, the Bank paid $2.5 million in dividends to the Company to fund repurchase of nearly 4% of the Company’s outstanding shares. The Company approved a new stock repurchase program effective April 30, 2002 to replace the Company’s previous stock purchase plan that expired on the same date. The new stock repurchase program, which will remain in effect until April 30, 2004, allows purchases in an aggregate of up to 4% of the Company’s outstanding shares of common stock over each rolling 12-month period. During 2003, the Bank paid $0.5 million in dividends to the Company to fund the repurchase of 67,825 shares of the Company’s outstanding common stock. During 2002 the Bank paid $5.5 million in dividends to the Company to fund the repurchase of 226,833 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 and from time to time the stock repurchase program is a prudent use of excess capital. The Company expects to renew its stock repurchase program under similar guidelines in April 2004, but no assurance can be given as to the level of such repurchases in the future.

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.

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.

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.

At December 31, 2003, federal funds sold of $70.9 million with a yield of 1.00% and investments of $8.3 million with a weighted-average, tax equivalent yield of 6.59% were scheduled to mature within one year. In addition, net loans of $172.7 million with a weighted-average yield of 5.77% were scheduled to mature or reprice within the same timeframe. Overall, interest-earning assets scheduled to mature within one year totaled $251.9 million with a weighted-average, tax-equivalent yield of 4.55%. With respect to interest-bearing liabilities, based on historical withdrawal patterns, NOW accounts, money market and savings deposits, of $72.0 million with a weighted-average cost of 0.12% were scheduled to mature within one year. In addition, certificates of deposit totaling $108.8 million with a weighted-average cost of 1.55% were scheduled to mature in the same timeframe. Total interest-bearing liabilities scheduled to mature within one year equaled $180.8 million with a weighted-average cost of 0.98%.

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 $172.7 million or 45.6% of the total loan portfolio at December 31, 2003 (including loans held for sale) are subject to repricing within one year. Loan maturities in the after five-year category increased to $113.1 million at December 31, 2003 from $95.2 million at December 31, 2002. The reason for this increase was due, for the most part, to increased volume in the commercial loan category.

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 $1,488,000 in other comprehensive income as reflected in the December 31, 2003 balance sheet. Mark to market adjustments during the year ending December 31, 2002 was positive a $1,146,000. These adjustments were the result of fluctuating interest rates.

Schedule II—Loans to Officers, Directors, Principal Security Holders and any Associates of the Foregoing Persons: See Note 10 of Notes to Consolidated Financial Statements (page 61)

Schedule III—Loans: See Note 4 of Notes to Consolidated Financial Statements (page 56).

Schedule IV—Bank Premises and Equipment: See Note 5 of Notes to Consolidated Financial Statements (page 57)

Schedule V—Investments in, Income From Dividends, and Equity in Earnings or Losses of Subsidiaries and Associated Companies: Not Applicable

Schedule VI—Allowance for Possible Loan Losses: See Note 4 of Notes to Consolidated Financial Statements (page 57).

We have audited the accompanying consolidated balance sheets of First Northern Community Bancorp and subsidiary as of December 31, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

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, under the prospective method of adoption as of January 1, 2003.

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.

For purposes of the statement 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.

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 does not hold any derivatives at December 31, 2003 and 2002.

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.

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.

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.

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:

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.

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 twelve months ended December 31, 2003 for cash proceeds equal to the fair value of the loans.

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.

At December 31, 2003, the Company had $10,672,000 mortgage loans held for sale. At December 31, 2003 and December 31, 2002, the Company serviced real estate mortgage loans for others of $98,200,000 and $67,775,000, respectively.

Mortgage servicing rights as of December 31, 2003 were $675,908. The balance as of December 31, 2002 was not significant.

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 $2,355,000 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. 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 noncompliance 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.

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, 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 periods ended December 31, 2003, 2002 and 2001, respectively:

The weighted average fair value at date of grant for options granted during the years ended December 31, 2003, 2002 and 2001, was $6.73, $6.92 and $6.90 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:

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 61).

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.

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.

In December 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46R”) (revised December 2003), Consolidation of Variable Interest Entities (“VIE”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interest of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The adoption of FIN 46R did not have a material impact on the Financial Statements.

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.

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, 2003 and 2002. The Bank has met its average reserve requirements during 2003 and 2002 and the minimum required balance at December 31, 2003 and 2002.

The amortized cost and estimated market values of investments in debt and other securities at December 31, 2003 are summarized as follows:

The amortized cost and estimated market values of investments in debt and other securities at December 31, 2002 are summarized as follows:

The Bank is a member of the Federal Home Loan Bank (“FHLB”), which requires ownership of its stock, which is carried at cost. The balance of the Bank’s investment in FHLB stock, which is included in other securities, was $1,248 and $869 as of December 31, 2003 and 2002, respectively.

Gross realized gains from sales of available-for-sales securities were $793, $477, and $542 for the years ended December 31, 2003, 2002 and 2001, respectively. Gross realized losses from sales of available-for-sale securities were $-0-, $15 and $426 for the years ended December 31, 2003, 2002 and 2001, respectively. During the year ended December 31, 2001, a loss of $352 was recognized due to an other than temporary decline in the market value of one of the Bank’s available-for-sale securities.

The amortized cost and estimated market value of debt and other securities at December 31, 2003 by contractual maturity are shown below. 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.

Investment securities carried at $19,475 and $22,373 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

As of December 31, 2003, approximately 19% of the Bank’s loans are for real estate construction. Additionally 47% of the Bank’s loans are mortgage type loans which are secured by residential real estate. Approximately 33% 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 $98,200 and $68,000 at December 31, 2003 and 2002, respectively.

Effective September 12 and October 21, 2003, the Bank transferred approximately $1,717 and $1,980, respectively, from their loans held for sale portfolio to their loans held to maturity portfolio.

Nonaccrual loans totaled approximately $3,877, $552, and $530 at December 31, 2003, 2002 and 2001, respectively. If interest on these non-accrual loans had been accrued, such income would have approximated $228, $76, and $52 during the years ended December 31, 2003, 2002 and 2001, respectively.

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 $3,877 and $552 at December 31, 2003 and 2002, respectively, and had related valuation allowances of approximately $425, and $42 at December 31, 2003 and 2002, respectively. The average outstanding balance of impaired loans was approximately $4,701, $872, and $602, on which $164, $1, and $22 of interest income was recognized for the years ended December 31, 2003, 2002 and 2001, respectively.

Loans in the amount of $-0- and $407 at December 31, 2003 and 2002, respectively, were pledged to secure potential borrowings from the Federal Reserve Bank.

Loans in the amount of $39,970 and $52,612 at December 31, 2003 and 2002, respectively, were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank.

Changes in the allowance for loan losses for the years ended December 31, are summarized as follows:

Depreciation and amortization expense, included in occupancy and equipment expense, is $1,262, $1,165, and $940 for the years ended December 31, 2003, 2002 and 2001, respectively.

The Company amortizes capitalized software costs on a straight-line basis using a useful life from three to five years.

The Bank did not hold any other real estate owned (OREO) as of December 31, 2003, 2002 and 2001 and had no allowance for losses on OREO recorded for these periods.

SALARY CONTINUATION AND RELATED SPLIT DOLLAR PLAN FOR CERTAIN OFFICERS FOR THE PROVISION OF DEATH, DISABILITY AND RETIREMENT BENEFITS.

On July 19, 2001, the Company and the Bank approved a salary continuation and related split dollar plan for certain officers for the provision of death, disability and retirement benefits. The Salary Continuation Plan is intended to provide certain officers with an annual benefit for 10 years at the normal retirement age of 65. This is a non-qualified plan funded with bank owned life insurance policies taken on the life of the officer with a split-dollar endorsement to provide each officer’s survivor with a tax-free distribution. The Company will accrue for the compensation based on anticipated years of service and the vesting schedule. The Salary Continuation benefits will be funded by benefit accruals under the plan in the amount by which, if any, the increase in cash surrender value of the related insurance policies exceeds a predetermined profitability index. The cash surrender value of the related insurance policies as of December 31, 2003 and 2002 totaled $3,911,000 and $3,744,000, respectively. The accrued liability for the plan as of December 31, 2003 and 2002 totaled $468,000 and $216,000, respectively. The expenses for the plan as of December 31, 2003, 2002 and 2001 totaled $252,000, $216,000 and $-0-, respectively.

DIRECTOR RETIREMENT PLAN WITH RELATED SPLIT DOLLAR PLAN FOR ALL DIRECTORS FOR THE PROVISION OF DEATH, DISABILITY AND RETIREMENT BENEFITS.

On July 19, 2001, the Company and the Bank approved a director retirement plan and related split dollar plan for all directors for the provision of death, disability and retirement benefits. The director retirement plan is intended to provide directors with an annual benefit of $15,000 for 10 years at the normal retirement age of 65. This is a non-qualified plan funded with bank owned life insurance policies taken on the life of the director with a split-dollar endorsement to provide each director’s survivor with a tax-free distribution. The Company will accrue for the retirement benefit based on anticipated years of service and the vesting schedule. The director retirement benefits will be funded by benefit accruals under the plan in the amount by which, if any, the increase in cash surrender value of the related insurance policies exceeds a predetermined profitability index. The cash surrender value of the related insurance policies as of December 31, 2003 and 2002 totaled $1,962,000 and $1,880,000, respectively. The accrued liability for the plan as of December 31, 2003 and 2002 totaled $193,000 and $144,000, respectively. The expenses for the plan as of December 31, 2003, 2002 and 2001 totaled $64,000, $118,000 and $38,000, respectively.

On July 19, 2001, the Bank approved a revised Executive Elective Deferred Compensation Plan—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 nonqualified 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 $1,125,000, 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, 2003 and 2002 totaled $2,589,000 and $2,471,000, respectively. The accrued liability for the plan as of December 31, 2003 and 2002 totaled $244,000 and $152,000, respectively. The expenses for the plan as of December 31, 2003, 2002 and 2001 totaled $22,000, $16,000 and $21,000, respectively.

On July 19, 2001, the Bank approved a Director Elective Deferred Fee Plan—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 nonqualified 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, 2003 and 2002 totaled $83,000 and $79,000, respectively. The accrued liability for the plan as of December 31, 2003 and 2002 totaled $6,584 and $2,141, respectively. The expenses for the plan as of December 31, 2003, 2002 and 2001 totaled $443, $141 and $-0-, respectively.

The provision for income tax expense consists of the following for the years ended December 31:

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 consist of:

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:

On January 22, 2004, the Board of Directors of the Company declared a 6% stock dividend payable as of March 31, 2004. All income per share amounts have been adjusted to give retroactive effect to the stock dividend.

Basic and diluted earnings per share for the years ended December 31, 2003, 2002 and 2001 were computed as follows:

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 $2,266 and $1,635 at December 31, 2003 and 2002, respectively.

The following is an analysis of the activity of loans to executive officers and directors for the years ended December 31:

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 statements of income, were $1,097, $999 and $870 in 2003, 2002 and 2001, respectively.

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 695,939 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 Nonstatutory Stock Option Plan, the Company may grant options to an outside director for an amount up to 8,350 shares of common stock during the director’s lifetime. There are 208,779 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 7,432 shares to a new director, any future grants require shareholder approval.

Stock option activity for the employee and outside director’s stock option plans during the periods indicated is as follows:

The 2000 Employee Stock Option Plan permits stock-for-stock exercises of shares. During 2003, employees tendered 17,558 (adjusted for stock options exercised in January and February 2003) mature shares in stock-for-stock exercises. Matured shares are those held by employees longer than six months.

At December 31, 2003, the range of exercise prices for all outstanding options ranged from $10.18 to $23.14. The following table provides certain information with respect to stock options outstanding at December 31, 2003:

Options exercisable as of December 31 were 152,818 in 2003, 149,178 in 2002, and 167,514 shares in 2001, at a weighted-average exercise price of $14.08, $12.88, and $11.67, respectively.

The following table provides certain information with respect to stock options exercisable at December 31, 2003:

Under the 2000 Employee Stock Purchase Plan, the Company is authorized to issue to an eligible employee shares of common stock. There are 695,939 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 60 percent of eligible employees are participating in the Plan in the current participation period, which began November 24, 2002 and will end November 22, 2004. At the annual stock purchase date, November 23, 2003, there were $183,738 in contributions, and 9,703 shares were purchased at an average price of $18.80, totaling $182,436.

Short-term debt at December 31, 2003, consisted of secured borrowings from the U.S. Treasury in the amount of $1,260,000. 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 investment and mortgage-backed securities and mortgage loans. At December 31, 2003, the Company had a current borrowing capacity with the FHLB of $12,300,000. 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. Treasury Securities.

Long-term debt at December 31, 2003, consisted of a 5.29 percent fixed-rate, amortizing advance of $5,000,000 and a 2.67 percent fixed-rate advance of $3,313,000 from the Federal Home Loan Bank (“FHLB”). The 5.29 percent advance matures on March 15, 2006. The scheduled principal payments on the note for the next three years total, $75,709 in 2004, $80,180 in 2005 and $3,143,155 in 2006. The prepayment fee applicable to the advance is equal to the present value of the cash flow differences between the initial matched maturity rate and the current matched maturity rate, plus the present value of 5 basis points per annum, with both applied against the remaining principal balance amortization schedule of the Advance amount being repaid. The note is secured under terms of a blanket collateral agreement by a pledge of qualifying residential mortgage loans. The purpose of the advance was to offset the interest rate risk associated with a loan with similar payment characteristics. The 2.67 percent fixed-rate advance matures May 27, 2008. The scheduled payments on the note for the next five years are monthly interest and principal of $5,000,000 due at maturity. The prepayment fee applicable to the advance is the greater of zero or the amount equal to the sum of the present value of the change in the FHLB’s cost of funding the advance applied against the principal amount being prepaid through the scheduled maturity date, plus the present value of 10 basis points per annum applied against the principal amount being prepaid through the scheduled maturity date. The note is secured under terms of a blanket collateral agreement by a pledge of qualifying residential mortgage loans.

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 $808, $705, and $570 for the years ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003, the future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one year are as follows:

At December 31, 2003, the aggregate maturities for time deposits are as follows:

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 financial condition or results of operations of the Company.

The Bank’s exposure to credit loss in the event of nonperformance 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, are as follows:

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, 2003 there was $80 issued in financial standby letters of credit and the Bank carried no liability. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. At December 31, 2003 there was $8,683 issued in performance standby letters of credit and the Bank carried no liability. The terms of the guarantees will expire primarily in 2004. 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.

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, 2003, the Company has no off-balance sheet derivatives requiring additional disclosure.

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 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, 2003, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2003, 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, 2003 and 2002, respectively, as set forth in the following tables:

Cash dividends 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.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

The carrying amounts reported in the balance sheet for cash and short-term instruments are a reasonable estimate of fair value.

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.

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.

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.

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.

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.

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, property, plant, equipment and goodwill. 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 financial instruments are approximately as follows:

Supplemental disclosures to the Statements of Cash Flows for the years ended December 31, are as follows:

This information should be read in conjunction with the other notes to the consolidated financial statements. The following presents a summary balance sheet as of December 31, 2003 and summary statements of operations and cash flows information for the years ended December 31, 2003, 2002 and 2001.

ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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. In designing and evaluating its disclosure controls and procedures, management recognized that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. 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, subject to the limitations noted above, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within those entities.

During the year last fiscal quarter, 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.

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 2004 Annual Meeting of Shareholders entitled “Security Ownership of Certain Beneficial Owners and Management,” “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 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 its website. The Company’s website address is www.thatsmybank.com.

The information called for by this item is incorporated by reference herein to the sections of the Company’s proxy statement for the 2004 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.”

ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Certain of the information called for by this item is incorporated herein by reference from the sections of the Company’s proxy statement for the 2004 Annual Meeting of Shareholders entitled “Security Ownership of Management” and “Nomination and Election of Directors”.

The following table shows the 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 equity compensation plans as of December 31, 2003. The plans included in this table are the FNC Bancorp 2000 Stock Option Plan and the FNC Bancorp Outside Director 2000 Non-statutory Stock Option Plan. See “Stock Compensation Plans” Note 12 of Notes to Consolidated Financial Statements (page 62).

The information called for by this item is incorporated herein by reference from the sections of the Company’s proxy statement for the 2003 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.”

The information called for by this item is incorporated herein by reference from the section of the Company’s proxy statement for the 2004 Annual Meeting of Shareholders entitled “Audit and Non-Audit Fees.”

Reference is made to the Index to Financial Statements under Item 8 in Part II of this Form 10-K

The following is a list of all exhibits filed as part of this Annual Report on Form 10-K.

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 15, 2004.


FIRST NORTHERN COMMUNITY BANCORP

By:		/s/ OWEN J. ONSUM
		Owen J. Onsum
		President/Chief Executive Officer/Director
		(Principal Executive Officer)

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Owen J. Onsum, Louise A. Walker and Stanley R. Bean, and each of them, his or her true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

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.


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)

Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act:		None Common Stock, no par value (Title of Class)


		Page
PART I

Item 1. Business		3

Item 2. Properties		17

Item 3. Legal Proceedings		18

Item 4. Submission of Matters to a Vote of Security Holders		18

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters		19

Item 6. Selected Financial Data		20

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 7A. Quantitative and Qualitative Disclosures about Market Risk		40

Item 8. Financial Statements and Supplementary Data		43

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		72

Item 9A. Controls and Procedure		72

PART III

Item 10. Directors and Executive Officers of the Registrant		72

Item 11. Executive Compensation		73

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		73

Item 13. Certain Relationships and Related Transactions		73

Item 14. Principal Accountant fees and Services		73

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K		74

Exhibit Index		74

Signatures		76


	The Company
	Actual				Well Capitalized Ratio		Minimum Capital Requirement
	Capital		Ratio		Well Capitalized Ratio		Minimum Capital Requirement
Leverage	$	45,035	8.2	%	5.0	%	4.0	%
Tier 1 Risk-Based		45,035	10.1	%	6.0	%	4.0	%
Total Risk-Based		50,657	11.3	%	10.0	%	8.0	%

	The Bank
	Actual				Well Capitalized Ratio		Minimum Capital Requirement
	Capital		Ratio		Well Capitalized Ratio		Minimum Capital Requirement
Leverage	$	44,473	8.1	%	5.0	%	4.0	%
Tier 1 Risk-Based		44,473	9.9	%	6.0	%	4.0	%
Total Risk-Based		50,095	11.2	%	10.0	%	8.0	%


“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%.


QUARTER/YEAR	HIGH	LOW
4th Quarter 2003	$27.25	$25.00
3rd Quarter 2003	$25.75	$23.50
2nd Quarter 2003	$25.50	$23.25
1st Quarter 2003	$27.36	$22.17

4th Quarter 2002	$24.15	$22.25
3rd Quarter 2002	$25.90	$23.40
2nd Quarter 2002	$27.70	$25.75
1st Quarter 2002	$29.00	$25.00


Shareholder Record Date	Dividend Percentage	Date Payable
February 27, 2004	6%	March 31, 2004
February 28, 2003	6%	March 31, 2003
February 28, 2002	6%	March 29, 2002


	2003			2002			2001			2000			1999
Interest Income and Loan Fees	$	30,326		$	28,941		$	29,524		$	28,857		$	25,135
Interest Expense		(3,109	)		(4,237	)		(8,318	)		(8,990	)		(7,835	)

Net Interest Income		27,217			24,704			21,206			19,867			17,300
(Provision for) Reversal and Recovery of Loan Losses		(2,230	)		(521	)		308			—			800

Net Interest Income after (Provision for) Reversal
and Recovery of Loan Losses		24,987			24,183			21,514			19,867			18,100
Other Operating Income		7,160			4,972			3,525			3,720			2,745
Other Operating Expense		(22,791	)		(20,566	)		(16,936	)		(15,886	)		(14,641	)

Income before Taxes		9,356			8,589			8,103			7,701			6,204
Provision for Taxes		(3,245	)		(2,871	)		(2,774	)		(2,658	)		(2,121	)

Net Income	$	6,111		$	5,718		$	5,329		$	5,043		$	4,083

Basic Income Per Share	$	1.69		$	1.55		$	1.40		$	1.28		$	1.01

Diluted Income Per Share	$	1.65		$	1.51		$	1.37		$	1.27		$	1.01

Total Assets	$	558,709		$	495,221		$	439,833		$	391,628		$	370,991

Total Investments	$	50,235		$	69,958		$	96,797		$	126,638		$	135,452

Total Loans, including loans held for sale, net	$	379,090		$	355,018		$	269,351		$	217,127		$	162,291

Total Deposits	$	498,849		$	442,241		$	391,815		$	349,779		$	335,630

Total Equity	$	46,972		$	43,442		$	41,556		$	36,537		$	32,073

Weighted Average Shares of Common Stock outstanding Used for Basic Income Per Share Computation ¹		3,620,874			3,691,355			3,798,373			3,934,392			4,048,155

Weighted Average Shares of Common Stock outstanding Used for Diluted Income Per Share Computation ¹		3,705,272			3,798,375			3,898,600			3,985,609			4,060,992

Return on Average Total Assets		1.18	%		1.25	%		1.30	%		1.35	%		1.16	%

Net Income/Average Equity		13.56	%		13.71	%		13.55	%		15.45	%		12.83	%

Net Income/Average Deposits		1.32	%		1.40	%		1.46	%		1.49	%		1.29	%

Average Loans/Average Deposits		79.25	%		73.99	%		66.96	%		55.67	%		51.04	%

Average Equity to Average Total Assets		8.69	%		9.11	%		9.60	%		8.74	%		9.08	%


	2003 Over 2002									2002 Over 2001
	Volume			Rate			Change			Volume			Rate			Change
Increase (Decrease) in Interest Income:
Loans & Banker’s Acceptance	$	3,896		$	(1,514	)	$	2,382		$	2,448		$	(1,650	)	$	798
Investment Securities		(1,159	)		(146	)		(1,305	)		(1,533	)		(346	)		(1,879	)
Federal Funds Sold		120			(234	)		(114	)		75			(329	)		(254	)
Loan Fees		422			—			422			752			—			752

	$	3,279		$	(1,894	)	$	1,385		$	1,742		$	(2,325	)	$	(583	)

Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing Transaction Deposits	$	8		$	—		$	8		$	65		$	(404	)	$	(339	)
Savings & MMDAs		190			(466	)		(276	)		631			(1,800	)		(1,169	)
Time Certificates		40			(971	)		(931	)		(6	)		(2,557	)		(2,563	)
Borrowed Funds		95			(24	)		71			7			(17	)		(10	)

	$	333		$	(1,461	)	$	(1,128	)	$	697		$	(4,778	)	$	(4,081	)

Increase (Decrease) in Net Interest Income	$	2,946		$	(433	)	$	2,513		$	1,045		$	2,453		$	3,498


	Within One Year				After One But Within Five Years				After Five But Within Ten Years
Security	Amount		Yield		Amount		Yield		Amount		Yield
U.S. Treasury Securities	$	251	6.04	%	$	265	4.54	%	$	—	—
Securities of U.S. Government Agencies and Corporations		5,579	6.12	%		6,448	6.70	%		—	—
Obligations of State & Political Subdivisions		2,305	7.78	%		23,688	7.06	%		6,592	7.81	%
Mortgage Backed Securities		151	6.58	%		1,751	4.30	%		—	—
Obligations of U.S. Corporations And Other Securities		—	—			785	6.91	%		—	—

TOTAL	$	8,286	6.59	%	$	32,937	6.82	%	$	6,592	7.81	%


	After Ten Years				Total
Security	Amount		Yield		Amount		Yield
U.S. Treasury Securities	$	—	—		$	516	5.27	%
Securities of U.S. Government Agencies and Corporations		—	—			12,027	6.43	%
Obligations of State & Political Subdivisions		1,062	8.24	%		33,647	7.29	%
Mortgage Backed Securities		—	—			1,902	4.48	%
Obligations of U.S. Corporations And Other Securities		1,358	4.41	%		2,143	5.33	%

TOTAL	$	2,420	6.09	%	$	50,235	6.88	%


	December 31,
	2003				2002				2001
	Balance		Percent		Balance		Percent		Balance		Percent
Commercial	$	88,611	24.1	%	$	76,641	24.6	%	$	57,497	23.5	%
Agriculture		32,641	8.9	%		31,824	10.2	%		26,147	10.7	%
Real Estate Mortgage		174,206	47.2	%		143,711	46.0	%		107,288	44.0	%
Real Estate Construction		68,111	18.5	%		53,921	17.3	%		47,422	19.4	%
Installment		4,849	1.3	%		5,948	1.9	%		5,921	2.4	%

TOTAL	$	368,418	100.0	%	$	312,045	100.0	%	$	244,275	100.0	%


	2000				1999
	Balance		Percent		Balance		Percent
Commercial	$	51,292	24.4	%	$	38,761	25.5	%
Agriculture		23,263	11.0	%		21,874	14.4	%
Real Estate Mortgage		107,971	51.3	%		72,528	47.6	%
Real Estate Construction		22,793	10.8	%		15,154	9.9	%
Installment		5,222	2.5	%		3,958	2.6	%

TOTAL	$	210,541	100.0	%	$	152,275	100.0	%


Maturing	Fixed Rate		Variable Rate		Total
Within one year	$	24,089	$	137,932	$	162,021
After one year through five years		31,192		62,122		93,314
After five years		16,452		96,631		113,083

Total	$	71,733	$	296,685	$	368,418


	December 31, 2003				December 31, 2002				December 31, 2001
	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 Loans		Allocation of Allowance for loan Losses Balance		Loans as a % of Total Loans
Loan Type:
Commercial	$	2,078	24.1	%	$	2,612	24.6	%	$	3,713	23.5	%
Agriculture		1,928	8.9	%		1,070	10.2	%		1,689	10.7	%
Real Estate Mortgage		2,409	47.2	%		307	46.0	%		346	44.0	%
Real Estate Construction		686	18.5	%		2,716	17.3	%		762	19.4	%
Installment		637	1.3	%		580	1.9	%		416	2.4	%
Unallocated		—	—			—	—			—	—

Total	$	7,738	100.00	%	$	7,285	100.00	%	$	6,926	100.00	%


	December 31, 2000				December 31, 1999
	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 Loans
Loan Type:
Commercial	$	4,078	24.4	%	$	4,002	25.5	%
Agriculture		1,849	11.0	%		2,258	14.4	%
Real Estate Mortgage		361	51.3	%		391	47.6	%
Real Estate Construction		795	10.8	%		861	9.9	%
Installment		145	2.5	%		313	2.6	%
Unallocated		—	—			—	—

Total	$	7,228	100.00	%	$	7,825	100.00	%


Three months or less	$	30,846
Over three months through twelve months		21,705
Over twelve months		7,132

Total	$	59,683


	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)	$	379,309	379,309	—	—	—
Certificates of Deposit (a)		119,540	107,368	11,535	637	—
Borrowed Funds (a)		1,260	1,260	—	—	—
Long-Term Debt (b)		9,281	382	3,700	5,199	—
Operating Leases		3,117	715	1,202	617	583
Purchase Obligations		987	987	—	—	—

Total	$	513,494	490,021	16,437	6,453	583


	Maturities by period
Commitments	Total		Less than 1 year	1-3 years	3-5 years	More than 5 years
Commitments to extend credit
Commercial	$	54,616	47,132	4,410	1,851	1,223
Agriculture		20,646	20,639	7	—	—
Residential Real Estate		47,803	30,872	9,850		7,081
Home equity lines of Credit		32,242	115	1,381	4,207	26,539
Installment		1,154	1,154	—	—	—
Stand by Letters of Credit		8,683	2,683	6,000	—	—
Financial Stand by Letters of Credit		80	80	—	—	—

Total	$	165,224	102,675	21,648	6,058	34,843


	2003				2002				2001
	Average Balance		Percent		Average Balance		Percent		Average Balance		Percent
ASSETS
Cash and Due From Banks	$	35,627	6.87	%	$	26,810	5.86	%	$	20,683	5.05	%
Investment Securities:
U.S. Government Securities		14,234	2.74	%		18,243	3.99	%		25,257	6.16	%
Obligations of States & Political Subdivisions		43,822	8.45	%		52,908	11.56	%		63,551	15.51	%
Other Securities		4,544	0.88	%		12,079	2.64	%		20,584	5.02	%
Federal Funds Sold		30,164	5.82	%		24,825	5.42	%		22,507	5.49	%
Loans¹		367,520	70.86	%		303,006	66.20	%		243,858	59.51	%
Other Assets		22,761	4.39	%		19,816	4.33	%		13,349	3.26	%

Total Assets	$	518,672	100.00	%	$	457,687	100.00	%	$	409,789	100.00	%

LIABILITIES & STOCKHOLDERS’ EQUITY
Deposits:
Demand	$	138,161	26.64	%	$	112,049	24.48	%	$	96,148	23.46	%
Interest-Bearing Transaction Deposits		53,810	10.38	%		47,590	10.40	%		41,892	10.22	%
Savings & MMDAs		152,542	29.41	%		132,190	28.88	%		108,340	26.44	%
Time Certificates		119,250	22.99	%		117,669	25.71	%		117,802	28.75	%
Borrowed Funds		7,368	1.42	%		4,547	0.99	%		4,393	1.07	%
Other Liabilities		2,490	0.48	%		1,934	0.42	%		1,886	0.46	%
Shareholders’ Equity		45,051	8.69	%		41,708	9.11	%		39,328	9.60	%

Total Liabilities & Stockholders’ Equity	$	518,672	100.00	%	$	457,687	100.00	%	$	409,789	100.00	%


	2003						2002						2001
Assets	Average Balance		Interest Income/ Expense		Yields Earned/ Rates Paid		Average Balance		Interest Income/ Expense		Yields Earned/ Rates Paid		Average Balance		Interest Income/ Expense		Yields Earned/ Rates Paid
Securities:
U.S. Government	$	14,234	$	849	5.96	%	$	18,243	$	1,061	5.82	%	$	25,257	$	1,533	6.07	%
Obligations of States And Political Subdivisions¹		43,822		2,501	5.71	%		52,908		3,105	5.87	%		63,551		3,860	6.07	%
Other Securities		4,544		163	3.59	%		12,079		652	5.40	%		20,584		1,304	6.34	%

Total Investment Securities		62,600		3,513	5.61	%		83,230		4,818	5.79	%		109,392		6,697	6.12	%
Federal Funds Sold		30,164		275	0.91	%		24,825		389	1.57	%		22,507		643	2.86	%
Loans ²		367,520		23,615	6.43	%		303,006		21,233	7.01	%		243,858		20,435	8.38	%
Loan Fees		—		2,923	0.80	%		—		2,501	0.83	%		—		1,749	0.72	%

Total Loans, Including Loan Fees		367,520		26,538	7.22	%		303,006		23,734	7.83	%		243,858		22,184	9.10	%

Total Earning Assets		460,284	$	30,326	6.59	%		411,061	$	28,941	7.04	%		375,757	$	29,524	7.86	%

Cash and Due from Banks		35,627						26,810						20,683
Premises and Equipment		7,914						7,196						6,453
Interest Receivable and Other Assets		14,847						12,620						6,896

Total Assets	$	518,672					$	457,687					$	409,789


	2003						2002						2001
Liabilities and Stockholders’ Equity	Average Balance		Interest Income/ Expense		Yields Earned/ Rates Paid		Average Balance		Interest Income/ Expense		Yields Earned/ Rates Paid		Average Balance		Interest Income/ Expense		Yields Earned/ Rates Paid
Interest-Bearing Deposits:
Interest-Bearing Transaction Deposits	$	53,810	$	80	0.15	%	$	47,590	$	72	0.15	%	$	41,892	$	411	0.98	%
Savings & MMDAs		152,542		706	0.46	%		132,190		982	0.74	%		108,340		2,151	1.99	%
Time Certificates		119,250		2,056	1.72	%		117,669		2,987	2.54	%		117,802		5,550	4.71	%

Total Interest-Bearing Deposits		325,602		2,842	0.87	%		297,449		4,041	1.36	%		268,034		8,112	3.03	%
Borrowed Funds		7,368		267	3.62	%		4,547		196	4.33	%		4,393		206	4.69	%

Total Interest-Bearing Deposits and Funds		332,970		3,109	0.93	%		301,996		4,237	1.40	%		272,427		8,318	3.05	%
Demand Deposits		138,161		—	—			112,049		—	—			96,148		—	—

Total Deposits and Borrowed Funds		471,131	$	3,109	0.66	%		414,045	$	4,237	1.02	%		368,575	$	8,318	2.26	%

Accrued Interest and Other Liabilities		2,490						1,934						1,886
Stockholders’ Equity		45,051						41,708						39,328

Total Liabilities and Stockholders’ Equity	$	518,672					$	457,687					$	409,789

Net Interest Income and Net Interest Margin¹			$	27,217	5.91	%			$	24,704	6.01	%			$	21,206	5.64	%

Net Interest Spread ²					5.66	%					5.64	%					4.81	%


	2003				2002				2001
	Average Amount		Average Rate		Average Amount		Average Rate		Average Amount		Average Rate
Deposit Type:
Non-interest-Bearing Demand	$	138,161	—		$	112,049	—		$	96,148	—
Interest-Bearing Demand (NOW)	$	53,810	0.15	%	$	47,590	0.15	%	$	41,892	0.98	%
Savings and MMDAs	$	152,542	0.46	%	$	132,190	0.74	%	$	108,340	1.99	%
Time	$	119,250	1.72	%	$	117,669	2.54	%	$	117,802	4.71	%


	2003		2002
Undisbursed loan commitments	$	156,461	$	126,692
Standby letters of credit		8,763		1,346
Commitments to sell loans		—		—

	$	165,224	$	128,038


	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	70,915		—		—		—		70,915		70,915
Average interest rate	1.00	%	—		—		—		—		—
Fixed rate investments	8,286		20,092		12,845		9,012		50,235		50,235
Average interest rate	6.59	%	6.82	%	6.82	%	7.35	%	6.88	%	—
Fixed rate loans (1)	24,089		17,249		13,943		16,452		71,733		71,617
Average interest rate	6.56	%	7.45	%	7.11	%	7.19	%	7.02	%	—
Variable rate loans (1)	137,932		35,348		26,774		96,631		296,685		293,887
Average interest rate	5.63	%	5.92	%	5.94	%	6.72	%	6.04	%	—
Loans held for sale	10,672		—		—		—		10,672		10,672
Average interest rate	5.85	%	—		—		—		5.85	%	—

Interest-Sensitive Liabilities:
NOW account deposits (2)	21,174		4,603		3,836		47,118		76,731		64,312
Average interest rate	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%	—
Money market deposits (2)	26,246		17,485		8,724		34,970		87,425		76,389
Average interest rate	.15	%	.15	%	.15	%	.15	%	.15	%	—
Savings deposits (2)	24,549		9,118		7,014		29,459		70,140		61,108
Average interest rate	.10	%	.10	%	.10	%	.10	%	.10	%	—
Certificates of deposit	108,801		10,112		627		—		119,540		119,668
Average interest rate	1.55	%	2.62	%	2.18	%	—		1.64	%	—

Interest-Sensitive Off-Balance Sheet Items:
Commitments to lend	—		—		—		—		156,461		1,173
Standby letters of credit	—		—		—		—		8,763		88


Independent Auditors’ Report		Page 44
Consolidated Balance Sheets as of December 31, 2003 and 2002		Page 45
Consolidated Statements of Operations for years ended December 31, 2003, 2002, and 2001		Page 46
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for years ended December 31, 2003, 2002, and 2001		Page 47
Consolidated Statements of Cash Flows for years ended December 31, 2003, 2002, and 2001		Page 48
Notes to Consolidated Financial Statements		Page 49


Description	Common Stock					Comprehensive Income			Additional Paid-in Capital	Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares		Amounts			Comprehensive Income			Additional Paid-in Capital	Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2000	3,070,949		$	22,784					977	12,036		740		36,537
Comprehensive income:
Net income						$	5,329			5,329				5,329

Other comprehensive income:
Unrealized holding gains arising during the current period, net of tax effect of $886							1,329
Reclassification adjustment due to losses realized, net of tax effect of $95							142

Total other comprehensive income, net of tax effect of $981							1,471					1,471		1,471

Comprehensive income						$	6,800

6% stock dividend	183,908			3,126						(3,126	)			—
Cash in lieu of fractional shares										(7	)			(7	)
Common shares issued, including tax benefits	55,189			494										494
Stock repurchase and retirement	(118,582	)		(2,268	)									(2,268	)

Balance at December 31, 2001	3,191,464		$	24,136					977	14,232		2,211		41,556
Comprehensive income:
Net income						$	5,718			5,718				5,718

Other comprehensive income:
Unrealized holding gains arising during the current period, net of tax effect of $948							1,423
Reclassification adjustment due to losses realized, net of tax effect of $185							(277	)

Total other comprehensive income, net of tax effect of $763							1,146					1,146		1,146

Comprehensive income						$	6,864

6% stock dividend	190,253			5,356						(5,356	)			—
Cash in lieu of fractional shares										(13	)			(13	)
Common shares issued, including tax benefits	82,902			1,018										1,018
Stock repurchase and retirement	(226,833	)		(5,983	)									(5,983	)

Balance at December 31, 2002	3,237,786		$	24,527					977	14,581		3,357		43,442
Comprehensive income:
Net income						$	6,111			6,111				6,111
Other comprehensive income:
Unrealized holding gains 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							474

Total other comprehensive income, net of tax effect of $992							(1,488	)				(1,488	)	(1,488	)

Comprehensive income						$	4,623

6% stock dividend	193,701			4,746						(4,746	)			—
Cash in lieu of fractional shares										(13	)			(13	)
Stock-based compensation and related tax benefits				182										182
Common shares issued, including tax benefits	53,595			418										418
Stock repurchase and retirement	(67,825	)		(1,680	)									(1,680	)

Balance at December 31, 2003	3,417,257		$	28,193					977	15,933		1,869		46,972


Buildings and improvements		15 to 50 years
Furniture and equipment		3 to 10 years


	Amortized cost		Unrealized gains	Unrealized losses	Estimated market value
Investment securities available for sale:
U.S. Treasury securities	$	500	16	—	516
Securities of U.S. government agencies and corporations		11,481	546	—	12,027
Obligations of U.S. corporations		—	—	—	—
Obligations of states and political subdivisions		31,934	2,497	—	34,431
Mortgage backed securities		1,846	57	—	1,903

Total debt securities		45,761	3,116	—	48,877
Other securities		1,358	—	—	1,358

	$	47,119	3,116	—	50,235


	Amortized cost		Estimated market value
Due in one year or less	$	8,146	8,286
Due after one year through five years		30,474	32,937
Due after five years through ten years		6,173	6,592
Due after ten years		2,326	2,420

	$	47,119	50,235


	2003		2002
Land	$	1,478	1,478
Buildings		4,454	4,454
Furniture and equipment		8,342	8,068
Leasehold improvements		1,380	1,613

		15,654	15,613
Less accumulated depreciation		7,948	7,746

	$	7,706	7,867


	2003		2002
Accrued interest	$	2,474	2,945
Software, net of amortization		456	347
Officer’s Life Insurance		8,545	8,174
Prepaid and other		3,068	1,873
Investment in Limited Partnerships		2,148	2,290
Deferred tax assets (liabilities), net		228	(154	)

	$	16,919	15,475


	2003		2002
Deferred tax assets:
Allowance for loan losses	$	2,829	2,412
Deferred compensation		79	65
Retirement compensation		296	162
Current state franchise taxes		308	296
Other		5	392

Total deferred tax assets		3,517	3,327

Deferred tax liabilities:
Fixed assets		1,619	884
State franchise taxes		200	181
Other		224	178
Investment securities unrealized gains		1,246	2,238

Total deferred tax liabilities		3,289	3,481

Net deferred tax assets (liabilities)	$	228	(154	)


	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, 2000	229,874		$	10.48	81,815		$	9.05
Granted	69,079			14.27	—			—
Exercised	(40,219	)		10.08	(24,970	)		9.89


Balance at December 31, 2001	258,734			11.56	56,845			9.17
Granted	53,933			23.14	—			—
Exercised	(43,811	)		9.81	(48,497	)		8.80


Balance at December 31, 2002	268,856			14.08	8,348			11.28
Granted	50,350			22.17	—			—
Exercised	(54,771	)		10.82	(6,679	)		11.28


Balance at December 31, 2003	264,435		$	16.30	1,669		$	11.28


Range of exercise prices	Stock options outstanding	Weighted average exercise price		Weighted average remaining contractual life
Under $11.00	93,225	$	10.63	5.29
$11.00 to $12.00	1,669		11.28	1.13
$12.00 to $16.00	66,930		14.27	7.01
$16.00 and over	104,280		22.67	8.49

	266,104	$	16.27	6.95


Range of exercise prices	Stock options exercisable	Weighted average exercise price
Under $11.00	81,868	$	10.63
$11.00 to $16.00	39,304		14.27
$16.00 and over	31,646		22.67

	152,818	$	14.08


Year ended December 31:
2004	$	715
2005		686
2006		516
2007		374
2008		243
Thereafter		583

	$	3,117


	2003			2002
	Carrying amount		Fair value	Carrying amount	Fair value
Financial assets:
Cash and federal funds sold	$	104,759	104,759	46,903	46,903
Investment securities		50,235	50,235	69,958	69,958
Loans:
Net loans		368,418	365,504	312,045	310,366
Loans held for sale		10,672	10,672	42,973	42,973
Financial liabilities:
Deposits		498,849	442,188	442,241	400,567


	2003
	Contract amount		Carrying amount	Fair value
Unrecognized financial instruments:
Commitments to extend credit	$	156,461	751	1,173

Standby letters of credit	$	8,763	—	88

Commitments to sell loans	$	—	—	—


	March 31,		June 30,	September 30,	December 31,
2003:
Interest income	$	7,543	7,505	7,890	7,388
Net interest income		6,756	6,756	7,108	6,597
Provision (reversal of provision) for loan losses		670	570	320	670
Other operating income		1,963	2,110	1,450	1,637
Other operating expense		5,642	5,867	5,798	5,484
Income before taxes		2,407	2,429	2,440	2,080
Net income		1,573	1,583	1,584	1,371
Basic earnings per share		.43	.44	.44	.38
Diluted earnings per share		.42	.43	.43	.37

2002:
Interest income	$	6,724	7,110	7,404	7,703
Net interest income		5,511	6,042	6,375	6,776
Reversal of provision for loan losses		—	—	270	251
Other operating income		1,020	1,147	1,533	1,272
Other operating expense		4,648	5,063	5,319	5,536
Income before taxes		1,883	2,126	2,319	2,261
Net income		1,260	1,392	1,564	1,502
Basic earnings per share		.33	.38	.42	.42
Diluted earnings per share		.32	.36	.42	.41


Balance Sheet	2003		2002
Assets
Cash	$	562	1,191
Investment in wholly owned subsidiary		46,410	42,251
Other assets		—	—

Total assets	$	46,972	43,442

Liabilities and stockholders’ equity
Stockholders’ equity		46,972	43,442

Total liabilities and stockholders’ equity	$	46,972	43,442


Statement of Operations	2003			2002		2001
Dividends from subsidiary	$	500		5,500		2,482
Other operating expenses		(59	)	(41	)	(32	)
Income tax benefit		24		17		13

Income before undistributed earnings of subsidiary		465		5,476		2,463
Equity in undistributed earnings of subsidiary		5,646		242		2,866

Net income	$	6,111		5,718		5,329


Statement of Cash Flows	2003			2002		2001
Net income	$	6,111		5,718		5,329
Adjustments to reconcile net income to net cash provided by operating activities
Decrease (increase) in other assets		(1	)	13		(2	)
Equity in undistributed earnings of subsidiary		(5,646	)	(242	)	(2,866	)

Net cash provided by operating activities		464		5,489		2,461
Cash flows from financing activities:
Common stock issued		600		1,018		494
Stock repurchases		(1,680	)	(5,983	)	(2,268	)
Cash in lieu of fractional shares		(13	)	(13	)	(7	)

Net cash used in financing activities		(1,093	)	(4,978	)	(1,781	)

Net change in cash		(629	)	511		680
Cash at beginning of year		1,191		680		—

Cash at end of year	$	562		1,191		680


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column)
	(a)	(b)	(a) (c)
Equity compensation plans approved by security holders	266,104	$16.27	416,346

Equity compensation plans not approved by security holders	—	—	—

Total	266,104	$16.27	416,346