FNB BANCORP/CA/
Forward-Looking Statements: Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13 a decline in real estate values in the Company's operating market areas; (14) the effects of terrorism, the threat of terrorism or the impact of the current military conflict in Iraq and the conduct of the war on terrorism by the United States and its allies, as well as other factors. The factors set forth under "Item 1A - Risk Factors" in this report and other cautionary statements and information set forth in this report should be read carefully considered and understood as being applicable to all related forward-looking statements contained in this report when evaluating the business prospects of the Company and its subsidiary.           Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, or to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.                                         4   General - -------           FNB Bancorp (sometimes referred to herein as the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on February 28, 2001. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and regulations thereunder. Its principal office is located at 975 El Camino Real, South San Francisco, California 94080, and its telephone number is (650) 588-6800.           The Company owns all of the issued and outstanding shares of common stock of First National Bank of Northern California, a national banking association ("First National Bank" or the "Bank"). The Company has no other subsidiary.           The Bank was organized in 1963 as "First National Bank of Daly City." In 1995, the shareholders approved a change in the name to "First National Bank of Northern California." The administrative headquarters of the Bank is located at 975 El Camino Real, South San Francisco, California. The Bank is locally owned and presently operates eleven full service banking offices within its primary service area of San Mateo County, in the cities of Colma, Daly City, South San Francisco, Millbrae, Pacifica, Half Moon Bay, San Mateo, Redwood City and Pescadero. The Bank also provides services since May 2005 for the City and County of San Francisco through its Financial District and Portola offices in San Francisco. The Bank's primary business is servicing the business or commercial banking needs of individuals and small to mid-sized businesses within San Mateo and San Francisco Counties.           The Bank is chartered under the laws of the United States and is governed by the National Bank Act, and is a member of the Federal Reserve System. The Federal Deposit Insurance Corporation insures the deposits of the Bank up to the applicable legal limits. The Bank is subject to regulation, supervision and regular examination by the Office of the Comptroller of the Currency. The regulations of the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency govern many aspects of the Bank's business and activities, including investments, loans, borrowings, branching, mergers and acquisitions, reporting and numerous other areas. The Bank is also subject to applicable provisions of California law to the extent those provisions are not in conflict with or preempted by federal banking law. See "Supervision and Regulation" below.           First National Bank offers a broad range of services to individuals and businesses in its primary service area with an emphasis upon efficiency and personalized attention. First National Bank provides a full line of business financial products with specialized services such as courier, appointment banking, and business Internet banking. The Bank offers personal and business checking and savings accounts, including individual interest-bearing negotiable orders of withdrawal ("NOW"), money market accounts and/or accounts combining checking and savings accounts with automatic transfer capabilities, IRA accounts, time certificates of deposit and direct deposit of social security, pension and payroll checks and computer cash management with access through the Internet. First National Bank also makes available commercial, standby letters                                         5   of credit, construction, accounts receivable, inventory, automobile, home improvement, residential real estate, commercial real estate, single family mortgage, Small Business Administration, office equipment, leasehold improvement and consumer loans as well as overdraft protection lines of credit. In addition, the Bank sells travelers checks and cashiers checks, offers automated teller machine (ATM) services tied in with major statewide and national networks and offers other customary commercial banking services.           Most of First National Bank's deposits are obtained from commercial businesses, professionals and individuals. As of December 31, 2005, First National Bank had a total of 24,543 accounts. On occasion, the Bank has obtained deposits through deposit brokers for which it pays a broker fee. As of December 31, 2005, First National Bank had no such deposits. There is no concentration of deposits or any customer with 5% or more of First National Bank's deposits.           At December 31, 2005, the Company had total assets of $569,141,000, net loans of $380,051,000, deposits of $507,544,000 and shareholders' equity of $55,243,000. The Company competes with approximately 33 other banking or savings institutions in its service areas. The Company's market share of Federal Deposit Insurance Corporation insured deposits in the service area of San Mateo County is approximately 2.45% (based upon the most recent information available by the Federal Deposit Insurance Corporation through June 30, 2005). See "Competitive Data" below.  Employees - ---------           At December 31, 2005, The Company employed 176 persons on a full-time basis. The Company believes its employee relations are good. The Company is not a party to any collective bargaining agreement.  Available Information - ---------------------           FNB Bancorp and First National Bank maintain an Internet website at http://www.FNBNORCAL.com. The Company's annual report on form 10-K, quarterly reports on Form 10-Q, current reports on 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available free of charge on or through such website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Also made available on or through such website are the Section 16 reports of ownership and changes in ownership of the Company's common stock which are filed with the Securities and Exchange Commission by the directors and executive officers of the Company and by any persons who own more than 10 percent of the outstanding shares of such stock. Information on such website is not incorporated by reference into this report.                                         6                              SUPERVISION AND REGULATION  General - -------           FNB Bancorp. The common stock of FNB Bancorp is subject to the registration requirements of the Securities Act of 1933, as amended, and the qualification requirements of the California Corporate Securities Law of 1968, as amended. FNB Bancorp has registered its common stock under Section 12 (g) of the Securities Exchange Act of 1934, as amended. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended, which include, but are not limited to, annual, quarterly and other current reports with the Securities and Exchange Commission.           FNB Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is registered as such with, and subject to the supervision of, the Board of Governors of the Federal Reserve System (the "Board of Governors"). FNB Bancorp is required to obtain the approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, FNB Bancorp would own or control more than 5% of the voting shares of such bank. The Bank Holding Company Act prohibits FNB Bancorp from acquiring any voting shares of, or interest in, all or substantially all of the assets of, a bank located outside the State of California unless such an acquisition is specifically authorized by the laws of the state in which such bank is located. Any such interstate acquisition is also subject to the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.           FNB Bancorp, and any subsidiary which it may acquire or organize, are deemed to be "affiliates" of the Bank within the meaning of that term as defined in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans by First National Bank to its affiliates, and (b) on investments by First National Bank in affiliates' stock as collateral for loans to any borrower. FNB Bancorp and First National Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.           In addition, regulations of the Board of Governors under the Federal Reserve Act require that reserves be maintained by First National Bank in conjunction with any liability of FNB Bancorp under any obligation (promissory note, acknowledgment of advance, banker's acceptance or similar obligation) with a weighted average maturity of less than seven (7) years to the extent that the proceeds of such obligations are used for the purpose of supplying funds to First National Bank for use in its banking business, or to maintain the availability of such funds.           First National Bank of Northern California. As a national banking association licensed under the national banking laws of the United States, First National Bank is regularly examined by the Office of the Comptroller of the Currency and is subject to supervision and regulation by the Federal Deposit Insurance Corporation, the Board of Governors, and the Office of the Comptroller of the Currency. This supervision and regulation includes comprehensive reviews of all major aspects of First National Bank's business and condition, including its capital ratios, allowance for possible loan losses and other factors. However, no inference should be drawn that such authorities have approved any                                         7   such factors. First National Bank is required to file reports with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. First National Bank's deposits are insured by the Federal Deposit Insurance Corporation up to the applicable legal limits.  Capital Standards. - -----------------           The Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have adopted risk-based guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, First National Bank is required to maintain (and FNB Bancorp and First National Bank will be required to maintain) capital equal to at least 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves.           Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk and certain assets considered to present less risk than others permit maintenance of capital at less than the 8% ratio. For example, most home mortgage loans are placed in a 50% risk category and therefore require maintenance of capital equal to 4% of those loans, while commercial loans are placed in a 100% risk category and therefore require maintenance of capital equal to 8% of those loans.           Under the risk-based capital guidelines, assets reported on an institution's balance sheet and certain off-balance sheet items are assigned to risk categories, each of which has an assigned risk weight. Capital ratios are calculated by dividing the institution's qualifying capital by its period-end risk-weighted assets. The guidelines establish two categories of qualifying capital: Tier 1 capital (defined to include common shareholders' equity and noncumulative perpetual preferred stock) and Tier 2 capital which includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for credit losses. Tier 2 capital may also include up to 45% of the pretax unrealized gains on certain available-for-sale equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk. Each institution is required to maintain a minimum risk-based capital ratio (including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier 1 capital.           A leverage capital standard was adopted as a supplement to the risk-weighted capital guidelines. Under the leverage capital standard, an institution is required to maintain a minimum ratio of Tier 1 capital to the sum                                         8   of its quarterly average total assets and quarterly average reserve for loan losses, less intangibles not included in Tier 1 capital. Period-end assets may be used in place of quarterly average total assets on a case-by-case basis. The Board of Governors and the Federal Deposit Insurance Corporation have also adopted a minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital guidelines. The leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weakness, a high risk profile, or are undergoing or anticipating rapid growth.           At December 31, 2005, The Company was in compliance with the risk-weighted capital and leverage ratios. See "Capital" under Item 7 below.  Prompt Corrective Action - ------------------------           The Board of Governors, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency have adopted regulations implementing a system of prompt corrective action pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five capital categories with the following characteristics: (1) "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of les than 4%, or a leverage ratio of less than 4%; (4) "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%.           The regulations established procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. The regulations impose restrictions upon all institutions to refrain from certain actions which would cause an institution to be classified within any one of the three "undercapitalized" categories, such as declaration of dividends or other capital distributions or payment of management fees, if following the distribution or payment the institution would be classified within one of the "undercapitalized" categories. In addition, institutions that are classified in one of the three "undercapitalized" categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory actions include (1) increased monitoring and review by the appropriate federal banking agency; (2) implementation of a capital restoration plan; (3) total asset growth                                         9   restrictions; and (4) limitation upon acquisitions, branch expansion, and new business activities without prior approval of the appropriate federal banking agency. Discretionary supervisory actions may include (1) requirements to augment capital; (2) restrictions upon affiliate transactions; (3) restrictions upon deposit gathering activities and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activities of the institution and its affiliates; (6) requiring divestiture or sale of the institution; and (7) any other supervisory action that the appropriate federal banking agency determines is necessary to further the purposes of the regulations. Further, the federal banking agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan.  The aggregate liability of the parent holding company under the guaranty is limited to the lesser of (i) an amount equal to 5 percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it were "significantly undercapitalized". FDICIA also restricts the solicitation and acceptance of and interest rates payable on brokered deposits by insured depository institutions that are not "well capitalized." An "undercapitalized" institution is not allowed to solicit deposits by offering rates of interest that are significantly higher than the prevailing rates of interest on insured deposits in the particular institution's normal market areas or in the market areas in which such deposits would otherwise be accepted.           Any financial institution which is classified as "critically undercapitalized" must be placed in conservatorship or receivership within 90 days of such determination unless it is also determined that some other course of action would better serve the purposes of the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt without prior regulatory approval and regulators must prohibit a critically undercapitalized institution from taking certain other actions without prior approval, including (1) entering into any material transaction other than in the usual course of business, including investment expansion, acquisition, sale of assets or other similar actions; (2) extending credit for any highly leveraged transaction; (3) amending articles or bylaws unless required to do so to comply with any law, regulation or order; (4) making any material change in accounting methods; (5) engaging in certain affiliate transactions; (6) paying excessive compensation or bonuses; and (7) paying interest on new or renewed liabilities at rates which would increase the weighted average costs of funds beyond prevailing rates in the institution's normal market areas.  Additional Regulations - ----------------------           Under FDICIA, the federal financial institution agencies have adopted regulations which require institutions to establish and maintain comprehensive written real estate policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio                                         10   diversification standards, and documentation, approval and reporting requirements. FDICIA further generally prohibits an insured bank from engaging as a principal in any activity that is impermissible for a national bank, absent Federal Deposit Insurance Corporation determination that the activity would not pose a significant risk to the Bank Insurance Fund, and that such bank is, and will continue to be, within applicable capital standards.           The Federal Financial Institutions Examination Council ("FFIEC") utilizes the Uniform Institutions Rating System ("UFIRS"), commonly referred to as "CAMELS," to classify and evaluate the soundness of financial institutions. Bank examiners use the CAMELS measurements to evaluate capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. Effective January 1, 2005, bank holding companies such as the Company, became subject to evaluation and examination under a revised bank holding company rating system. This so-called BOPEC rating system, implemented in 1979, has been focused primarily on financial condition, consolidated capital and consolidated earnings. The new rating system reflects a change toward analysis of risk management (as reflected in bank examination under the CAMELS measurements), in addition to financial factors and the potential impact of nondepository subsidiaries upon depository institution subsidiaries.           The federal financial institution agencies have established bases for analysis and standards for assessing financial institution's capital adequacy in conjunction with the risk-based capital guidelines including analysis of interest rate risk, concentrations of credit risk, risk posed by non-traditional activities, and factors affecting overall safety and soundness. The safety and soundness standards for insured financial institutions include analysis of (1) internal controls, information systems and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation, fees and benefits; and (7) excessive compensation for executive officers, directors or principal shareholders which could lead to material financial loss. If an agency determines that an institution fails to meet any standard, the agency may require the financial institution to submit to the agency an acceptable plan to achieve compliance with the standard. If the agency requires submission of a compliance plan and the institution fails to timely submit an acceptable plan or to implement an accepted plan, the agency must require the institution to correct the deficiency. The agencies may elect to initiate enforcement action in certain cases rather than rely on an existing plan particularly where failure to meet one or more of the standards could threaten the safe and sound operation of the institution.           Community Reinvestment Act ("CRA") regulations evaluate banks' lending to low and moderate income individuals and businesses across a four-point scale from "outstanding" to "substantial noncompliance," and are a factor in regulatory review of applications to merge, establish new branches or form bank holding companies. In addition, any bank rated in "substantial noncompliance" with the CRA regulations may be subject to enforcement proceedings. First National Bank has a current rating of "satisfactory" for CRA compliance.                                         11   Limitation on Dividends - -----------------------           FNB Bancorp. The Company's ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds for payment of any cash dividends by the Company would be obtained from its investments as well as dividends and/or management fees from First National Bank. First National Bank's ability to pay cash dividends is subject to restrictions imposed under the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency.           FNB Bancorp has paid quarterly dividends for each quarter commencing with the second quarter of 2002. Future dividends will continue to be determined after consideration of the Company's earnings, financial condition, future capital funds, regulatory requirements and other factors such as the Board of Directors may deem relevant. It is the intention of the Company to pay cash dividends, subject to legal restrictions on the payment of cash dividends and depending upon the level of earnings, management's assessment of future capital needs and other factors to be considered by the Board of Directors.           The California General Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The California General Corporation Law further provides that, in the event sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if, after giving effect to the distribution, it meets two conditions, which generally stated are as follows: (i) the corporation's assets must equal at least 125% of its liabilities; and (ii) the corporation's current assets must equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for those fiscal years, then the corporation's current assets must equal at least 125% of its current liabilities.           The Board of Governors of the Federal Reserve System 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 Federal Reserve Board 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.           First National Bank of Northern California. First National Bank's shareholder is entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available therefore, subject to the restrictions set forth in the National Bank Act.           The payment of cash dividends by First National Bank may be subject to the approval of the Office of the Comptroller of the Currency, as well as restrictions established by federal banking law and the Federal Deposit Insurance Corporation. Approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by First National Bank's                                         12   board of directors in any calendar year will exceed First National Bank's net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or to a fund for the retirement of preferred stock. Additionally, the Federal Deposit Insurance Corporation and/or the Office of the Comptroller of the Currency, might, under some circumstances, place restrictions on the ability of a bank to pay dividends based upon peer group averages and the performance and maturity of that bank.                                     COMPETITION  Competitive Data - ----------------           In its market area, First National Bank competes for deposit and loan customers with other banks (including those with much greater resources), thrifts and, to a lesser extent, credit unions, finance companies and other financial service providers.           Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services, which First National Bank is not authorized nor prepared to offer currently. First National Bank has made arrangements with its correspondent banks and with others to provide some of these services for its customers. For borrowers requiring loans in excess of First National Bank's legal lending limits, First National Bank has offered, and intends to offer in the future, such loans on a participating basis with its correspondent banks and with other independent banks, retaining the portion of such loans which is within its lending limits. As of December 31, 2005, First National Bank's aggregate legal lending limits to a single borrower and such borrower's related parties were $8,557,000 on an unsecured basis and $14,261,000 on a fully secured basis, based on regulatory capital of $57,045,000.           First National Bank's business is concentrated in its service area, which primarily encompasses San Mateo County, but also includes portions of the City and County of San Francisco. The economy of First National Bank's service area is dependent upon government, manufacturing, tourism, retail sales, population growth and smaller service oriented businesses.           Based upon the most recent information available by the Federal Deposit Insurance Corporation at June 30, 2005, there were 33 commercial and savings banking offices in San Mateo County with a total of $17,835,774,000 in deposits at June 30, 2005. First National Bank had a total of 11 offices in the county with total deposits of $436,868,000 at the same date, or 2.45% of the San Mateo County totals. At June 30, 2004, there were 33 commercial and savings banking offices in San Mateo County with total deposits of $17,013,242,000, while First National Bank had $413,260,000, or 2.43% of the San Mateo County totals.           In 1996, pursuant to Congressional mandate, the Federal Deposit Insurance Corporation reduced bank deposit insurance assessment rates to a range from $0 to $0.27 per $100 of deposits, dependent upon a bank's risk. In 2005, Congress adopted the Federal Deposit Insurance Reform Act of 2005, which will have the effect of merging the Bank Insurance Fund and the Savings Association Insurance Fund into a new Deposit Insurance Fund (which is anticipated to occur                                         13   on or before July 1, 2006). The FDIC has not yet released final regulations, but it is anticipated that final regulations will be released not later than the fourth quarter of 2006. When released, the final regulations are expected to include, among other matters, (1) increased premium assessments to banks based on a bank's risk assessment profile, subject to a one-time assessment credit for banks that paid premiums prior to December 31, 1996 to offset premium assessments; (2) a $100,000 deposit account insurance limit until January 1, 2012, subject to inflation indexing; and (3) increased retirement account insurance limits to $250,000, until January 1, 2012, subject to inflation indexing. The inflation indexing is expected to use 2005 as the base year and adjust for inflation on April 1, 2010 and every five years thereafter on January 1 of the following year. Until final regulations are released by the FDIC and banks are assigned to a risk category, the precise amount of premium assessment increase cannot be determined, but it is expected that the expense for premium assessments for First National Bank will not increase in an amount that will have a material adverse effect on the Company's results of operations. Based upon the current risk-based assessment rate schedule in effect since 1996, and First National Bank's current capital ratios and level of deposits, First National Bank does not anticipate a significant increase in operating expenses due to changes in the assessment rate applicable to it during 2006 from that in 2005.  General Competitive Factors - ---------------------------           In order to compete with the financial institutions in their primary service areas, community banks such as First National Bank use to the fullest extent possible, the flexibility which is accorded by their independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by their respective officers, directors and employees. They also seek to provide special services and programs for individuals in their primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture and tools of the trade or expansion of practices or businesses. In the event there are customers whose loan demands exceed their respective lending limits, they seek to arrange for such loans on a participation basis with other financial institutions. They also assist those customers requiring services not offered by either bank to obtain such services from correspondent banks.           Banking is a business that depends on interest rate differentials. In general, the difference between the interest rate paid by a bank to obtain their deposits and other borrowings and the interest rate received by a bank on loans extended to customers and on securities held in a bank's portfolio comprise the major portion of a bank's earnings. Commercial banks compete with savings and loan associations, credit unions, other financial institutions and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.           The interest rate differentials of a bank, and therefore its earnings, are affected not only by general economic conditions, both domestic and foreign, but also by statutes and as implemented by federal agencies, particularly the Federal Reserve Board. The Federal Reserve Board can and does implement national monetary policy, such as seeking to curb inflation and combat recession, by its                                         14   open market operations in United States government securities, adjustments in the amount of interest free reserves that banks and other financial institutions are required to maintain, and adjustments to the discount rates applicable to borrowing by banks from the Federal Reserve Board. These activities influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and timing of any future changes in monetary policies and their impact on First National Bank are not predictable.  Legislative and Regulatory Impact - ---------------------------------           Since 1996, California law implementing certain provisions of prior federal law has (1) permitted interstate merger transactions; (2) prohibited interstate branching through the acquisition of a branch business unit located in California without acquisition of the whole business unit of the California bank; and (3) prohibited interstate branching through de novo establishment of California branch offices. Initial entry into California by an out-of-state institution must be accomplished by acquisition or merger with an existing whole bank, which has been in existence for at least five years.           The federal financial institution agencies, especially the Office of the Comptroller of the Currency and the Board of Governors, have taken steps to increase the types of activities in which national banks and bank holding companies can engage, and to make it easier to engage in such activities. The Office of the Comptroller of the Currency has issued regulations permitting national banks to engage in a wider range of activities through subsidiaries. "Eligible institutions" (those national banks that are well capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries subject to an expedited application process. In addition, a national bank may apply to the Office of the Comptroller of the Currency to engage in an activity through a subsidiary in which First National Bank itself may not engage.           The Gramm-Leach-Bliley Act (the "Act"), eliminated most of the remaining depression-era "firewalls" between banks, securities firms and insurance companies which was established by the Banking Act of 1933, also known as the Glass-Steagall Act ("Glass-Steagall"). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The Act repealed Section 20 of Glass-Steagall, which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as "financial holding companies" can now, among other matters, acquire securities firms or create them as subsidiaries, and securities firms can now acquire banks or start banking activities through a financial holding company. The Act includes provisions which permit national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly, as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to the same extent as permitted to a "financial holding company" or its affiliates. This liberalization of United States banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in the United States. Consequently, the common ownership of banks, securities firms and insurance is now possible, as is the conduct of commercial banking, merchant banking,                                         15   investment management, securities underwriting and insurance within a single financial institution using a structure authorized by the Act.           Prior to the Act, significant restrictions existed on the affiliation of banks with securities firms and related securities activities. Banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers. The Act removed these restrictions and substantially eliminated the prohibitions under the Bank Holding Company Act on affiliations between banks and insurance companies. Bank holding companies which qualify as financial holding companies can now, among other matters, insure, guarantee, or indemnify against loss, harm, damage, illness, disability, or death; issue annuities; and act as a principal, agent, or broker regarding such insurance services.           In order for a commercial bank to affiliate with a securities firm or an insurance company pursuant to the Act, its bank holding company must qualify as a financial holding company. A bank holding company will qualify if (i) its banking subsidiaries are "well capitalized" and "well managed" and (ii) it files with the Board of Governors a certification to such an effect and a declaration that it elects to become a financial holding company. The amendment of the Bank Holding Company Act now permits financial holding companies to engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to such financial activities. Financial holding companies are also permitted to engage in activities that are complementary to financial activities if the Board of Governors determines that the activity does not pose a substantial risk to the safety or soundness of depository institutions or the financial system in general. These standards expand upon the list of activities "closely related to banking" which have to date defined the permissible activities of bank holding companies under the Bank Holding Company Act.           One further effect of the Act was to require that federal financial institution and securities regulatory agencies prescribe regulation to implement the policy that financial institutions must respect the privacy of their customers and protect the security and confidentiality of customers' non-public personal information. These regulations require, in general, that financial institutions (1) may not disclose non-public information of customers to non-affiliated third parties without notice to their customers, who must have an opportunity to direct that such information not be disclosed; (2) may not disclose customer account numbers except to consumer reporting agencies; and (3) must give prior disclosure of their privacy policies before establishing new customer relationships.           Neither the Company nor First National Bank has determined whether or when it may seek to acquire and exercise new powers or activities under the Act, and the extent to which competition will change among financial institutions affected by the Act has not yet become clear.                                 RECENT LEGISLATION The Patriot Act - ---------------           On October 26, 2001, President Bush signed the USA Patriot Act (the "Patriot Act"), which includes provisions pertaining to domestic security, surveillance procedures, border protection, and terrorism laws to be                                         16   administered by the Secretary of the Treasury. Title III of the Patriot Act entitled "International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001" includes amendments to the Bank Secrecy Act which expand the responsibilities of financial institutions in regard to anti-money laundering activities with particular emphasis upon international money laundering and terrorism financing activities through designated correspondent and private banking accounts. Certain surveillance provisions of the Patriot Act were scheduled to expire on December 31, 2005, but the deadline was postponed to allow time for evaluation of such provisions, and on March 9, 2006, President Bush signed legislation to reauthorize the Patriot Act, incorporating certain civil liberty protections approved by Congress.           Section 313 (a) of the Patriot Act prohibits any insured financial institution such as First National Bank, from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as "shell banks"), subject to certain exceptions for regulated affiliates of foreign banks. Section 313 (a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks, and Section 319 (b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established.           Section 312 of the Patriot Act creates a requirement for special due diligence for correspondent accounts and private banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts.           The Company and First National Bank are not currently aware of any account relationships between the Bank and any foreign bank or other person or entity as described above under Sections 313 (a) or 312 of the Patriot Act. The terrorist attacks on September 11, 2001 have realigned national security priorities of the United States and it is reasonable to anticipate that the United States Congress may enact additional legislation in the future to combat terrorism including modifications to existing laws such as the Patriot Act to expand powers as deemed necessary. The effects which the Patriot Act and any additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation would likely increase compliance costs and thereby potentially have an adverse effect upon the Company's results of operations.           The Check Clearing for the 21st Century Act (commonly referred to as "Check 21") was signed into law in 2003 and became effective on October 28, 2004. The law facilitates check truncation by creating a new negotiable instrument called a "substitute check" which permits banks to truncate original checks, to process check information electronically and to deliver "substitute checks" to banks that want to continue receiving paper checks. Check 21 is intended to reduce the dependence of the check payment system on physical transportation networks (which can be disrupted by terrorist attacks of the type which occurred on September 11, 2001) and to streamline the collection and                                         17   return process. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create "substitute checks." The Company and First National Bank do not currently anticipate that compliance with the Act will have a material effect upon their financial position or results of operations or cash flows.  Sarbanes-Oxley Act of 2002 - --------------------------           President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the "Act") on July 30, 2002, which addressed certain concerns regarding corporate governance and accountability. Among other matters, key provisions of the Act and rules promulgated by the Securities and Exchange Commission pursuant to the Act include the following:           Expanded oversight of the accounting profession by creating a new independent public company oversight board to be monitored by the SEC.           Revised rules on auditor independence to restrict the nature of non-audit services provided to audit clients and to require such services to be pre-approved by the audit committee.           Improved corporate responsibility through mandatory listing standards relating to audit committees, certifications of periodic reports by the CEO and CFO and making issuer interference with an audit a crime.           Enhanced financial disclosures, including periodic reviews for the largest issuers and real time disclosure of material company information.           Enhanced criminal penalties for a broad array of white collar crimes and increases in the statute of limitations for securities fraud lawsuits.           Disclosure of whether a company has adopted a code of ethics that applies to the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and disclosure of any amendments or waivers to such code of ethics. This disclosure obligation became effective for fiscal years ending on or after July 15, 2003. The ethics code must contain written standards that are reasonably designed to deter wrongdoing and to promote:  o        Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;  o        Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission and in other public communications made by the registrant;  o        Compliance with applicable governmental laws, rules and regulations;  o        The prompt internal reporting to an appropriate person or persons identified in the code, of violations of the code; and                                         18   o        Accountability for adherence to the code.  o        Disclosure of whether a company's audit committee of its board of directors has a member of the audit committee who qualifies as an "audit committee financial expert." The disclosure obligation became effective for fiscal years ending on or after July 15, 2003. To qualify as an "audit committee financial expert," a person must have:  o        An understanding of generally accepted accounting principles and financial statements;  o        The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;  o        Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities;  o        An understanding of internal controls and procedures for financial reporting; and  o        An understanding of audit committee functions.  A person must have acquired the above listed attributes to be deemed to qualify as an "audit committee financial expert" through any one or more of the following:  o        Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;  o        Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;  o        Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or  o        Other relevant experience.  The disclosure obligation contains a specific safe harbor provision to clarify that the designation of a person as an "audit committee financial expert" does not cause that person to be deemed to be an "expert" for any purpose under Section 11 of the Securities Act of 1933, as amended, or impose on such person any duties, obligations or liability greater that the duties, obligations and liability imposed on such person as a member of the audit committee and the board of directors, absent such designation. Such a designation also does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.                                         19   o        prohibition on insider trading during pension plan black-out periods.  o        Disclosure of off-balance sheet transactions.  o        A prohibition on personal loans to directors and officers.  o        Conditions on the use of non-GAAP (generally accepted accounting principles) financial measures.  o        Standards on professional conduct for attorneys requiring attorneys having an attorney-client relationship with a company, among other matters, to report "up the ladder" to the audit committee, another board committee or the entire board of directors certain material violations.  o        Expedited filing requirements for Form 4 reports of changes in beneficial ownership of securities reducing the filing deadline to within 2 business days of the date a transaction triggers an obligation to report.  o        Accelerated filing requirements for Forms 10-K and 10-Q by public companies which qualify as "large accelerated filers" or "accelerated filers." Large accelerated filers are now required to file form 10-K within 75 days after the fiscal year-end in 2005 and within 60 days in 2006. Accelerated filers are required to file Form 10-K within 75 days after the fiscal year-end in both 2005 and 2006. Both large accelerated filers and accelerated filers must file Form 10-Q within 40 days after each fiscal quarter-end in 2005 and 2006. FNB Bancorp is not currently defined as a "large accelerated filer" or an "accelerated filer" and its deadlines to file Form 10-K and Form 10-Q remain at 90 days and 45 days after the fiscal year-end and each quarter-end, respectively, in 2005 and 2006.  o        Disclosure concerning website access to reports on Forms 10-K, 10-Q and 8-K, and any amendments to those reports, by "accelerated filers" as soon as reasonably practicable after such reports and material are filed with or furnished to the Securities and Exchange Commission.  o        Rules requiring national securities exchanges and national securities associations to prohibit the listing of any security whose issuer does not meet audit committee standards established pursuant to the Act, including:  o        Independence standards for members;  o        Responsibility for selecting and overseeing the issuer's independent accountant;  o        Responsibility for handling complaints regarding the issuer's accounting practices;  o        Authority to engage advisers; and  o        Funding requirements for the independent auditor and outside advisers engaged by the audit committee.                                         20   On November 4, 2003, the Securities and Exchange Commission adopted changes to the standards for the listing of issuer securities by the New York Stock Exchange and the Nasdaq Stock Market. The revised standards for listing conform to and supplement Rule 10A-3 under the Securities Exchange Act of 1934, as amended, which the Securities and Exchange Commission adopted in April 2003 pursuant to the Act. In the future, if the Company's common stock is listed on the Nasdaq Stock Market, the Company would be required to comply with these listing standards, as revised, in addition to the rules promulgated by the Securities and Exchange Commission pursuant to the Act.  The effect of the Act upon the Company is uncertain; however, the Company will incur increased costs to comply with the Act and the rules and regulations promulgated pursuant to the Act by the Securities and Exchange Commission and other regulatory agencies having jurisdiction over the Company. The Company does not currently anticipate, however, that compliance with the Act and such rules and regulations will have a material adverse effect upon its financial position or results of its operations or its cash flows.  California Corporate Disclosure Act - -----------------------------------           The California Corporate Disclosure Act (the "CCD Act"), became effective January 1, 2003. The CCD Act requires publicly traded corporations incorporated or qualified to do business in California to disclose information about their past history, auditors, directors and officers. The CCD Act requires the Company to disclose:  o        The name of the company's independent auditor and a description of services, if any, performed for the company during the previous 24 months;  o        The annual compensation paid to each director and executive officer, including stock or stock options not otherwise available to other company employees;  o        A description of any loans made to a director at a "preferential" loan rate during the previous 24 months, including the amount and terms of the loans;  o        Whether any bankruptcy was filed by a company or any of its directors or executive officers within the previous 10 years;  o        Whether any director or executive officer of a company has been convicted of fraud during the previous 10 years; and  o        Whether a company violated any federal securities laws or any securities or banking provisions of California law during the previous 10 years for which the company was found liable or fined more than $10,000.  The Company does not currently anticipate that compliance with the CCD Act will have a material adverse effect upon its financial position or results of its operations or its cash flows.                                         21   Future Legislation and Regulations - ----------------------------------           Certain legislative and regulatory proposals that could affect FNB Bancorp, First National Bank, and the banking business in general are periodically introduced before the United States Congress, the California State Legislature and Federal and state government agencies. It is not known to what extent, if any, legislative proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationships of financial institutions. It is likely, however, that such legislation could subject FNB Bancorp and First National Bank to increased regulation, disclosure and reporting requirements, competition, and costs of doing business.           In addition to legislative changes, the various Federal and state financial institution regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such rules or regulations will be enacted or the effect that such regulations may have on the Company and First National Bank.
In addition to the risks associated with the business of banking generally, as described above under Item 1 (Description of Business), the Company's business, financial condition, operating results, future prospects and stock price can be adversely impacted by certain risk factors, as set forth below, any of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results.  Dependence on Key Officers and Employees. We are dependent on the successful recruitment and retention of highly qualified personnel. Our ability to implement our business strategies is closely tied to the strengths of our executive officers who have extensive experience in the banking industry but who are not easily replaced. In addition, business banking, one of the Company's principal lines of business, is dependent on relationship banking, in which First National Bank personnel develop professional relationships with small business owners and officers of larger business customers who are responsible for the financial management of the companies they represent. If these employees were to leave First National Bank and become employed by a local competing bank, we could potentially lose business customers. In addition, we rely on our customer service staff to effectively serve the needs of our consumer customers. We actively recruit for all open positions and management believes that its relations with employees are good.  Growth strategy. We have pursued and continue to pursue a growth strategy which depends primarily on generating an increasing level of loans and deposits at acceptable risk levels. We may not be able to sustain this growth strategy without establishing new branches or new products. Therefore, we may expand in our current market by opening or acquiring branch offices or other financial institutions or branch offices. This expansion may require significant investments in equipment, technology, personnel and site locations. We cannot assure you of our success in implementing our growth strategy without corresponding increases in our noninterest expenses.                                         22   Commercial loans. As of December 31, 2005, approximately 13.8% of our loan portfolio consisted of commercial business loans, which have a higher degree of risk than other types of loans. Commercial business loans generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the mobility of collateral, the effect of general economic conditions and the increased difficulty of evaluating and monitoring these types of loans. In addition, unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired.  Real Estate Values. A large portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2005, real estate served as the principal source of collateral with respect to approximately 85.3% of the Company's loan portfolio. A substantial decline in the economy in general, or a decline in real estate values in the Company's primary operating market areas in particular, could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available-for-sale investment portfolio, as well as the Company's financial condition and results of operations in general and the market value for Company Common Stock. Acts of nature, including fires, earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition.  Allowance for Loan and Lease Losses. Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance, but its allowance for loan losses may not be adequate to cover actual loan and lease losses. In addition, future provisions for loan and lease losses could materially and adversely affect the Company and therefore the Company's operating results. The Company's allowance for loan and lease losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Company's control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Company's loans and allowance for loan and lease losses. Although we believe that the Company's allowance for loan and lease losses is adequate to cover current losses, we cannot assure you that it will not further increase the allowance for loan and lease losses or that the regulators will not require it to increase this allowance. Either of these occurrences could materially and adversely affect the Company's earnings.  Environmental Liabilities. In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity                                         23   or third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigations or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we could become subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business prospects, financial condition, liquidity, results of operations and stock price could be materially and adversely affected.  Dilution of Common Stock. Shares of the Company's common stock eligible for future sale could have a dilutive effect on the market for common stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 10,000,000 shares of common stock, of which 2,700,322 were outstanding at December 31, 2005. Pursuant to its 1997 and 2002 Stock Option Plans, at December 31, 2005, the Company had outstanding options to purchase 223,638 shares of common stock. As of December 31, 2005, 125,359 shares of common stock remained available for grants under the 2002 Stock Option Plan. Sales of substantial amounts of the Company's common stock in the public market could adversely affect the market price of common stock.  Operating Losses. The Company is subject to certain operations risks, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company's internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations.  Business Confidence Uncertainty. The terrorist actions on September 11, 2001, and thereafter, plus military actions taken by the United States in Afghanistan, Iraq and elsewhere, have had significant adverse effects upon the United States economy. Whether terrorist activities in the future and the actions taken by the United States and its allies in combating terrorism on a worldwide basis will adversely impact the Company, and the extent of such impact, is uncertain. However, such events have had and may continue to have an adverse effect on the economy in the Company's market areas. Such continued economic deterioration could adversely affect the Company's future results of operations by, among other matters, reducing the demand for loans and the amounts required to be reserved for loan losses, reducing the value of collateral held as security for the Company's loans, and causing a decline in the Company's stock price.
Not applicable.                                         24
FNB Bancorp does not own any real property. Since its incorporation on February 28, 2001, FNB Bancorp has conducted its operations at the administrative offices of First National Bank, located at 975 El Camino Real, South San Francisco, California 94080.           First National Bank owns the land and building at 975 El Camino Real, South San Francisco, California 94080. The premises consist of a modern, three-story building of approximately 20,000 square feet and off-street parking for employees and customers of approximately 45 vehicles. The Buri Buri Branch Office of First National Bank is located on the ground floor of this three-story building and administrative offices, including the offices of senior management, occupy the second and third floors.           First National Bank owns the land and two-story building occupied by the Daly City Branch Office (6600 Mission Street, Daly City, CA 94014); the land and two-story building occupied by the Colma Branch Office (1300 El Camino Real, Colma, CA 94014); the land and two-story building occupied by the South San Francisco Branch Office (211 Airport Boulevard, South San Francisco, CA 94080); the land and two-story building occupied by the Redwood City Branch Office (700 El Camino Real, Redwood City, CA 94063); the land and two-story building occupied by the Millbrae Branch Office (1551 El Camino Real, Millbrae, CA 94030); the land and single-story building occupied by the Half Moon Bay Branch Office (756 Main Street, Half Moon Bay, CA 94019); and the land and two-story building occupied by the Pescadero Branch Office (239 Stage Road, Pescadero, CA 94060). All properties include adequate vehicle parking for customers and employees.           First National Bank leases premises at 1450 Linda Mar Shopping Center, Pacifica, California 94044, for its Linda Mar Branch Office. This ground floor space of approximately 4,100 square feet is leased from Fifty Associates and Demartini/Linda Mar, LLC. The lease term is 10 years and expires on September 1, 2009.           First National Bank leases premises at 210 Eureka Square, Pacifica, California 94044, for its Eureka Square Branch Office. This ground floor space of approximately 3,000 square feet is leased from Joseph A. Sorci and Eldiva Sorci. The lease term is for 5 years, commencing January 1, 1995, with two 5-year options to extend the lease term, the second of which has been exercised and expires on December 31, 2009.           The Flower Mart facility located at 640 Brannan Street, Suite 102, San Francisco, California, 94107 was discontinued during 2005, and is now replaced by two full-service branches, the Financial District Office at 65 Post Street, San Francisco, and the Portola Office, at 699 Portola Drive, San Francisco.           First National Bank leases premises at 65 Post Street, San Francisco, CA 94104, for its Financial District Office. The current lease term expires April 30, 2008, with two 5-year options to extend the lease. The location consists of approximately 2,826 square feet of street level, 1,322 square feet of basement, and 1,077 square feet of mezzanine space.                                         25            First National Bank leases premises at 6599 Portola Drive, San Francisco, CA 94127, for its Portola Office. The current lease expires June 30, 2009, and has a remaining 5-year option to extend the lease. The location consists of approximately 1,325 square feet of street level space.           First National Bank leases premises at 150 East Third Avenue, San Mateo, CA 94401, for its San Mateo Branch Office. The lease term is for 5 years, which will expire July 31, 2008. The location consists of approximately 4,000 square feet of ground floor usable commercial space.           The foregoing summary descriptions of leased premises are qualified in their entirety by reference to the full text of the lease agreements listed as exhibits to this report.
There are no material legal proceedings adverse to the Company or First National Bank to which any director, officer, affiliate of the Company, or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company are a party, and none of the foregoing persons has a material interest adverse to the Company or First National Bank.           From time to time, the Company and/or First National Bank is a party to claims and legal proceedings arising in the ordinary course of business. The Company's management is not aware of any material pending legal proceedings to which either it or First National Bank may be a party or has recently been a party, which will have a material adverse effect on the financial condition or results of operations of the Company and First National Bank, taken as a whole.
Not applicable.                                        PART II
Since March 18, 2002, the common stock of the Company has been quoted on the OTC Bulletin Board under the trading symbol, "FNBG.OB." There has been limited trading in the shares of common stock of the Company. On February 15, 2006, the Company had approximately 400 shareholders of common stock of record.                                         26            The following table summarizes sales of the common stock of FNB Bancorp during the periods indicated of which management of the Bank has knowledge, including the approximate high and low bid prices during such periods and the per share cash dividends declared for the periods indicated. All information has been adjusted to reflect 5% stock dividends effected on December 15, 2004 and on December 16, 2005. The prices indicated below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.                              Bid Price of FNB Bancorp                                   Common Stock                                                       Cash                                                     Dividends                                                     Declared                             High          Low         (1)                          ----------   ----------   ----------    2004 - -------------- First Quarter            $  33.6054   $  27.3650   $     0.12 Second Quarter           $  29.8412   $  28.1179         0.12 Third Quarter               30.4309      29.0250         0.12 Fourth Quarter              34.7619      31.9524         0.12                                                          0.12     Special                                                                   Dividend    2005 - -------------- First Quarter            $  35.2381   $  31.9048   $     0.15 Second Quarter              31.9048      28.0952         0.15 Third Quarter               30.2381      28.9524         0.15 Fourth Quarter              33.2500      30.7500         0.15  (1)  See Item 1, "Limitations on Dividends," above, for a description of the      limitations applicable to the payment of dividends by FNB Bancorp.                                          27
The following table presents a summary of selected financial information that should be read in conjunction with the Company's financial statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA."  Dollars in thousands, except per share amounts and ratios                     2005          2004          2003          2002          2001                                           ----------    ----------    ----------    ----------    ----------       STATEMENT OF INCOME DATA Total interest income                     $   30,732    $   24,046    $   22,867    $   26,159    $   30,844 Total interest expense                         5,533         2,533         2,658         4,288         7,935                                           ----------    ----------    ----------    ----------    ---------- Net interest income                           25,199        21,513        20,209        21,871        22,909 Provision for loan losses                        600           480           780           150           300                                           ----------    ----------    ----------    ----------    ---------- Net interest income after provision for    loan losses                                24,599        21,033        19,429        21,721        22,609 Total non interest income                      3,841         3,787         4,026         3,308         3,007 Total non interest expenses                   20,283        18,555        17,918        18,705        17,911                                           ----------    ----------    ----------    ----------    ---------- Earnings before taxes                          8,157         6,265         5,537         6,324         7,705 Income tax expense                             2,429         1,577         1,396         1,510         2,468                                           ----------    ----------    ----------    ----------    ---------- Net earnings                              $    5,728    $    4,688    $    4,141    $    4,814    $    5,237                                           ==========    ==========    ==========    ==========    ==========  PER SHARE DATA - see note  Net earnings per share:    Basic                                  $     2.12    $     1.71    $     1.48    $     1.71    $     1.87    Diluted                                $     2.08    $     1.67    $     1.47    $     1.71    $     1.86 Cash dividends per share                  $     0.60    $     0.60    $     0.60    $     1.00    $     1.23 Weighted average shares outstanding:    Basic                                   2,699,000     2,748,000     2,797,000     2,808,000     2,806,000    Diluted                                 2,758,000     2,799,000     2,824,000     2,817,000     2,812,000 Shares outstanding at period end           2,700,322     2,586,269     2,518,559     2,437,043     2,318,849 Book value per share                      $    20.46    $    20.35    $    20.64    $    21.01    $    20.06  BALANCE SHEET DATA Investment securities                        113,463       102,823        63,692        75,963        65,311 Net loans                                    380,051       340,906       312,929       284,889       288,067 Allowance for loan losses                      4,547         3,334         3,284         3,396         3,543 Total assets                                 569,141       490,054       429,448       401,834       397,388 Total deposits                               507,544       413,253       374,214       347,406       344,079 Shareholders' equity                          55,243        52,629        51,987        31,203        46,523  SELECTED PERFORMANCE DATA Return on average assets                        1.08%         1.02%         1.00%         1.17%         1.30% Return on average equity                       10.75%         8.94%         8.00%         9.87%        11.43% Net interest margin                             5.27%         5.14%         5.33%         5.83%         6.34% Average loans as a percentage of    average deposits                            77.80%        79.98%        82.93%        80.79%        77.67% Average total stockholder's equity as    a percentage of average total assets        10.06%        11.37%        12.49%        11.86%        11.41% Dividend payout ratio                          26.92%        32.54%        35.63%        29.35%        43.38% SELECTED ASSET QUALITY RATIOS Net loan charge-offs to average loans           0.02%         0.13%         0.30%         0.10%         0.03% Allowance for loan losses/Total Loans           1.18%         0.97%         1.04%         1.18%         1.21% CAPITAL RATIOS  Tier 1 risk-based                              10.67%        12.69%        13.29%        13.92%        12.98% Total risk-based                               11.59%        13.50%        14.15%        14.87%        13.98% Leverage                                        9.50%        10.72%        12.06%        12.16%        11.41%    Note: per share data has been adjusted for stock dividends.                                         28
Forward-Looking Statements: Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as "believe," "expect," "anticipate," "intend," "may," "will," "should," "could," "would," and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) variances in the actual versus projected growth in assets; (2) return on assets; (3) loan and lease losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries; (9) changes in the regulatory environment; (10) changes in business conditions and inflation; (11) changes in securities markets; (12) data processing problems; (13) a decline in real estate values in the Company's operating market areas; (14) the effects of terrorism, the threat of terrorism or the impact of the current military conflict in Iraq and the conduct of the war on terrorism by the United States and its allies, as well as other factors. The factors set forth under "Item 1A - Risk Factors" in this report and other cautionary statements and information set forth in this report should be read carefully considered and understood as being applicable to all related forward-looking statements contained in this report when evaluating the business prospects of the Company and its subsidiary.           Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, or to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.                                         29   Critical Accounting Policies And Estimates - ------------------------------------------           Management's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to its loans and allowance for loan losses. The Company bases its estimates on current market conditions, 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 requires significant judgments and estimates used in the preparation of its consolidated financial statements.  Allowance for Loan Losses. The allowance for loan losses is periodically evaluated for adequacy by management. Factors considered include the Company's loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower's ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact borrowers' ability to repay loans. Determination of the allowance is in part objective and in part a subjective judgment by management given the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher charge-offs and loan loss provisions.  Recent Accounting Changes - -------------------------           On December 12, 2003, AICPA issued Statement of Position 03-3 which addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans with evidence of deterioration of credit quality since origination acquired by completion of a transfer, including such loans acquired in purchase business combinations. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The Company is prospectively adopting SOP 03-03 effective for loans acquired beginning January 1, 2005.           In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No. 123(R) requires the Company to measure the cost of employee services received in exchange for an award of equity instruments using a fair-value method, and record such expense in its financial statements, for annual reporting periods beginning after June 15, 2005. The revised Statement eliminates an entity's ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to                                         30   Employees, which was permitted under Statement 123, as originally issued. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. This accounting change is not expected to have a material effect on the consolidated financial statements.  Earnings Analysis - -----------------           Net earnings in 2005 were $5,728,000, a 22.2% increase from 2004 earnings of $4,688,000. Earnings for the year 2004 increased $547,000 or 13.2% from year 2003 earnings of $4,141,000. The principal source of earnings is interest income on loans. In the year 2003, the prime lending rate started at 4.25%, and ended at 4.00%. In 2004, the rate rose from 4.00% to 5.25%. The year 2005 started at 5.25%, and rose eight times, ending at 7.25%.           Basic earnings per share were $2.12 in 2005; $1.71 in 2004 and $1.48 in 2003. Diluted earnings per share were $2.08 in 2005; $1.67 in 2004; and $1.47 in 2003.           Net interest income for 2005 was $25,199,000, an increase of $3,686,000 or 17.1% from 2004. Net interest income was $21,513,000 in 2004, an increase of $1,304,000 or 6.5% from 2003. Interest income was $30,732,000 in 2005, an increase of $6,686,000 or 27.8% over 2004. Interest income was $24,046,000 in 2004, an increase of $1,179,000, or 5.2% over 2003. Average interest earning assets in 2005 were $477,833,000, an increase of $59,510,000 or 14.2% from 2004. In 2004, they were $418,323,000, an increase of $39,054,000, or 10.3% over 2003. The yield on interest earning assets increased 68 basis points in 2005 compared to 2004. The yield on interest earning assets declined 28 basis points in 2004 compared to 2003. The principal earning assets were loans, and their average increased $43,822,000 in 2005 versus 2004, while their yield increased 72 basis points. Average loans were $319,577,000 in 2004, an increase of $23,250,000 over 2003, while their yield declined 11 basis points.           Interest expense for 2005 was $5,533,000 and $2,533,000 in 2004, an increase of $3,000,000 or 118.4%. Interest expense was $2,533,000 in 2004, a decrease of $125,000 compared to 2003, or 4.7%. Average interest bearing liabilities were $353,857,000 in 2005, and $295,062,000 in 2004, an increase of $58,795,000 or 19.9%. They were $295,062,000 in 2004, and $264,905,000 in 2003, an increase of $30,157,000 or 11.4%. The cost of these liabilities increased 70 basis points in 2005 compared to 2004, and declined 14 basis points in 2004 compared to 2003. The principal cost was in time deposits, which increased 97 basis points in 2005 compared to 2004, but decreased 38 basis points in 2004 compared to 2003.  Net Interest Income - -------------------           Net interest income is the difference between interest yield generated by earning assets and the interest expense associated with the funding of those assets. Net interest income is affected by the interest rate earned or paid and by volume changes in loans, investment securities, deposits and borrowed funds.                                         31     TABLE 1                                                      Net Interest Income and Average Balances                                   ------------------------------------------------------------------------------------------------                                                                            (In thousands)                                                                         Year ended December 31                                                 2005                            2004                             2003                                   ------------------------------   ------------------------------   ------------------------------                                               Interest    Average              Interest   Average               Interest    Average                                    Average    Income      Yield     Average    Income      Yield     Average    Income      Yield                                    Balance   (Expense)    (Cost)    Balance   (Expense)    (Cost)    Balance   (Expense)    (Cost)                                   --------   --------   --------   --------   --------   --------   --------   --------   --------           INTEREST EARNING ASSETS Loans, gross                      $363,399   $ 26,754       7.36%  $319,577   $ 21,226       6.64%  $296,327   $ 19,990       6.75% Taxable Securities                  60,408      2,173       3.60%    48,536      1,418       2.92%    40,221      1,446       3.60% Nontaxable Securities               44,628      1,512       3.39%    36,293      1,250       3.44%    36,012      1,358       3.77% Federal funds sold                   9,398        293       3.12%    13,917        152       1.09%     6,709         73       1.09%                                   -------------------              -------------------              -------------------  Total interest earning assets    $477,833   $ 30,732       6.43%  $418,323   $ 24,046       5.75%  $379,269   $ 22,867       6.03%                                   -------------------              -------------------              -------------------  NONINTEREST EARNING ASSETS Cash and due from banks           $ 19,758                         $ 19,106                         $ 18,069 Premises and equipment              11,896                           13,320                           10,916 Other assets                        20,254                           10,342                            6,155                                   --------                         --------                         --------  Total noninterest earning   assets                          $ 51,908                         $ 42,768                         $ 35,140                                   --------                         --------                         -------- TOTAL ASSETS                      $529,741                         $461,091                         $414,409                                   ========                         ========                         ========  INTEREST BEARING LIABILITIES Deposits:  Demand, interest bearing          $ 57,478   $   (168)     (0.29%) $ 56,561   $   (113)     (0.20%) $ 51,981   $   (105)     (0.20%)   Money Market                       110,488     (1,888)     (1.71%)   86,598       (757)     (0.87%)   66,189       (571)     (0.86%) Savings                             58,820       (181)     (0.31%)   60,040       (161)     (0.27%)   56,281       (183)     (0.33%) Time deposits                      124,004     (3,203)     (2.58%)   88,627     (1,429)     (1.61%)   90,280     (1,797)     (1.99%) Fed funds purchased  and other borrowings                3,067        (93)     (3.03%)    3,236        (73)     (2.26%)      174         (2)     (1.15%)                                   -------------------              -------------------              -------------------  Total interest bearing   liabilities                     $353,857   $ (5,533)     (1.56%) $295,062   $ (2,533)     (0.86%) $264,905   $ (2,658)     (1.00%)                                   -------------------              -------------------              -------------------  NONINTEREST BEARING LIABILITIES: Demand deposits                    116,331                          107,758                           92,609 Other liabilities                    6,284                            5,833                            5,148                                   --------                         --------                         -------- Total noninterest bearing  liabilities                       $122,615                        $113,591                         $ 97,757                                   --------                         --------                         --------  Total liabilities                $476,472                         $408,653                         $362,662 Stockholders' equity              $ 53,269                         $ 52,438                         $ 51,747                                   --------                         --------                         -------- TOTAL LIABILITIES AND  STOCKHOLDERS' EQUITY             $529,741                         $461,091                         $414,409                                   ========                         ========                         ========  NET INTEREST INCOME AND MARGIN ON TOTAL EARNING ASSETS                               $ 25,199       5.27%             $ 21,513       5.14%             $ 20,209       5.33%                                              ========                         ========                         ========    Interest income is reflected on an actual basis, not on a fully taxable equivalent basis. Yields on gross loans were not adjusted for nonaccrual loans, as these were considered not material for this calculation.  The following table analyzes the dollar amount of change in interest income and expense and the changes in dollar amounts attributable to (a) changes in volume (changes in volume at the current year rate), (b) changes in rate (changes in rate times the prior year's volume) and (c) changes in rate/volume (changes in rate times changes in volume). In this table, the dollar change in rate/volume is prorated to volume and rate proportionately.                                         32     TABLE 2                                               Rate/Volume Variance Analysis                              ---------------------------------------------------------------------------                                                            (In thousands)                                                          Year Ended December 31                              ------------------------------------   ------------------------------------                                      2005 Compared to 2004                  2004 Compared to 2003                                       Increase (decrease)                   Increase (decrease)                                Interest                               Interest                               Income/             Variance           Income/            Variance                               Expense          Attributable To       Expense         Attributable To                               Variance       Rate        Volume      Variance       Rate        Volume                              ----------   ----------   ----------   ----------   ----------   ----------        INTEREST EARNING ASSETS: Loans                        $    5,528   $    2,302   $    3,226   $    1,236   $     (308)  $    1,544  Taxable Securities                  755          408          347          (28)        (327)         299  Nontaxable Securities               262          (25)         287         (108)        (119)          11  Federal Funds sold                  141          282         (141)          79           --           79                              ----------   ----------   ----------   ----------   ----------   ----------      Total                   $    6,686   $    2,967   $    3,719   $    1,179   $     (754)  $    1,933                              ----------   ----------   ----------   ----------   ----------   ----------  INTEREST BEARING LIABILITIES:  Demand deposits              $       55   $       53   $        2   $        8   $       (1)  $       (9)  Money market                      1,131          723          408          186            8          178  Savings deposits                     20           24           (4)         (22)         (32)          10  Time deposits                     1,774        1,204          570         (368)        (335)         (33)  Federal funds purchased  and other borrowings                20           25           (5)          71            2           69                              ----------   ----------   ----------   ----------   ----------   ----------      Total                   $    3,000   $    2,029   $      971   $     (125)  $     (358)  $      233                               ----------   ----------   ----------   ----------   ----------   ---------- NET INTEREST INCOME          $    3,686   $      938   $    2,748   $    1,304   $     (396)  $    1,700                              ==========   ==========   ==========   ==========   ==========   ==========            In 2005, net interest income represented 86.77% of net revenue (net interest income plus non-interest income), compared to 85.28% in 2004 and 75.16% in 2003. The net interest margin on average earning assets was 5.27% in 2005 compared to 5.14% in 2004 and 5.33% in 2003. The average rate earned on interest earning assets was 6.43% in 2005, up from 5.75% in 2004, and 6.03% in 2003. The average cost for interest-bearing liabilities was 1.56% in 2005, compared to 0.86% in 2004 and 1.00% in 2003. The net effect of the above changes resulted in a 13 basis point increase in net interest margin for 2005.           As mentioned before under the heading "Earnings Analysis", there were declines in the prime lending rate during 2003, finally followed by increases in 2004 and 2005, as a result of action by the Federal Open Market Committee of the Federal Reserve, which affected interest-bearing assets and interest-bearing liabilities.           Yield on average loans was 7.36% in 2005, increasing from 6.64% in 2004 and 6.75% in 2003. Interest on average taxable securities was 3.60% in 2005, increasing from 2.92% in 2004, but the same as 3.60% in 2003. Interest on                                         33   average nontaxable securities was 3.39% in 2005, decreasing from 3.44% in 2004 and 3.77% in 2003. Interest on average federal funds sold was 3.12% in 2005, an increase from 1.09% in 2004 and 2003. Interest on average total interest earning assets was 6.43% in 2005, 5.75% in 2004 and 6.03% in 2003. On the expense side, interest on average interest bearing demand deposits was 0.29% in 2005, an increase from 0.20% in 2004 and 2003 . Interest on average money market accounts was 1.71% in 2005, increasing from 0.87% in 2004, and 0.86% in 2003. Interest on average savings accounts was 0.31% in 2005, an increase from 0.27% in 2004, but decreasing from 0.33% in 2003. Interest on average time deposits was 2.58% in 2005, an increase from 1.61% in 2004 and 1.99% in 2003. Interest on average federal funds purchased and other borrowings was 3.03% in 2005, an increase from 2.26% in 2004 and 1.15% in 2003. Interest on average total interest bearing liabilities was 1.56% in 2005, an increase from 0.86% in 2004 and 1.00% in 2003.  Allowance For Loan Losses - -------------------------           The Bank has the responsibility of assessing the overall risks in its loan portfolio, assessing the specific loss expectancy, and determining the adequacy of the loan loss reserve. The level of reserves is determined by internally generating credit quality ratings, reviewing economic conditions in the Bank's market area, and considering the Bank's historical loan loss experience. The Bank is committed to maintaining adequate reserves, identifying credit weaknesses by consistent review of loans, and maintaining the ratings and changing those ratings in a timely manner as circumstances change.           Real estate loans outstanding increased by $47,380,000 in 2005 compared to 2004. They increased by $40,845,000 in 2004 compared to 2003. The proportion of the Allowance for Loan Losses attributable to real estate loans was $3,373,000 in 2005 compared to $1,589,000 in 2004 and $1,428,000 in 2003. As a percentage of total loans, the amount allocated to these loans was 78.5% in 2005,73.9% in 2004, and 67.5% in 2003.           The allowance for loan losses totaled $4,547,000, $3,334,000 and $3,284,000 at December 31, 2005, 2004 and 2003, respectively. This represented 1.18%, 0.97% and 1.04% of outstanding loans on those respective dates. The balances reflect an amount that, in management's judgment, is adequate to provide for probable loan losses based on the considerations listed above. During 2005, the provision for loan losses was $600,000, while write-offs were $110,000. In 2004, the provision for loan losses was $480,000, while write-offs totaled $431,000. In 2003, the provision was $780,000, and total write-offs were $896,000.                                         34     TABLE 3                                              Allocation of the Allowance for Loan Losses                                                                      (In thousands)                               2005                   2004                   2003                   2002                   2001                            Percent                Percent                Percent                Percent                Percent                            in each                in each                in each                in each                In each                            category               category               category               Category               category                            to total               to total               to total               to total               To total                  Amount     Loans       Amount     Loans       Amount     Loans       Amount     Loans       Amount     Loans                 --------   --------    --------   --------    --------   --------    --------   --------    --------   --------            Real Estate     $  3,373       78.5%   $  1,589       73.9%   $  1,428       67.5%   $  2,008       72.9%   $  1,912       74.1% Construction         365        6.8%        618        8.4%      1,087       15.3%        989       11.4%        504       11.6% Commercial           611       13.8%        340       17.0%        158       16.4%        221       14.7%        387       13.4% Consumer              25        0.9%         19        0.7%         22        0.8%         43        1.0%        226        0.9% Unfunded   commitments        173         --         201         --         129         --         135         --         514         -- Unallocated           --         --         567         --         460         --          --         --          --         --                 --------   --------    --------   --------    --------   --------    --------   --------    --------   -------- Total           $  4,547      100.0%   $  3,334      100.0%   $  3,284      100.0%   $  3,396      100.0%   $  3,543      100.0%                 ========   ========    ========   ========    ========   ========    ========   ========    ========   ========            Table 4 summarizes transactions in the allowance for loan losses and details the charge-offs, recoveries and net loan losses by loan category for each of the last five fiscal years ended December 31, 2005. The amount added to the provision and charged to operating expenses for each period is based on the risk profile of the loan portfolio.           Charge-offs between 2001 and 2002 were very low. However, there were partial charge-offs for two loans secured by office buildings for $200,000 and $539,000 respectively in 2003, which, when taken into consideration in the evaluation of the adequacy of the allowance for loan losses, resulted in an increase in the provision for probable loan losses to $780,000 in 2003.                                         35     TABLE 4                                                      Allowance for Loan                                                                    Losses                                                              Historical Analysis                                        --------------------------------------------------------------                                                               (In thousands)                                                        For the year ended December 31                                           2005         2004         2003         2002         2001                                        ----------   ----------   ----------   ----------   ----------       Balance at Beginning of Period         $    3,334   $    3,284   $    3,396   $    3,543   $    3,332 Provision for Loan Losses                     600          480          780          150          300  Charge-offs: Real Estate                                   (70)        (383)        (739)         (59)          -- Commercial                                    (34)         (31)        (110)        (216)         (22) Consumer                                       (6)         (17)         (47)         (30)         (72)                                        ----------   ----------   ----------   ----------   ----------    Total                                     (110)        (431)        (896)        (305)         (94)  Recoveries: Commercial                                     22           --            2            2           -- Consumer                                        1            1            2            6            5                                        ----------   ----------   ----------   ----------   ----------    Total                                       23            1            4            8            5 Net charge-offs                               (87)        (430)        (892)        (297)         (89) Allowance acquired in business  combination                                  700 Balance at End of Period               $    4,547   $    3,334   $    3,284   $    3,396   $    3,543   Percentages Allowance for Loan Losses/Total Loans        1.18%        0.97%        1.04%        1.18%        1.21% Net charge-offs/Real Estate Loans            0.27%        1.32%        1.52%        0.18%          -- Net charge-offs//Commercial Loans            0.02%        0.05%        0.21%        0.50%        0.06% Net charge-offs/Consumer Loans               0.15%        0.62%        1.76%        0.81%        2.58% Net charge-offs/Total Loans                  0.02%        0.12%        0.28%        0.10%        0.03% Allowance for Loan Losses/Non-performing Loans             26,747.06%      119.16%       36.15%      157.15%      180.86%   Non-performing Assets - ---------------------           Non-performing assets consist of nonaccrual loans, foreclosed assets, and loans that are 90 days or more past due but are still accruing interest. The accrual of interest on non-accrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. For the year ended December 31, 2005, had non-accrual loans performed as agreed, approximately $2,000 in interest would have been accrued.           At December 31, 2005, nonaccrual loans totaled only $17,000. At December 31, 2004, nonaccrual loans totaled $2,798,000, of which a loan secured by an office building located in the Silicon Valley community of Mountain View, represented $2,679,000. During 2005, this loan was foreclosed and is currently classified as Other Real Estate Owned, with a balance of $2,600,000.           Table 5 provides a summary of contractually past due loans for the most recent five years. Nonperforming loans were less than 0.01% of total loans at December 31, 2005, compared to 0.8% of total loans at the end of 2004. Nonperforming loans were 2.9% of total loans at the end of 2003. Management believes the current list of past due loans are collectible and does not anticipate significant losses. There were no foreclosed assets as of the periods indicated.                                         36   TABLE 5                            Analysis of Nonperforming Assets                          ----------------------------------------------------                                              (In thousands)                                         Year ended December 31,                          ----------------------------------------------------                            2005       2004       2003       2002       2001                          --------   --------   --------   --------   -------- Accruing loans 90 days or more                  $     --   $     --   $     --   $     --   $     -- Nonaccrual loans               17      2,798      9,085      2,161      1,959                          --------   --------   --------   --------   -------- Total                    $     17   $  2,798   $  9,085   $  2,161   $  1,959                          ========   ========   ========   ========   ========  There was no commitment to lend additional funds to any customer whose loan was classified nonperforming at December 31, 2005, 2004 and 2003.  Noninterest Income - ------------------           The following table sets forth the principal components of noninterest income:   TABLE 6                                               Noninterest Income                                                ------------------------------                                                    (Dollars in thousands)                                                     Years Ended December 31,                                                ------------------------------                                                  2005       2004       2003                                                --------   --------   -------- Service charges                                $  2,305   $  2,500   $  2,662 Credit card fees                                    856        886        946 Gain (loss) on write-down and sales of investment securities                              (101)       (31)       165 Other income                                        781        432        248                                                --------   --------   --------    Total noninterest income                    $  3,841   $  3,787   $  4,021                                                ========   ========   ========  Noninterest income for the year ended December 31, 2005 was $3,841,000 compared to $3,787,000 for 2004 and $4,021,000 for 2003. Service charges and credit card fees represented the major portion of noninterest income. In October of 2002, service charges per incident, in general, were increased, including charges for insufficient funds. Since the increase, fewer waivers have been allowed. The increase in these charges discouraged those customers in the habit of using insufficient funds, and other service charge originating activities also declined. In 2005 and 2004, the Bank recognized impairment charges of $116,000 and $27,000, respectively, representing the other than temporary impaired value of one security investment. The principal source of Other Income was Tax Free Income on Officers' Life Insurance, which was $310,000, $269,000 and $148,000 in the years 2005, 2004 and 2003, which reflected an increased investment in this insurance.  Noninterest Expenses - --------------------  The following table sets forth the various components of noninterest expense:                                         37   TABLE 7                                 Noninterest Expenses                                   -------------------------------                                       (Dollars in thousands)                                        Years Ended December 31,                                   -------------------------------                                     2005        2004       2003                                   --------    --------   --------  Salaries and employee benefits                          $ 11,344    $ 10,521   $ 10,576 Occupancy expense                    1,444       1,288      1,240 Equipment expense                    1,624       1,662      1,582 Advertising expense                    710         472        218 Data processing expense                416         344        394 Professional fees                      952       1,086        914 Director expense                       180         180        152 Surety insurance                       555         479        493 Telephone, postage, supplies                               939       1,103        898 Bankcard expenses                      802         803        818 Other                                1,317         617        633                                   --------    --------   --------    Total noninterest     expense                       $ 20,283    $ 18,555   $ 17,918                                   ========    ========   ========           Noninterest expenses for the year ended December 31, 2005 were $20,283,000, an increase of $1,728,000 or 9.3% compared to 2004. For 2004, they were $18,555,000, an increase of $637,000 or 3.6% over 2003. In 2005, Salaries and employee benefits were $11,344,000 in 2005 compared to $10,521,000 in 2004. The principal single item causing the increase was related to the acquisition of two branches in San Francisco, which represented $318,000, and the remainder was related to merit increases and promotional rewards. 2004 compared to 2003 showed no significant change. Occupancy expense increased by $156,000 in 2005 over 2004. The addition of the two former Sequoia branches accounted for $210,000, with some reductions, including the discontinuation of the Flower Mart facility in San Francisco. Advertising expense continued to increase from $218,000 in 2003 to $710,000. In 2005, newspaper and community advertising represented $280,000; in 2004 $103,000, and in 2003 it was $30,000. Contributions, public relations/fund raising, marketing materials and giveaway items were $381,000 in 2005; $291,000 in 2004, and $112,000 in 2003. All other expense was $1,317,000 in 2005, $617,000 in 2004 and $633,000 in 2003. Of the $700,000 increase in other expense during 2005, $339,000 was from acquisition related expense; $106,000 deposit intangible amortization; $61,000 in Other Real Estate Owned expense; and an impairment write-down of an equity security for $75,000. The remainder is in numerous smaller accounts. 2004 and 2003 did not change materially year over year.  Balance Sheet Analysis - ----------------------           Total assets of the Company were $569,141,000 at December 31, 2005, an increase of 16.1% over 2004. Total assets were $490,054,000 at December 31, 2004, an increase of 14.1% over 2003. Assets averaged $529.7 million in 2005, compared to $461.1 million in 2004 and $414.4 million in 2003. Average earning assets increased from $379.3 million in 2003 to $418.3 million in 2004 and $477.8 million in 2005. Average earning assets represented 91.5% of total average assets in 2003, 90.7% in 2004, and 90.2% in 2005. Interest-bearing liabilities averaged $264.9 million in 2003, $295.1 million in 2004, and $353.9 million in 2005.                                         38   Loans - -----           The loan portfolio is the principal earning asset of the Bank. Loans outstanding at December 31, 2005 increased by $40.4 million or 11.7% compared to December 31, 2004, while loans outstanding December 31, 2004 increased by $28.0 million or 8.9% compared to December 31, 2003.           Real Estate loans increased by $47.4 million or 18.5% in 2005 compared to 2004, and Real Estate loans increased by $40.8 million or 19.0% in 2004 compared to 2003. Construction loans decreased by $2.8 million or 9.5% in 2005 compared to 2004, and decreased by $19.6 million or 40.3% in 2004 compared to 2003. Commercial loans decreased by $5.8 million or 9.8% in 2005 compared to 2004, and increased by $6.6 million or 12.6% in 2004 compared to 2003. Consumer loans represent a nominal portion of total loans. They increased $0.8 million or 32.1% in 2005 compared to 2004, and increased by $0.04 million or 1.5% in 2004 compared to 2003.           Table 8 presents a detailed analysis of loans outstanding at December 31, 2001 through December 31, 2005.     TABLE 8                                        Loan Portfolio                         --------------------------------------------------------------                                                 (in thousands)                                                    December 31,                         --------------------------------------------------------------                            2005         2004         2003         2002         2001                         ----------   ----------   ----------   ----------   ----------       Real Estate loans       $  302,813   $  255,433   $  214,588   $  211,473   $  217,650 Construction loans          26,243       28,997       48,610       32,947       34,016 Commercial loans            53,070       58,849       52,248       42,549       39,195 Consumer loans               3,420        2,589        2,551        2,956        2,600                         ----------   ----------   ----------   ----------   ----------    Sub total               385,546      345,868      317,997      289,925      293,461 Net deferred loan fees                     (948)      (1,628)      (1,784)      (1,640)      (1,851)                         ----------   ----------   ----------   ----------   ----------    Total                $  384,598   $  344,240   $  316,213   $  288,285   $  291,610                         ==========   ==========   ==========   ==========   ==========            The following table shows the Bank's loan maturities and sensitivities to changes in interest rates as of December 31, 2005.                                                    Maturing                                       Maturing    After One     Maturing                                      Within One   But Within     After                                         Year      Five Years   Five Years      Total                                      ----------   ----------   ----------   ----------      Real Estate loans                    $  246,114   $   23,888   $   32,811   $  302,813 Construction loans                       21,329        2,070        2,844       26,243 Commercial loans                         43,133        4,187        5,750       53,070 Consumer loans                            2,780          270          370        3,420                                      ----------   ----------   ----------   ----------    Sub total                            313,356       30,415       41,775      385,546 Net deferred loan fees                     (770)         (75)        (103)        (948)                                      ----------   ----------   ----------   ----------    Total                             $  312,586   $   30,340   $   41,672   $  384,598                                      ==========   ==========   ==========   ========== With predetermined interest rates                       $   59,070   $    5,733   $    7,875   $   72,678 With floating interest rates                                $  253,516   $   24,607   $   33,797   $  311,920                                      ----------   ----------   ----------   ----------    Total                             $  312,586   $   30,340   $   41,672   $  384,598                                      ==========   ==========   ==========   ==========                                          39   Investment Portfolio - --------------------           Investments at December 31, 2005 were $113,463,000, an increase of $10,640,000 or 10.3% over 2004. Investments at December 31, 2004 were $102,823,000, an increase of $39,131,000 or 61.4% over 2003. The increase in investments in 2005 was funded by increases in total deposits.           Available funds are first used for Loans, then Investments, and the remainder is sold as Federal Funds. The primary source of funds is the deposit base. If more funds are needed, the Investment Portfolio maturity may be used, as well as sales and calls, which accounts for the volume variances in Investments. The Bank's investment portfolio is concentrated in U. S. Government Agencies and in obligations of States and their political subdivisions. The Bank believes this provides for an appropriate liquidity level.  The following table sets forth the maturity distribution and interest rate sensitivity of investment securities at December 31, 2005:                                                After                After                                           One                 Five                      Due                 Year                 Years                 Due                    In One               Through              Through               After                        Maturity                     Year                 Five                  Ten                  Ten                Fair       In       Average                    Or Less    Yield      Years     Yield      Years    Yield       Years   Yield       Value     Years      Yield                   --------   ------    --------   ------    --------   ------    --------  ------    --------   --------   --------                                                              (Dollars in thousands)             U. S. Government Agencies          $ 29,641     4.42%   $ 18,719     4.02%   $     --       --    $  1,766    5.49%   $ 50,126       2.55       4.30% States & Political Subdivisions         7,422     2.94%     23,403     3.51%     24,423     3.63%        780    3.76%     56,028       4.52       3.49% Corporate Debt       4,853     3.64%      1,011     2.96%         --       --          --      --       5,864       0.82       3.52% Other Securities        --       --          --       --       1,445     7.66%         --      --       1,445       9.83       7.66%      Total        $ 41,916     4.07%   $ 43,133     3.72%   $ 25,868     3.85%   $  2,546    4.94%   $113,463       3.52       3.91%   The following table shows the securities portfolio mix at December 31, 2005, 2004 and 2003.                                                       Years Ended December 31,                                          2005                  2004                 2003                                        ---------------------------------------------------------------                                        Amortized    Fair     Amortized   Fair      Amortized    Fair                                          Cost       Value      Cost      Value       Cost       Value                                        --------   --------   --------   --------   --------   --------                                                            (Dollars in thousands)        U. S. Government Agencies              $ 50,571     50,126     54,779     54,697     23,688     23,855 States & Political Subdivisions          56,208     56,028     41,446     42,515     32,340     33,908 Corporate Debt                            5,918      5,864      3,977      3,950      4,003      4,031 Other Securities                          1,445      1,445      1,661      1,661      1,897      1,898                                        --------   --------   --------   --------   --------   --------    Total                               $114,142    113,463    101,863    102,823     61,928     63,692                                        --------   --------   --------   --------   --------   --------   Deposits - --------           The increase in earning assets in 2005 was funded by the increase in the deposit base. During 2005, average deposits were $467,121,000, an increase of $67,537,000 or 16.9% over 2004. In 2004, average deposits were $399,584,000 an increase of $42,244,000 or 11.8% over 2003.. In 2005, average interest-bearing deposits were $350,790,000, an increase of $58,964,000 or 20.2%                                         40   over 2004. In 2004, average interest-bearing deposits were $291,826,000, an increase of $27,095,000 or 10.2% compared to 2003.           The series of declines in the prime rate during 2003 without any increases in the same period resulted in decreased costs of all types of interest-bearing deposits in that period. The prime lending rate rose from 4% at the beginning of 2004 to 7.25% at the end of 2005. Time deposits lagged the prime rate changes because their rates changed only as certificates matured or new certificates were issued. Thus, interest-bearing demand costs averaged 0.3% in 2005, and 0.2% in 2004 and 2003. Money market deposit costs averaged 1.7% in 2005, and 0.9% in 2004 and 2003. Savings rates averaged 0.3% in 2005, 2004 and 2003. Finally, average interest on time certificates of deposit of $100,000 or more was 2.7% in 2005, 1.5% in 2004 and 1.7% in 2003. On certificates under $100,000, average rates were 2.5% in 2005, 1.7% in 2004 and 2.2% in 2003.           The following table summarizes the distribution of average deposits and the average rates paid for them in the periods indicated:                                               Average Deposits and Average Rates paid for the period ending December 31,                                         2005                                2004                                 2003                         ---------------------------------    ---------------------------------    ---------------------------------                                                    % of                                 % of                                % of                           Average     Average      Total      Average      Average      Total      Average      Average     Total                           Balance      Rate      Deposits     Balance       Rate      Deposits     Balance       Rate      Deposits                         ---------------------------------    ---------------------------------    ---------------------------------           (in thousands)  Deposits: Interest-bearing  demand                 $   57,478        0.3%       12.3%   $   56,561        0.2%       14.1%   $   51,981        0.2%       14.6% Money market               110,488        1.7%       23.7        86,598        0.9%       21.7        66,189        0.9%       18.5 Savings                     58,820        0.3%       12.6        60,040        0.3%       15.0        56,281        0.3%       15.7 Time deposits $100,000  or more                    59,447        2.7%       12.7        38,764        1.5%        9.7        38,593        1.7%       10.8 Time deposits under  $100,000                   64,557        2.5%       13.8        49,863        1.7%       12.5        51,687        2.2%       14.5                         ---------------------------------    ---------------------------------    --------------------------------- Total interest  bearing deposits       $  350,790        1.6%       75.1    $  291,826        0.8%       73.0       264,731        1.6%       74.1 Demand deposits            116,331        0.0%       24.9       107,758        0.0%       27.0        92,609        0.0%       25.9                         ---------------------------------    ---------------------------------    --------------------------------- Total deposits          $  467,121        1.2%      100.0%   $  399,584        0.6%      100.0%   $  357,340        1.2%      100.0%                         =================================    =================================    =================================            The following table indicates the maturity schedule of time deposits of $100,000 or more:         Analysis of Time Deposits of $100,000 or more at December 31, 2005                                  (in thousands)                 Total                   Over         Over               Deposits    Three       Three        Six To      Over               $100,000    Months      To Six       Twelve     Twelve               or More    Or Less      Months       Months     Months             ----------  ---------   ---------    ----------  --------             $   77,572  $  28,506   $  27,375    $   14,871  $  6,820   Capital - -------           At December 31, 2005, shareholders' equity of the Company was $55,243,000, an increase of $2,614,000 or 5.0%; at December 31, 2004 shareholders' equity was $52,629,000, an increase of $642,000 or 1.2% over 2003. The increases were primarily attributable to retention of net income after payment of cash dividends of $1,542,000 in 2005, $1,526,000 in 2004, and $1,475,000 in 2003.                                         41            In 1989, the Federal Deposit Insurance Corporation (FDIC) established risk-based capital guidelines requiring banks to maintain certain ratios of "qualifying capital" to "risk-weighted assets". Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the Company's Tier 1 capital consists of common shareholders' equity, though other instruments such as certain types of preferred stock can also be included in Tier 1 capital. Tier 2 capital consists of eligible reserves for possible loan losses and qualifying subordinated notes and debentures. Total capital is the sum of Tier 1 plus Tier 2 capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance sheet assets and off-balance sheet obligations.           At year-end 1990, the FDIC also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3.0% for the highest rated banks and ratios of 100 to 200 basis points higher for most banks. Furthermore, in 1993, the FDIC began assessing risk-based deposit insurance assessments based on financial institutions' capital resources and "management strength", as mandated by the FDIC Improvement Act of 1991. To qualify for the lowest insurance premiums as indicated in the following table, "well-capitalized" financial institutions must maintain risk-based Tier 1 and total capital ratios of at least 6.0% and 10.0% respectively. "Well-capitalized financial institutions must also maintain a leverage ratio equal to or exceeding 5.0%.  The following table shows the risk-based capital ratios and the leverage ratios at December 31, 2005, 2004 and 2003 for the Bank.                                                              Minimum "Well      Risk-Based                                              Capitalized"      Capital Ratios        2005      2004     2003           Requirements      --------------    ---------------------------      Tier 1 Capital       10.64%    12.69%   13.29%      >      6.00%                                                          -       Total Capital        11.56%    13.50%   14.15%      >     10.00%                                                          -       Leverage Ratios       9.47%    10.71%   12.06%      >      5.00%                                                          -  Liquidity - ---------           The Company's primary source of liquidity on a stand-alone basis is dividends from the Bank. The payment of dividends by the Bank is subject to regulatory restrictions. Liquidity is a measure of the Company's ability to convert assets into cash with minimum loss. Liquidity consists of cash and due from other banks accounts, including time deposits, Federal Funds sold, and Securities Available-for-Sale . The Company's policy is to maintain a liquidity ratio of 20% or greater of total assets. As of December 31, 2005, the Company's primary liquidity was 26.14% compared to 24.47% in 2004 and 21.97% in 2003. The ratio increased due to increases in Total Liquid Assets, which were $148,761,000 in 2005, $119,907,000 in 2004 and $94,336,000 in 2003. The objective of liquidity management is to ensure that the Company has funds available to meet all present and future financial obligations and to take advantage of business opportunities as they occur. Financial obligations arise from withdrawals of deposits, repayment on maturity of purchased funds, extension of loans or other forms of credit, payment of operating expenses and payments of dividends.                                         42            Core deposits, which consist of all deposits other than time deposits, have provided the Company with a sizable source of relatively stable low-cost funds. The Company's average core deposits funded 64.8% of average total assets of $529,741,000 for the year ended December 31, 2005; funded 67.4% of average total assets of $461,091,000 for the year ended December 31, 2004, and funded 64.4% of average total assets of $414,409,000 for the year ended December 31, 2003.           As of December 31, 2005, the Company had contractual obligations and other commercial commitments totaling approximately $99,204,000. The following table sets forth the Company's contractual obligations and other commercial commitments as of December 31, 2005. These obligations and commitments will be funded primarily by loan repayments and the Company's liquidity sources, such as cash and due from other banks, federal funds sold, securities available for sale, as well as time deposits.                                                   Payments Due by Period   (In thousands)  Contractual                               1 year      Over 1 to    Over 3 to      Over Obligations                     Total     or less      3 years      5 years      5 years                             ----------   ----------   ----------   ----------   ----------       Operating Leases            $    1,503   $      491   $      849   $      163   $       --  Time deposits                  140,833      120,412       20,141  Other Long-Term Obligations                         --           --           --           --           --                             ----------   ----------   ----------   ----------   ---------- Total Contractual Cash Obligations            $  142,336   $  120,903   $   20,990   $      163   $       --                             ==========   ==========   ==========   ==========   ==========                                                   Amount of Commitment                                                Expirations Per Period (In thousands)                                Total Other Commercial              Amounts    1 year       Over 1 to    Over 3 to      Over Commitments                 Committed    or less       3 years      5 years      5 years                             ----------   ----------   ----------   ----------   ----------          Lines of Credit             $   53,326   $   41,672   $    1,864   $    7,332   $    2,458  Standby Letters of Credit                           7,768        7,768           --           --           --  Guarantees                          --           --           --           --           --  Other Commercial Commitments                     36,607       25,422       11,185           --           --                              ----------   ----------   ----------   ----------   ---------- Total Commercial Commitments                 $   97,701   $   74,862   $   13,049   $    7,332   $    2,458                             ==========   ==========   ==========   ==========   ==========            The largest component of the Company's earnings is net interest income, which can fluctuate widely when significant interest rate movements occur. The prime lending rate went from 4.25% at the beginning of 2003 to 5.25% at the end of 2004, and 7.25% at the end of 2005. The Company's management is responsible for minimizing the Bank's exposure to interest rate risk and assuring an adequate level of liquidity. This is accomplished by developing objectives, goals and strategies designed to enhance profitability and performance. Ongoing management of the Company's interest rate sensitivity limits interest rate risk by controlling the mix and maturity of assets and liabilities. Management regularly reviews the Company's position and evaluates alternative sources and uses of funds as well as changes in external factors. Various methods are used to achieve and maintain the desired rate sensitivity position including the sale or purchase of assets and product pricing.                                         43            In order to ensure that sufficient funds are available for loan growth and deposit withdrawals, as well as to provide for general needs, the Company must maintain an adequate level of liquidity. Asset liquidity comes from the Company's ability to convert short-term investments into cash and from the maturity and repayment of loans and investment securities. Liability liquidity is provided by the Company's ability to attract deposits. The primary source of liability liquidity is the Bank's customer base, which provides core deposit growth. The overall liquidity position of the Company is closely monitored and evaluated regularly. The Company has federal fund borrowing facilities for a total of $50,000,000, a Federal Home Loan Bank line of up to 25% of total assets, and a Federal Reserve Bank facility. Management believes the Company's liquidity sources at December 31, 2005 are adequate to meet its operating needs in 2006 and into the foreseeable future.  Effect of Changing Prices - -------------------------           The results of operations and financial conditions presented in this report are based on historical cost information and are not adjusted for the effects of inflation.           Since the assets and liabilities of banks are primarily monetary in nature (payable in fixed, determinable amounts), the performance of the Company is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.           The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plant and inventories. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, increases in the price of goods and services will result in increased operating expenses.           The following table includes key ratios, including returns on average assets and equity.                                       Return on Equity and Assets                                      (Key financial ratios are                                     computed on average balances)                                          Year Ended December 31,                                   2005           2004          2003                                -----------    ----------    -----------     Return on average     assets                         1.08%          1.02%          1.00%      Return on average     equity                        10.75%          8.94%          8.00%      Dividend payout     ratio                         26.92%         32.54%         35.63%      Average equity to     assets ratio                  10.06%         11.37%         12.49%                                          44
Interest Rate Risk - ------------------           Closely related to the concept of liquidity is the concept of interest rate sensitivity (i. e., the extent to which assets and liabilities are sensitive to changes in interest rates). Interest rate sensitivity is often measured by the extent to which mismatches or "gaps" occur in the repricing of assets and liabilities within a given time period. Gap analysis is used to quantify such mismatches. A "positive" gap results when the amount of earning assets repricing within a given time period exceeds the amount of interest-bearing liabilities repricing within that time period. A "negative" gap results when the amount of interest-bearing liabilities repricing within a given time period exceeds the amount of earning assets repricing within such time period.           In general, a financial institution with a positive gap in relevant time periods will benefit from an increase in market interest rates and will experience erosion in net interest income if such rates fall. Likewise, a financial institution with a negative gap in relevant time periods will normally benefit from a decrease in market interest rates and will be adversely affected by an increase in rates. By maintaining a balanced interest rate sensitivity position, where interest rate sensitive assets roughly equal interest sensitive liabilities in relevant time periods, interest rate risk can be limited.           As a financial institution, the Company's potential interest rate volatility is a primary component of its market risk. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those that possess a short-term maturity. Based upon the nature of the Company's operations, the Company is not subject to foreign currency or commodity price risk. The Company does not own any trading assets and does not have any hedging transactions in place, such as interest rate swaps and caps.           The Company's Board of Directors has adopted an Asset/Liability policy designed to stabilize net interest income and preserve capital over a broad range of interest rate movements. This policy outlines guidelines and ratios dealing with, among others, liquidity, volatile liability dependence, investment portfolio composition, loan portfolio composition, loan-to-deposit ratio and gap analysis ratio. The Board of Directors monitors the Company's performance as compared to Asset/Liability Policy. In addition, to effectively administer the Asset/Liability Policy and to monitor exposure to fluctuations in interest rates, the Company maintains an Asset/Liability Committee, consisting of the Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Branch Administrator, and Controller. This committee meets monthly to review the Company's lending and deposit-gathering activities, to review competitive interest rates, to develop strategies to implement the Asset/Liability Policy and to respond to market conditions.           The Company monitors and controls interest rate risk through a variety of techniques, including use of traditional interest rate sensitivity analysis (also known as "gap analysis") and an interest rate risk management model. With the interest rate risk management model, the Company projects future net                                         45   interest income, and then estimates the effect of various changes in interest rates and balance sheet growth rates on that projected net interest income. The Company also uses the interest rate risk management model to calculate the change in net portfolio value over a range of interest rate change scenarios. Traditional gap analysis involves arranging the Company's interest-earning assets and interest-bearing liabilities by repricing periods and then computing the difference (or "interest rate sensitivity gap") between the assets and liabilities that are estimated to reprice during each time period and cumulatively through the end of each time period.           Both interest rate sensitivity modeling and gap analysis are done at a specific point in time and involve a variety of significant estimates and assumptions. Interest rate sensitivity modeling requires, among other things, estimates of how much and when yields and costs on individual categories of interest-earning assets and interest-bearing liabilities will respond to general changes in market rates, future cash flows and discount rates.           Gap analysis requires estimates as to when individual categories of interest-sensitive assets and liabilities will reprice, and assumes that assets and liabilities assigned to the same repricing period will reprice at the same time and in the same amount. Gap analysis does not account for the fact that repricing of assets and liabilities is discretionary and subject to competitive and other pressures.           The following table sets forth the estimated maturity/repricing structure of the Company's interest-bearing assets and interest-bearing liabilities at December 31, 2005. Except as stated below, the amounts of assets or liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of each asset or liability. The majority of interest-bearing demand deposits and savings deposits are assumed to be "core" deposits, or deposits that will remain at the Company regardless of market interest rates. The table does not assume any prepayment of fixed-rate loans.                                         46                                                                   RATE SENSITIVE GAP ANALYSIS                                                                 As of December 31, 2005                                      ------------------------------------------------------------------                                                                 Maturing or repricing                                        ------------------------------------------------------------------                                         Three       Over Three      Over One       Over           Not                                         Months      To Twelve     Year Through     Five          Rate-                                        Or Less        Months       Five Years      Years       Sensitive        Total                                       ----------    ----------     ----------    ----------    ----------    ----------        (Dollars in thousands) Interest earning assets: Federal funds sold                    $   16,230    $       --     $       --    $       --    $       --    $   16,230 Securities                                 6,257        35,659         43,132        28,415            --       113,463 Loans                                    289,090        23,304         30,413        41,774            17       384,598                                       ----------    ----------     ----------    ----------    ----------    ----------  Total interest earning assets           311,577        58,963         73,545        70,189            17       514,291                                       ----------    ----------     ----------    ----------    ----------    ---------- Cash and due from banks                       --            --             --            --        19,068        19,068 Allowance for loan losses                     --            --             --            --        (4,547)       (4,547) Other assets                                  --            --             --            --        40,329        40,329                                       ----------    ----------     ----------    ----------    ----------    ----------   Total assets                        $  311,577    $   58,963     $   73,545    $   70,189    $   54,867    $  569,141                                       ==========    ==========     ==========    ==========    ==========    ==========  Interest bearing liabilities: Demand, interest bearing              $   62,581    $       --     $       --    $       --    $       --    $   62,581 Savings and money market                 180,489            --             --            --            --       180,489 Time deposits                             48,106        72,306         20,421            --            --       140,833                                       ----------    ----------     ----------    ----------    ----------    ----------  Total interest bearing liabilities      291,176        72,306         20,421            --            --       383,903                                       ----------    ----------     ----------    ----------    ----------    ---------- Noninterest demand deposits                   --            --             --            --       123,641       123,641 Federal funds purchased                       --            --             --            --            --            -- Other liabilities                             --            --             --            --         6,354         6,354 Stockholders' equity                          --            --             --            --        55,243        55,243                                       ----------    ----------     ----------    ----------    ----------    ----------   Total liabilities and      Stockholders' equity             $  291,176    $   72,306     $   20,421    $       --    $  185,238    $  569,141                                       ==========    ==========     ==========    ==========    ==========    ========== Interest rate sensitivity GAP         $   20,401    ($  13,343)    $   53,124    $   70,189    ($ 130,371)   $       --                                       ==========    ==========     ==========    ==========    ==========    ========== Cumulative interest rate   sensitivity GAP                     $   20,401    $    7,058     $   60,182    $  130,371    $       --    $       --  Cumulative interest rate    sensitivity GAP ratio                    6.55%         1.90%         13.55%        25.35%           --            --            Changes in estimates and assumptions made for interest rate sensitivity modeling and gap analysis could have a significant impact on projected results and conclusions. Therefore, these techniques may not accurately reflect the impact of general interest rate movements on the Company's net interest income or net portfolio value.           Because of the limitations in the gap analysis discussed above, members of the Company's Asset/Liability Management Committee believe that the interest sensitivity modeling more accurately reflects the effects and exposure to changes in interest rates. Net interest income simulation considers the relative sensitivities of the balance sheet, including the effect of interest rate caps on adjustable rate mortgages and the relatively stable aspects of core deposits. As such, net interest income simulation is designed to address the probability of interest rate changes and behavioral response of the balance sheet to those changes. Market Value of Portfolio Equity represents the fair value of the net present value of assets, liabilities and off-balance sheet items. The starting point (or "base case") for the following table is the Company's net portfolio at December 31, 2005, using current discount rates, and an estimate of net interest income for 2005 assuming that both interest rates and the Company's interest-sensitive assets and liabilities remain at December 31, 2005 levels. The "rate shock" information in the table shows estimates of net portfolio value                                         47   at December 31, 2005 and net interest income for 2005 assuming fluctuations or "rate shocks" of minus 100 and 200 basis points and plus 100 and 200 basis points. Rate shocks assume that current interest rates change immediately. The information set forth in the following table is based on significant estimates and assumptions, and constitutes a forward-looking statement within the meaning of that term set forth in Rule 173 of the Securities Act of 1933 and Rule 3-6 of the Securities Exchange Act of 1934.                                                Market Risk in Securities (Amount in thousands)                           Interest Rate Shock                                                At December 31, 2005 Available for Sale securities                                Rates Decline                            Rates Increase                          ------------------------                  ------------------------ Rate change                  (2%)          (1%)        Current         +1%         +2%        Unrealized gain (loss)   $    1,948    $      634    $     (679)   $   (2,764)   $   (4,848)  Change from current      $    2,627    $    1,313                  $   (3,443)   $   (5,527)                                            Market Risk on Net Interest Income (Amounts in thousands)                         At December 31, 2005                                 Rates Decline                            Rates Increase                          ------------------------                  ------------------------ Rate change                  (2%)          (1%)        Current         +1%         +2%       Net interest income      $   21,682    $   23,444    $   25,199    $   26,715    $   28,231  Change from current      $   (3,517)   $   (1,755)                 $    1,516    $    3,032                                          48
INDEX TO FINANCIAL STATEMENTS                                               Page                                                                             ----  Report of Independent Registered Public Accounting Firms..................   50  Consolidated Balance Sheets, December 31, 2005 and 2004...................   52  Consolidated Statements of Earnings for the years ended December 31, 2005, 2004 and 2003..........................................   53  Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003...............   54  Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003..........................................   55  Notes to Consolidated Financial Statements................................   56                                         49   [GRAPHIC LOGO OMITTED] MOSS-ADAMS LLP - ------------------------------------------------------------------------------- CERTIFIED PUBLIC ACCOUNTANTS                REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Stockholders and Directors FNB Bancorp  We have audited the accompanying consolidated balance sheet of FNB Bancorp and subsidiary (the "Company") as of December 31, 2005 and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 audit provides a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FNB Bancorp and subsidiary as of December 31, 2005 and the results of their operations and their cash flows for the year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.   /s/ Moss Adams LLP - --------------------------- Stockton, California March 28, 2006                                          50                Report of Independent Registered Public Accounting Firm  The Board of Directors and Stockholders FNB Bancorp:   We have audited the accompanying consolidated balance sheet of FNB Bancorp and subsidiary (the Company) as of December 31, 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ending December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ending December 31, 2004, in conformity with U.S. generally accepted accounting principles.    /s/ KPMG LLP - --------------------------- San Francisco, California March 3, 2005                                            51                               FNB BANCORP AND SUBSIDIARY                             Consolidated Balance Sheets                             December 31, 2005 and 2004                              Assets                                      2005            2004                                                                  ------------    ------------    Cash and due from banks                                            19,068,000      17,084,000 Federal funds sold                                                 16,230,000              --                                                                  ------------    ------------                     Cash and cash equivalents                      35,298,000      17,084,000 Securities available-for-sale                                     113,463,000     102,823,000 Loans, net                                                        380,051,000     340,906,000 Bank premises, equipment, and leasehold improvements               12,028,000      11,614,000 Other real estate owned                                             2,600,000              -- Goodwill                                                            1,841,000              -- Accrued interest receivable and other assets                       23,860,000      17,627,000                                                                  ------------    ------------      Total Assets                                                 569,141,000     490,054,000                                                                  ============    ============               Liabilities and stockholders' equity Deposits:      Demand, noninterest bearing                                  123,641,000     109,758,000      Demand, interest bearing                                      62,581,000      51,818,000      Savings                                                      180,489,000     160,062,000      Time                                                         140,833,000      91,615,000                                                                  ------------    ------------                     Total deposits                                507,544,000     413,253,000 Federal funds purchased                                                    --      19,172,000 Accrued expenses and other liabilities                              6,354,000       5,000,000                                                                  ------------    ------------                     Total liabilities                             513,898,000     437,425,000                                                                  ------------    ------------ Commitments and contingencies Stockholders' equity:      Common stock, no par value; authorized 10,000,000 shares;         issued and outstanding 2,700,000 and 2,586,000 shares         on December 31, 2005 and 2004, respectively                34,793,000      31,365,000      Additional paid-in capital                                        19,000           9,000      Retained earnings                                             20,832,000      20,689,000      Accumulated other comprehensive income                          (401,000)        566,000                                                                  ------------    ------------                     Total stockholders' equity                     55,243,000      52,629,000                                                                  ------------    ------------      Total liabilities and stockholders' equity                   569,141,000     490,054,000                                                                  ============    ============             See accompanying notes to consolidated financial statements.                                         52                              FNB BANCORP AND SUBSIDIARY                         Consolidated Statements of Earnings                    Years ended December 31, 2005, 2004 and 2003                                                                           2005            2004            2003                                                                    ------------    ------------    ------------     Interest income:      Interest and fees on loans                                    $ 26,754,000      21,226,000      19,990,000      Interest and dividends on securities                             2,173,000       1,418,000       1,446,000      Interest on tax-exempt securities                                1,512,000       1,250,000       1,358,000      Federal funds sold                                                 293,000         152,000          73,000                                                                    ------------    ------------    ------------                     Total interest income                            30,732,000      24,046,000      22,867,000 Interest expense:      Interest on deposits                                             5,440,000       2,460,000       2,656,000      Interest expense on other borrowings                                93,000          73,000           2,000                                                                    ------------    ------------    ------------                     Total interest expense                            5,533,000       2,533,000       2,658,000                                                                    ------------    ------------    ------------                     Net interest income                              25,199,000      21,513,000      20,209,000 Provision for loan losses                                               600,000         480,000         780,000                                                                    ------------    ------------    ------------                     Net interest income after provision                          for loan losses                             24,599,000      21,033,000      19,429,000                                                                    ------------    ------------    ------------ Noninterest income:      Service charges                                                  2,305,000       2,500,000       2,662,000      Credit card fees                                                   856,000         886,000         946,000      Gain (loss) on impairment and sale of investment securities       (101,000)        (31,000)        165,000      Other                                                              781,000         432,000         253,000                                                                    ------------    ------------    ------------                     Total noninterest income                          3,841,000       3,787,000       4,026,000                                                                    ------------    ------------    ------------ Noninterest expense:      Salaries and employee benefits                                  11,344,000      10,521,000      10,576,000      Occupancy expense                                                1,444,000       1,288,000       1,240,000      Equipment expense                                                1,624,000       1,662,000       1,582,000      Advertising expense                                                710,000         472,000         218,000      Data processing expense                                            416,000         344,000         394,000      Professional fees                                                  952,000       1,086,000         914,000      Director expense                                                   180,000         180,000         152,000      Surety insurance                                                   555,000         479,000         493,000      Telephone, postage, supplies                                       939,000       1,103,000         898,000      Bankcard expenses                                                  802,000         803,000         818,000      Other                                                            1,317,000         617,000         633,000                                                                    ------------    ------------    ------------                     Total noninterest expense                        20,283,000      18,555,000      17,918,000                                                                    ------------    ------------    ------------                     Earnings before income tax expense                8,157,000       6,265,000       5,537,000 Income tax expense                                                    2,429,000       1,577,000       1,396,000                                                                    ------------    ------------    ------------                     Net earnings                                   $  5,728,000       4,688,000       4,141,000                                                                    ============    ============    ============ Earnings per share data:      Basic                                                         $       2.12    $       1.71    $       1.48      Diluted                                                       $       2.08    $       1.67    $       1.47 Weighted average shares outstanding:      Basic weighted average shares outstanding                        2,699,000       2,748,000       2,797,000      Diluted weighted average shares outstanding                      2,758,000       2,799,000       2,824,000   See accompanying notes to consolidated financial statements.                                         53                              FNB BANCORP AND SUBSIDIARY      Consolidated Statements of Stockholders' Equity and Comprehensive Income                    Years ended December 31, 2005, 2004 and 2003                                                                                              Accumulated                                      Common stock            Additional                     other                               ---------------------------     paid-in       Retained     comprehensive  Comprehensive                                  Shares         Amount        capital       earnings        income         income          Total                               ------------   ------------   ------------  ------------   ------------   ------------   ------------         Balance at December 31, 2002     2,437,000   $ 26,492,000             --    22,907,000      1,804,000                    51,203,000 Net earnings                            --             --             --     4,141,000             --      4,141,000      4,141,000 Other comprehensive income:    Unrealized gain on       securities, net of       tax benefit of $121,000           --             --             --            --       (764,000)      (764,000)      (764,000)                                                                                                         ------------ Comprehensive income                                                                                    $  3,377,000                                                                                                         ============ Cash dividends of $0.12    per share, quarterly                 --             --             --    (1,166,000)            --             --     (1,166,000) Special cash dividend of    $0.12 per share                                                            (302,000)                                    (302,000) Stock dividend of 5%               120,000      3,532,000                   (3,532,000)                                          -- Cash on fractional shares    Related to stock dividend                                                    (7,000)                                      (7,000) Stock-based compensation    Expense                              --             --          3,000            --             --                         3,000 Stock repurchased and retired                            (41,000)    (1,177,000)            --            --             --                    (1,177,000) Stock options exercised              3,000         56,000             --            --             --                        56,000                               ------------   ------------   ------------  ------------   ------------                  ------------ Balance at December 31, 2003     2,519,000     28,903,000          3,000    22,041,000      1,040,000                    51,987,000 Net earnings                            --             --             --     4,688,000             --      4,688,000      4,688,000 Other comprehensive income:    Unrealized loss on       securities, net of       tax benefit of $330,000           --             --             --            --       (474,000)      (474,000)      (474,000)                                                                                                         ------------ Comprehensive income                                                                                    $  4,214,000                                                                                                         ============ Cash dividends of $0.12    per share, quarterly                 --             --             --    (1,210,000)            --                    (1,210,000) Special cash dividend of    $0.12 per share                                     --             --      (316,000)            --                      (316,000) Stock dividend of 5%               124,000      4,514,000                   (4,514,000)                                          -- Stock-based compensation    expense                              --             --          6,000            --             --                         6,000 Stock repurchased and retired      (69,000)    (2,324,000)            --            --             --                    (2,324,000) Stock options exercised             12,000        272,000             --            --             --                       272,000                               ------------   ------------   ------------  ------------   ------------                  ------------ Balance at December 31, 2004     2,586,000     31,365,000          9,000    20,689,000        566,000                    52,629,000 Net earnings                            --             --             --     5,728,000             --      5,728,000      5,728,000 Other comprehensive income:    Unrealized loss on       securities, net of       tax benefit of $671,000           --             --             --            --       (967,000)      (967,000)      (967,000)                                                                                                         ------------ Comprehensive income                                                                                    $  4,761,000                                                                                                         ============ Cash dividends of $0.15 per    share share, quarterly               --             --             --    (1,535,000)            --                    (1,535,000) Stock dividend of 5%               128,000      4,043,000                   (4,043,000)                                          -- Cash on fractional shares    related to stock dividend Stock-based compensation                                                        (7,000)                                      (7,000)    expense                              --             --         10,000            --             --                        10,000 Stock repurchased and retired      (21,000)      (765,000)            --            --             --                      (765,000) Stock options exercised              7,000        150,000             --            --             --                       150,000                               ------------   ------------   ------------  ------------   ------------                  ------------ Balance at December 31, 2005     2,700,000   $ 34,793,000         19,000    20,832,000       (401,000)                   55,243,000                               ============   ============   ============  ============   ============                  ============   See accompanying notes to consolidated financial statements.                                         54                              FNB BANCORP AND SUBSIDIARY                        Consolidated Statements of Cash Flows                          December 31, 2005, 2004 and 2003                                                                                2005            2004            2003                                                                         ------------    ------------    ------------     Cash flows from operating activities:    Net earnings                                                         $  5,728,000       4,688,000       4,141,000    Adjustments to reconcile net earnings to cash       provided by operating activities:          Depreciation, amortization and accretion, net                     1,594,000       1,790,000       1,971,000          (Gain) loss on sale of investment securities                        101,000          31,000        (165,000)          Securities write-down                                               116,000              --              --          Stock-based compensation expense                                     10,000           6,000           3,000          (Gain)loss on sale of bank premises, equipment,             and leasehold improvements                                            --              --           5,000          Provision for loan losses                                           600,000         480,000         780,000          Deferred taxes                                                     (181,000)         74,000        (862,000)          Changes in assets and liabilities:             Accrued interest receivable and other assets                  (5,149,000)     (6,422,000)     (1,776,000)             Accrued expenses and other liabilities                         1,720,000       2,083,000         834,000                                                                         ------------    ------------    ------------                Net cash provided by operating activities                   4,539,000       2,730,000       4,931,000                                                                         ------------    ------------    ------------ Cash flows from investing activities:    Proceeds from matured securities available-for-sale                    31,207,000      34,203,000      30,099,000    Purchases of securities available-for-sale                            (43,386,000)    (74,689,000)    (28,059,000)    Proceeds from sale of securities available-for-sale                            --              --       9,080,000    Net decrease (increase) in loans                                          892,000     (28,457,000)    (28,820,000)    Proceeds from sales of bank premises, equipment, and       leasehold improvements                                                 156,000         121,000           7,000    Purchases of bank premises, equipment, and leasehold       Improvements                                                        (1,733,000)     (2,101,000)       (927,000)   Cash and equivalents received in bank acquisition, net of cash paid      9,602,000              --              --                                                                         ------------    ------------    ------------                Net cash used in investing activities                      (3,262,000)    (70,923,000)    (18,620,000)                                                                         ------------    ------------    ------------ Cash flows from financing activities:    Net increase in demand and savings deposits                            16,215,000      39,392,000      24,392,000    Net increase (decrease) in time deposits                               22,051,000        (353,000)      2,416,000    Net increase (decrease) in federal funds purchased                    (19,172,000)     19,172,000              --    Cash dividends paid                                                    (1,542,000)     (1,526,000)     (1,475,000)    Repurchases of common stock                                              (765,000)     (2,324,000)     (1,177,000)    Exercise of stock options                                                 150,000         272,000          56,000    Payments on capital note payable                                               --              --         (78,000)                                                                         ------------    ------------    ------------                Net cash provided by                   financing activities                                    16,937,000      54,633,000      24,134,000                                                                         ------------    ------------    ------------                Net increase (decrease) in cash and cash                   Equivalents                                             18,214,000     (13,560,000)     10,445,000 Cash and cash equivalents at beginning of year                            17,084,000      30,644,000      20,199,000                                                                         ------------    ------------    ------------ Cash and cash equivalents at end of year                                $ 35,298,000      17,084,000      30,644,000                                                                         ============    ============    ============ Additional cash flow information:    Interest paid                                                        $  4,980,000       2,467,000       2,785,000    Income taxes paid                                                       2,224,000       1,691,000         872,000    Noncash - stock dividend                                                4,043,000       4,514,000       3,532,000   See accompanying notes to consolidated financial statements.                                         55                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003   (1)      The Company and Summary of Significant Accounting Policies           FNB Bancorp (the Company) is a bank holding company registered under          the Bank Holding Company Act of 1956, as amended. The Company was          incorporated under the laws of the State of California on February 28,          2001. The consolidated financial statements include the accounts of FNB          Bancorp and its wholly owned subsidiary, First National Bank of          Northern California (the Bank). The Bank provides traditional banking          services in San Mateo and San Francisco counties.           The Bank and the Company entered into an Agreement and Plan of          Reorganization dated November 1, 2001 (the Plan of Reorganization), and          the shareholders of the Bank approved the Plan of Reorganization at a          Special Meeting of the Shareholders of the Bank held on February 27,          2002. The Plan of Reorganization was consummated on March 15, 2002.          Each outstanding share of the common stock, par value $1.25 per share,          of the Bank (other than any shares as to which dissenters' rights of          appraisal have been properly exercised) was converted into one share of          the no par common stock of the Company, and the former holders of Bank          common stock became the holders of all of the Company common stock. The          change in capital structure has been included for all periods          presented.           The preparation of consolidated financial statements in conformity with          accounting principles generally accepted in the United States of          America requires management to make estimates and assumptions that          affect the reported amounts of assets and liabilities and the          disclosure of contingent assets and liabilities at the date of the          financial statements and revenue and expenses during the reporting          period. Actual results could differ from those estimates. For the Bank,          the significant accounting estimate is the allowance for loan losses          (note 1f). A summary of the significant accounting policies applied in          the preparation of the accompanying consolidated financial statements          follows.           (a)      Basis of Presentation                    The accounting and reporting policies of the Company and its                   wholly owned subsidiary are in accordance with accounting                   principles generally accepted in the United States of America.                   All intercompany balances and transactions have been                   eliminated.                                         56                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            (b)      Cash and Cash Equivalents                    Cash and cash equivalents include cash on hand, amounts due                   from banks, and federal funds sold. Generally, federal funds                   are sold for one-day periods. The cash equivalents are readily                   convertible to known amounts of cash and present insignificant                   risk of changes in value due to original maturity dates of 90                   days or less. Included in cash and cash equivalents are                   amounts restricted for the Federal Reserve requirement of                   approximately $2,358,000 and $1,087,000 at December 31, 2005                   and 2004, respectively.           (c)      Investment Securities                    Investment securities consist of U.S. Treasury securities,                   U.S. agency securities, obligations of states and political                   subdivisions, obligations of U.S. corporations,                   mortgage-backed securities and other securities. At the time                   of purchase of a security, the Company designates the security                   as held-to-maturity or available-for-sale, based on its                   investment objectives, operational needs, and intent to hold.                   The Company does not purchase securities with the intent to                   engage in trading activity. Held to maturity securities are                   recorded at amortized cost, adjusted for amortization of                   premiums or accretion of discounts. The Company did not have                   any investments in the held-to-maturity portfolio at December                   31, 2005 or 2004. Available-for-sale securities are recorded                   at fair value with unrealized holding gains or 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. Amortization of premiums and accretion of discounts                   on debt securities are included in interest income over the                   life of the related held-to-maturity or available-for-sale                   security 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.           (d)      Derivatives                    All derivatives are recognized as either assets or liabilities                   in the balance sheet                                         57                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                     and measured at fair value. The Company did not hold any                   derivatives at December 31, 2005 and 2004.           (e)      Loans                    Loans are reported at the principal amount outstanding, net of                   deferred loan fees and the allowance for loan losses. A loan                   is considered impaired when, based on current information and                   events, it is probable that the Company will be unable to                   collect all amounts due according to the contractual terms of                   the loan agreement, including scheduled interest payments. For                   a loan that has been restructured, the contractual terms of                   the loan agreement refer to the contractual terms specified by                   the original loan agreement, not the contractual terms                   specified by the restructuring agreement. An impaired loan is                   measured based upon the present value of future cash flows                   discounted at the loan's effective rate, the loan's observable                   market price, or the fair value of collateral if the loan is                   collateral dependent. Interest on impaired loans is recognized                   on a cash basis. If the measurement of the impaired loan is                   less than the recorded investment in the loan, an impairment                   is recognized by a charge to the allowance for loan losses.                    Unearned discount on installment loans is recognized as income                   over the terms of the loans by the interest method. Interest                   on other loans is calculated by using the simple interest                   method on the daily balance of the principal amount                   outstanding.                    Loan fees net of certain direct costs of origination, which                   represent an adjustment to interest yield, are deferred and                   amortized over the contractual term of the loan using the                   interest method.                    Loans on which the accrual of interest has been discontinued                   are designated as nonaccrual loans. Accrual of interest on                   loans is discontinued either when reasonable doubt exists as                   to the full and timely collection of interest or principal                   when a loan becomes contractually past due by 90 days or more                   with respect to interest or principal. When a loan is placed                   on nonaccrual 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                                         58                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                     been granted because of the borrowers' financial difficulties.                   Interest is generally accrued on such loans in accordance with                   the new terms. Net amount written off in 2005 was not                   considered material (see Allowance for Loan Losses caption on                   page 34 in the Management Discussion and Analysis section).           (f)      Allowance for Loan Losses                    The allowance for loan losses is established through a                   provision for loan losses 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 probable 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 determine the level of the allowance 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 banking                   regulators, as an integral part of its examination process,                   periodically review the Bank's allowance for loan losses. The                   banking regulators 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.           (g)      Premises and Equipment                    Premises and equipment are reported at cost less accumulated                   depreciation using the straight-line method over the estimated                   service lives of related assets ranging from 2 to 25 years.                   Leasehold improvements are amortized over the lives of the                   respective leases or the service lives of the improvements,                   whichever is shorter.                                         59                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            (h)      Cash Dividends                    The Company's ability to pay cash dividends is subject to                   restrictions set forth in the California General Corporation                   Law. Funds for payment of any cash dividends by the Company                   would be obtained from its investments as well as dividends                   and/or management fees from First National Bank. First                   National Bank's ability to pay cash dividends is subject to                   restrictions imposed under the National Bank Act and                   regulations promulgated by the Office of the Comptroller of                   the Currency.           (i)      Stock Dividend                    On October 28, 2005, the Company announced that its Board of                   Directors has declared a stock dividend of approximately                   128,341 shares, payable at the rate of one share of Common                   Stock for every twenty (20) shares of Common Stock owned. The                   stock dividend was paid on December 16, 2005, to shareholders                   of record on November 30, 2005. The earnings per share data                   presented have been adjusted for this stock dividend.           (j)      Income Taxes                    Deferred income taxes are determined using the assets and                   liabilities method. Under this method, the net deferred tax                   asset or liability is recognized for tax consequences of                   temporary differences by applying current tax rates to                   differences between the financial reporting and the tax basis                   of existing assets and liabilities. Deferred tax assets and                   liabilities are reflected at currently enacted income tax                   rates applicable to the period in which the deferred tax                   assets or liabilities are expected to be realized or settled.                   As changes in tax laws or rates are enacted, deferred tax                   assets and liabilities are adjusted through the provision for                   income taxes.           (k)      Stock Option Plan                    Beginning in fiscal 2003, the Company elected to adopt the                   fair value method of accounting for stock-based compensation.                   Historically, the Company applied the intrinsic value method                   permitted under SFAS 123, as defined in APB 25 and related                   interpretations, in accounting for its stock incentive plans                   in the past.                                         60                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                     All future employee stock option grants and other stock- based                   compensation will be expensed over the vesting period, based                   on the fair value at the time the stock-based compensation is                   granted.                    Had compensation cost related to the Company's stock option                   awards to employees and directors been determined under the                   fair value method prescribed under SFAS No. 123, the Company's                   net income, basic earnings per share, and diluted earnings per                   share would have been the pro-forma amounts below, for 2005,                   2004, and 2003:                                                                             2005            2004            2003                                                                      ------------    ------------    ------------               Net earnings                              As reported       $  5,728,000       4,688,000       4,141,000          Add stock-based employee             compensation expense             included in reported net             earnings, net of related             tax effects                                                    10,000           6,000           3,000          Deduct total stock-based             Employee compensation             expense determined under             the fair value based             method for all awards,             net of related             tax effects                                                    (6,000)        (10,000)        (10,000)                                                                      ------------    ------------    ------------          Net earnings                              Pro forma         $  5,732,000       4,684,000       4,134,000                                                                      ============    ============    ============           Basic earnings per share                  As reported       $       2.12            1.71            1.48                                                    Pro forma         $       2.12            1.70            1.48           Diluted earnings per share                As reported       $       2.08            1.67            1.47                                                    Pro forma         $       2.08            1.67            1.46                     Earnings per share have been computed based on the following:                                                             Year ended December 31                                                ------------------------------------------                                                    2005           2004           2003                                                ------------   ------------   ------------              Net earnings                          $  5,728,000      4,688,000      4,141,000          Weighted average number of             Shares outstanding                    2,699,000      2,748,000      2,797,000          Effect of dilutive options                  59,000         51,000         27,000                                                ------------   ------------   ------------                       Weighted average                          number of shares                          outstanding used to                          calculate diluted                          earnings per share       2,758,000      2,799,000      2,824,000                                                ============   ============   ============                     All outstanding options were included in the 2005, 2004 and                   2003 computations.                                         61                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004, and 2003            (l)      Fair Values of Financial Instruments                    The notes to financial statements include various estimated                   fair value information as of December 31, 2005 and 2004. Such                   information, which pertains to the Company's financial                   instruments, does not purport to represent the aggregate net                   fair value of the Company. Further, the fair value estimates                   are based on various assumptions, methodologies and subjective                   consideration, which vary widely among different financial                   institutions and which are subject to change.           (m)      Income Tax Credits                    At December 31, 2005, the Bank had a $1,445,000 equity                   investment in three partnerships, which own 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 these partnerships, 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 properties 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. These                   investments are accounted for using the effective yield method                   and are 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                   investments 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 properties, if any,                   will be included in earnings when realized or realizable.                   These investments are included in other securities in                   securities available-for-sale.           (n)      Reclassifications                    Certain prior year information has been reclassified to                   conform to current year presentation.                                         62                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            (o)      Bank Owned Life Insurance                    The Corporation purchased insurance on the lives of certain                   employees. The policies accumulate asset values to meet future                   liabilities including the payment of employee benefits such as                   the deferred compensation plan. Increases in the cash                   surrender value are recorded as other noninterest income in                   the consolidated statements of income. The cash surrender                   value of bank owned life insurance is reflected in other                   assets on the consolidated balance sheets in the amount of                   $7,011,000 and $6,773,000 at December 31, 2005 and 2004,                   respectively.              (p)   Acquisition                    On May 2, 2005, the Company announced that its wholly owned                   subsidiary, First National Bank of Northern California,                   completed its acquisition of Sequoia National Bank, which had                   two offices in San Francisco. Sequoia was consolidated with                   and merged into First National Bank of Northern California                   effective April 30, 2005. Sequoia had approximately                   $62,000,000 in total assets on an historical cost basis. A                   table showing the fair values of the assets acquired follows                   this note. Under the terms of the Acquisition Agreement,                   holders of Sequoia shares of common stock and options received                   approximately $10,450,000 in cash, after adjustments for                   certain contingencies specified in the Acquisition Agreement.                   At closing of the transaction $9,350,000 was paid to the                   former Sequoia National Bank shareholders, and on November 1,                   2005, after submission and payment of all such claims and                   expenses, the escrow was terminated and the approximately                   $1,100,000, the balance of funds remaining in escrow, was                   distributed to the former shareholders of Sequoia National                   Bank in accordance with their interests. Effective April 30,                   2005, the former banking offices of Sequoia National Bank                   began operating as branch offices of First National Bank of                   Northern California.                    In accordance with SFAS No. 141 the Bank recorded the assets                   acquired and liabilities assumed at their fair values at the                   acquisition date. The total acquisition cost exceeded the fair                   value of the new assets acquired by $4,781,000. This amount                   was recognized at acquisition date as intangible assets                   consisting of Goodwill of $3,235,000, Loan Premium of $271,000                   and Core Deposit Intangibles of $1,275,000. Goodwill has been                   adjusted for tax benefits of $1,394,000, net of deferred                   income tax liability of $525,000, related to Sequoia National                   Bank net operating losses that became available to the                   Company, the Core Deposit Intangibles, and the book reserve                   for possible loan losses. The tax benefits (Net deferred tax                   assets) are included in Other Assets, and the Loan Premium                   included in Net Loans in the table shown below.                                         63                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                     The following table summarizes the estimated fair values of                   the assets acquired and liabilities assumed by First National                   Bank of Northern California at the date of the acquisition:                                Assets:                              Cash and due from banks                          $  3,218,000                              Federal funds sold                                 17,365,000                              Securities available for sale                         627,000                              Loans, net                                         40,652,000                              Other assets                                        2,210,000                              Core deposit intangibles                            1,275,000                              Goodwill                                            1,841,000                                                                               ------------                                     Total Assets                                67,188,000                                                                               ------------                             Liabilities:                              Deposits:                                Noninterest-bearing                               6,945,000                                Interest-bearing                                 49,080,000                                                                               ------------                                     Total deposits                              56,025,000                              Accrued interest payable and other liabilities        274,000                                                                               ------------                                     Total Liabilities                           56,299,000                                                                               ------------                              Net Assets                                       $ 10,889,000                                                                               ------------                             The following table summarizes the carrying amount of goodwill:                             Gross acquisition consideration in excess                              of identifiable asset values                     $  4,781,000                            Less allocation to the following:                              Core deposit premium                                1,275,000                              Loan premium                                          271,000                              Deferred tax asset                                  1,394,000                            Goodwill at December 31, 2005                      $  1,841,000                     During 2005, Core Deposit Intangible and Loan Premium were                   amortized $106,000 and $15,000, respectively.                                         64                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                     In accordance with SFAS No. 142 "Goodwill and Other Intangible                   Assets", goodwill will not be expensed over a fixed period of                   time, but will be tested for impairment at least annually.                   None of the goodwill is deductible for income tax purposes.                   Identifiable intangible assets, namely core deposit                   intangibles and premium on loans, are amortized over their                   period of benefit. In the fourth quarter of 2005, the annual                   review of goodwill for impairment was performed, and it was                   determined that no adjustment was necessary. Additionally, the                   core deposit intangible and loan premium were evaluated for                   impairment at the end of each quarter, and no adjustments were                   determined to be necessary.                    The following table shows earnings proforma of FNB Bancorp and                   its subsidiary combined with Sequoia National Bank as if the                   acquisition had taken place as of January 1, 2004:   (thousands, except per share data)                      Consolidated Statements                                                              of Earnings                                                         Year ended December 31                                                      ---------------------------                                                          2005           2004                                                      ------------   ------------ Interest income                                      $     31,858   $     27,379 Interest expense                                            5,836          3,402                                                      ------------   ------------ Net interest income                                        26,022         23,977  Provision for loan losses                                     610            480                                                      ------------   ------------ Net interest income after     provision for loan losses                              25,412         23,497  Noninterest income                                          3,938          4,136 Noninterest expense                                        21,860         21,310                                                      ------------   ------------  Earnings before income tax expense                          7,490          6,323 Income tax expense                                          2,232          1,593                                                      ------------   ------------ Net earnings                                         $      5,258   $      4,730                                                      ============   ============  Earnings per share data: Basic                                                $       1.95   $       1.72 Diluted                                              $       1.91   $       1.69  Weighted average shares outstanding: Basic                                                   2,699,000      2,748,000 Diluted                                                 2,758,000      2,799,000                                         65                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003   (2)      Restricted Cash Balance           Cash and due from banks includes balances with the Federal Reserve Bank          (the FRB). The Bank is required to maintain specified minimum average          balances with the FRB, based primarily upon the Bank's deposit          balances. As of December 31, 2005 and 2004, the Bank maintained          deposits in excess of the FRB reserve requirement.  (3)      Securities Available-for-Sale           The amortized cost and carrying values of securities available-for-sale          are as follows:                                           Amortized      Unrealized      Unrealized       Carrying                                           cost          gains           losses          Value                                       ------------   ------------    ------------    ------------         December 31, 2005:       Obligations of U.S.          Government agencies          $ 50,571,000         65,000        (510,000)     50,126,000       Obligations of states          and political subdivisions     56,208,000        384,000        (564,000)     56,028,000       Corporate debt                     5,918,000          8,000         (62,000)      5,864,000       Other securities                   1,445,000             --              --       1,445,000                                       ------------   ------------    ------------    ------------                                       $114,142,000        457,000      (1,136,000)    113,463,000                                       ============   ============    ============    ============     December 31, 2004:       Obligations of U.S.          Government agencies          $ 54,779,000         85,000        (167,000)     54,697,000       Obligations of states          and political subdivisions     41,446,000      1,099,000         (30,000)     42,515,000       Corporate debt                     3,977,000             --         (27,000)      3,950,000       Other securities                   1,661,000             --              --       1,661,000                                       ------------   ------------    ------------    ------------                                       $101,863,000      1,184,000        (224,000)    102,823,000                                       ============   ============    ============    ============             An analysis of gross unrealized losses of the available for sale          investment securities portfolio as of December 31, 2005 and December          31, 2004 follows.                                               Less than 12                       12 Months or                                                 Months                             Longer                             Total December 31, 2005:                            Unrealized                         Unrealized                         Unrealized (Dollars in thousands        Fair Value         Losses          Fair Value         Losses          Fair Value         Losses                            --------------   --------------    --------------   --------------    --------------   --------------        Obligations of U.S.    government agencies     $   23,184,000         (212,000)       24,676,000         (298,000)       47,860,000         (510,000) Obligations of states    and political    subdivisions                29,456,000         (463,000)        8,082,000         (101,000)       37,538,000         (564,000) Corporate debt                  4,019,000          (39,000)        1,011,000          (23,000)        5,030,000          (62,000) Other securities                       --               --                --               --                --               --                            --------------   --------------    --------------   --------------    --------------   -------------- Total                          56,659,000         (714,000)       33,769,000         (422,000)       90,428,000       (1,136,000)                            ==============   ==============    ==============   ==============    ==============   ==============                                          66                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                                                Less than 12                       12 Months or                                               Months                             Longer                            Total December 31, 2004:                          Unrealized                         Unrealized                        Unrealized (Dollars in thousands      Fair Value         Losses          Fair Value         Losses         Fair Value         Losses                          --------------   --------------    --------------   --------------   --------------   --------------        Obligations of U.S.    government agencies   $   41,442,000         (167,000)               --               --       41,442,000         (167,000) Obligations of states    and political             12,327,000          (30,000)               --               --       12,327,000          (30,000) Corporate debt                3,977,000          (27,000)               --               --        3,977,000          (27,000) Other securities                     --               --                --               --               --               --                          --------------   --------------    --------------   --------------   --------------   -------------- Total                        57,746,000         (224,000)               --               --       57,746,000         (224,000)                          ==============   ==============    ==============   ==============   ==============   ==============            A total of 48 securities make up the amount of securities in an          unrealized loss position for greater than 12 consecutive months.          Management periodically evaluates each security in an unrealized loss          position to determine if the impairment is temporary or          other-than-temporary. Management has determined that no investment          security is other-than-temporarily impaired. The unrealized losses are          due solely to interest rate changes and the Company has the ability and          intent to hold all investment securities with identified impairments          resulting from interest rate changes to the earliest of forecasted          recovery or the maturity of the underlying investment security.           The amortized cost and carrying value of debt securities as of December          31, 2005, 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.                                                      Amortized       Carrying                                                        Cost           Value                                                    ------------   ------------          Available -for-sale:             Due in one year or less                $ 42,180,000     41,916,000             Due after one year though five years     43,419,000     43,133,000          Due after five years through ten years      26,047,000     25,868,000          Due after ten years                          2,496,000      2,546,000                                                    ------------   ------------                                                    $114,142,000    113,463,000                                                    ============   ============           For the years ended December 31, 2005, 2004, and 2003, gross realized          gains amounted to $15,000, $4,000, and $238,000, respectively. For the          years ended December 31, 2005, 2004, and 2003, gross realized losses          amounted to $116,000, $35,000, and $73,000, respectively.           At December 31, 2005 and 2004, securities with an amortized cost of          $57,801,000 and $44,820,000 and fair value of $57,646,000 and          $45,807,000 , respectively, were pledged as collateral for public          deposits and for other purposes required by law.                                         67                                BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            As of December 31, 2005 and 2004, the Bank had investments in Federal          Reserve Bank stock classified as other assets in the accompanying          balance sheets of $702,000 and $702,000, respectively. These          investments in Federal Reserve Bank stock are carried at cost, and          evaluated periodically for impairment.           In 2005, the Bank wrote down $116,000 representing the impaired value          of its investment in Federal National Mortgage Corp. securities.  (4)      Loans, Net           Loans are summarized as follows at December 31:                                              2005             2004                                         -------------    -------------           Real estate                    $ 302,813,000      255,433,000          Construction                      26,243,000       28,997,000          Commercial                        53,070,000       58,849,000          Consumer & other                   3,420,000        2,589,000                                         -------------    -------------                                           385,546,000      345,868,000           Allowance for loan losses         (4,547,000)      (3,334,000)          Net deferred loan fees              (948,000)      (1,628,000)                                         -------------    -------------                                         $ 380,051,000      340,906,000                                         =============    =============           The Bank had total impaired loans of $17,000 and $2,798,000 at December          31, 2005 and 2004, respectively. The allowance for loan losses related          to the impaired loans was $9,000 and $255,000 as of December 31, 2005          and 2004, respectively. The amount of the recorded investment in          impaired loans for which there is no related allowance is $8,000 and          $2,543,000 as of December 31, 2005 and 2004. During 2005 and 2004,          nonaccrual loans represented all impaired loans. The average recorded          investment in impaired loans during 2005, 2004 and 2003 was $1,205,000,          $4,010,000 and $8,552,000, respectively. Interest income on impaired          loans of $0, $4,800, and $0, was recognized for cash payments received          in 2005, 2004, and 2003, respectively. The amount of interest on          impaired loans not collected in 2005, 2004 and 2003, respectively was          $2,000, $255,000 and $757,000.                                         68                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003   (5)      Allowance for Loan Losses           Changes in the allowance for loan losses are summarized as follows for          the years ended December 31:                                                     2005            2004            2003                                              ------------    ------------    ------------                Balance, beginning of year        $  3,334,000       3,284,000       3,396,000                                              ------------    ------------    ------------            Loans charged off                     (110,000)       (431,000)       (896,000)            Recoveries                              23,000           1,000           4,000                                              ------------    ------------    ------------                      Net loans charged off        (87,000)       (430,000)       (892,000)             Provision for loan losses              600,000         480,000         780,000            Allowance acquired in               business combination                700,000              --              --                                              ------------    ------------    ------------            Balance, end of year              $  4,547,000       3,334,000       3,284,000                                              ============    ============    ============   (6)      Related Party Transactions           In the ordinary course of business, the Bank made loans and advances          under lines of credit to directors, officers, and their related          interests. The Bank's policies require that all such loans be made at          substantially the same terms as those prevailing at the time for          comparable transactions with unrelated parties and do not involve more          than normal risk or unfavorable features. The following summarizes          activities of loans to such parties in 2005 and 2004:                                                    2005           2004                                               ------------   ------------                 Balance, beginning of  year   $  3,376,000      7,202,000                 Additions                        5,673,000        138,000                 Repayments                       5,131,000      3,964,000                                               ------------   ------------                 Balance, end of year          $  3,918,000      3,376,000                                               ============   ============  (7)      Bank Premises, Equipment, and Leasehold Improvements           Bank premises, equipment and leasehold improvements are stated at cost,          less accu-mulated depreciation and amortization, and are summarized as          follows at December 31:                                         69                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003                                                                2005            2004                                                        ------------    ------------               Buildings                                   $  7,969,000       7,753,000            Equipment                                      8,642,000       7,924,000            Leasehold improvements                         1,173,000       1,170,000                                                        ------------    ------------                                                          17,784,000      16,847,000             Accumulated depreciation and amortization     (9,817,000)     (9,241,000)                                                        ------------    ------------                                                           7,967,000       7,606,000             Land                                           4,061,000       4,008,000                                                        ------------    ------------                                                        $ 12,028,000      11,614,000                                                        ============    ============            Depreciation expense for the years ended December 31, 2005, 2004, and          2003 was $1,163,000, $1,282,000 and $1,290,000, respectively.  (8)      Deposits           The aggregate amount of jumbo time certificates, each with a minimum          denomination of $100,000 or more, was $77,572,000 and $42,402,000 at          December 31, 2005 and 2004, respectively.           At December 31, 2005, the scheduled maturities of time certificates are          as follows:                           Year ending December 31:                             2006                                $  120,412,000                             2007                                    13,829,000                             2008                                     6,312,000                             2009                                        20,000                             2010                                       260,000                                                                 --------------                                                                 $  140,833,000                                                                 ==============  (9)      Commitments and Contingencies           The Bank leases a portion of its facilities and equipment under          noncancelable operating leases expiring at various dates through 2009.          Some of these leases provide that the Bank pay taxes, maintenance,          insurance, and other occupancy expenses applicable to leased premises.          Generally, the leases provide for renewal for various periods at          stipulated rates.                                         70                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            The minimum rental commitments under the operating leases as of          December 31, 2005 are as follows:                           Year ending December 31:                             2006                               $     491,000                             2007                                     499,000                             2008                                     350,000                             2009                                     163,000                                                                -------------                                                                $   1,503,000                                                                =============           Total rent expense for operating leases was $401,000, $284,000, and          $361,000, in 2005, 2004, and 2003, respectively.           The Bank is engaged in various lawsuits either as plaintiff or          defendant in the ordinary course of business and in the opinion of          management, based upon the advice of counsel, the ultimate outcome of          these lawsuits will not have a material effect on the Bank's financial          statements.  (10)     Bank Savings Plan           The Bank maintains a salary deferral 401(k) plan covering substantially          all employees, known as the First National Bank Savings Plan (the          Plan). The Plan allows employees to make contributions to the Plan up          to a maximum allowed by law and the Bank's contribution is          discretionary. The Plan expense for the years ended December 31, 2005,          2004, and 2003 was $626,000, $540,000 and $475,000, respectively.  (11)     Salary Continuation and Deferred Compensation Plans           The Bank maintains a Salary Continuation Plan for certain Bank          officers. Officers participating in the Salary Continuation Plan are          entitled to receive a monthly payment for a period of fifteen to twenty          years upon retirement. The Company accrues such post-retirement          benefits over the individual's employment period. The Salary          Continuation Plan expense for the years ended December 31, 2005, 2004,          and 2003 was $325,000, $305,000, and $137,000 respectively. Accrued          compensation payable under the salary continuation plan totaled          $1,780,000 and $1,515,000 at December 31, 2005 and 2004, respectively.                                         71                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            The Deferred Compensation Plan allows eligible officers to defer          annually their compensation up to a maximum 80% of their base salary          and 100% of their cash bonus. The officer will be entitled to receive          distribution upon reaching a specified age, passage of at least five          years or termination of employment. As of December 31, 2005 and 2004,          the related liability included in accrued expenses and other          liabilities was $1,851,000 and $1,649,000, respectively.  (12)     Income Taxes           The provision for income taxes for the years ended December 31,          consists of the following:                                        2005            2004            2003                                   ------------    ------------    ------------             Current:               Federal             $  2,223,000       1,275,000       1,473,000               State                    387,000         228,000         785,000                                   ------------    ------------    ------------                                      2,610,000       1,503,000       2,258,000                                   ------------    ------------    ------------            Deferred:               Federal                 (207,000)         62,000        (615,000)               State                     26,000          12,000        (247,000)                                   ------------    ------------    ------------                                       (181,000)         74,000        (862,000)                                   ------------    ------------    ------------                                   $  2,429,000       1,577,000       1,396,000                                   ============    ============    ============           The reasons for the differences between the statutory federal income          tax rate and the effective tax rates for the years ended December 31,          are summarized as follows:                                                                    2005         2004         2003                                                               --------     --------     --------                Statutory rate                                         34.0%        34.0%        34.0%            Increased (decrease ) resulting from:               Income tax exempt for federal purposes              (7.1)%       (8.0)%       (8.7)%               State taxes on income  net of federal benefit        3.3%         2.5%         6.4%               Benefits from low income housing credits            (1.1)%       (2.8)%       (5.8)%               Adjustment to prior year accruals                    0.0%        (0.6)%        0.0%               Other, net                                           0.6%         0.1%        (0.7)%                                                               --------     --------     --------                       Effective rate                              29.7%        25.2%        25.2%                                                               ========     ========     ========                                          72                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            The tax effect of temporary differences giving rise to the Bank's net          deferred tax asset is as follows:                                                                                  December 31                                                                       ---------------------------                                                                           2005           2004                                                                       ------------   ------------         Deferred tax assets:         Allowance for loan losses                                     $  1,857,000      1,307,000         Capitalized interest on buildings                                   29,000         32,000         Expenses accrued on books  not yet deductible in tax return      1,720,000      1,787,000         Depreciation                                                       497,000        169,000         Net operating loss carryforward                                  1,439,000             --         Unrealized loss on available-for-sale securities                   280,000             --                                                                       ------------   ------------              Total deferred tax assets                                   5,822,000      3,295,000                                                                       ------------   ------------      Deferred tax liabilities:         State income taxes                                                 312,000        303,000         Unrealized appreciation of available-for-sale securities                --        395,000         Core deposit intangible                                            524,000             --         Expenses and credits deducted on tax return, not books              42,000        115,000                                                                       ------------   ------------              Total deferred tax liabilities                                878,000        813,000                                                                       ------------   ------------              Net deferred tax assets before valuation allowance          4,944,000      2,482,000              Valuation allowance                                                --       (134,000)                                                                       ------------   ------------              Net deferred tax asset (included in other assets)           4,944,000      2,348,000                                                                       ============   ============            As of December 31, 2005, the Bank had no state tax credit carryforwards          for income tax purposes, as these were all used during 2005.          Accordingly, there is no valuation allowance as of December 31, 2005.          Additionally, management believes that it is more likely than not that          the deferred tax assets will be realized through recovery of taxes          previously paid and/or future taxable income. The Bank had net          operating loss carryforwards resulting from the acquisition of Sequoia          National Bank which expire from December 31, 2007 through December 31,          2020, for a total balance of $3,998,568.  (13)     Financial Instruments           The Bank 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 amount recognized in the          balance sheet.           The Bank's exposure to credit loss is represented by the contractual          amount of those instruments and is usually limited to amounts funded or          drawn. The contract or notional                                         73                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                        December 31, 2005, and 2004 and 2003            amounts of these agreements, which are not included in the balance          sheets, are an indicator of the Bank's credit exposure. Commitments to          extend credit generally carry variable interest rates and are subject          to the same credit standards used in the lending process for          on-balance-sheet instruments. Additionally, the Bank periodically          reassesses the customer's creditworthiness through ongoing credit          reviews. The Bank generally requires collateral or other security to          support commitments to extend credit. The following table provides          summary information on financial institutions whose contract amounts          represent credit risk as of December 31:                                                                            2005           2004                                                                     ------------   ------------               Financial instruments whose contract amounts represent                Credit risk:                    Undisbursed loan commitments                     $ 36,607,000     33,629,000                    Lines of credit                                    49,863,000     42,731,000                    MasterCard lines                                    3,463,000      3,560,000                    Standby letters of credit                           7,768,000      3,158,000                                                                     ------------   ------------                                                                     $ 97,701,000     83,078,000                                                                     ============   ============            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 and residential properties.           Equity reserve and unused credit card lines are additional commitments          to extend credit. Many of these customers are not expected to draw down          their total lines of credit, and therefore, the total contract amount          of these lines does not necessarily represent future cash requirements.           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.                                         74                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            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. As of December 31, 2005, there were          $7,488,000 issued in financial standby letters of credit. The          performance standby letters of credit are typically issued to          municipalities as specific performance bonds. As of December 31, 2005          there were $280,000 issued in performance standby letters of credit.          The terms of the guarantees will expire in 2006. The Bank has          experienced no draws on these letters of credit, and does not expect to          in the future; however, should a triggering event occur, the Bank          either has collateral in excess of the letters of credit or embedded          agreements of recourse from the customer.           The following methods and assumptions were used by the Company to          estimate the fair value of financial instruments.           (a)      Cash and Cash Equivalents                    The carrying amounts reported in the balance sheet for cash                   and short-term instruments approximate those assets fair                   values.           (b)      Securities                    Fair values for 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.           (c)      Loans                    Fair values for variable-rate loans that reprice frequently                   and have no significant change in credit risk are based on                   carrying values. The fair values for other 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.           (d)      Off-Balance Sheet Commitments                    Fair values for the company's off-balance-sheet lending                   commitments are based on fees currently charged to enter into                   similar agreements, taking into account the remaining terms of                   the agreements and the credit standing of the counterparties.                                         75                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            (e)      Deposit Liabilities                    The fair values estimated for demand deposits (interest and                   noninterest checking, passbook savings, and certain types of                   money market accounts) are, by definition, equal to the amount                   payable on demand at the reporting date (i.e., their carrying                   amounts). 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                   for a schedule of the aggregate expected monthly maturities on                   time deposits.           (f)      Federal Funds Sold/Purchased                    The carrying amount of federal funds sold/purchased                   approximates their fair values.           (g)      Bank Owned Life Insurance                    The carrying amount is the cash surrender value for all                   policies.                    The following table provides summary information on the                   estimated fair value of financial instruments at December 31,                   2005:                                                                                   Carrying        Fair                                                                                 amount         value                                                                              ------------   ------------                      Financial assets:                        Cash and cash equivalents                             $ 35,298,000     35,298,000                        Securities available for sale                          113,463,000    113,463,000                        Loans, net                                             380,051,000    387,199,000                        Bank owned life insurance                                7,011,000      7,011,000                        Accrued interest receivable                              3,437,000      3,437,000                    Financial liabilities:                        Deposits                                               507,544,000    507,604,000                        Accrued interest payable                                 1,165,000      1,165,000                    Off-balance-sheet commitments:                        Undisbursed loan commitments, lines of credit,                             Mastercard line, and standby letters of credit             --        833,000                                          76                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            The following table provides summary information on the estimated fair          value of financial instruments at December 31, 2004:                                                                               Carrying        Fair                                                                             amount         Value                                                                          ------------   ------------                     Financial assets:                    Cash and cash equivalents                             $ 17,084,000     17,084,000                    Securities available for sale                          102,823,000    102,823,000                    Loans, net                                             340,906,000    344,845,000                    Bank owned life insurance                                6,773,000      6,773,000                    Accrued interest receivable                              2,379,000      2,379,000                Financial liabilities:                    Deposits                                               413,253,000    413,137,000                    Federal funds purchased                                 19,172,000     19,172,000                    Accrued interest payable                                   403,000        403,000                Off-balance-sheet commitments:                    Undisbursed loan commitments, lines of credit,                         Mastercard line, and standby letters of credit             --        800,000            The carrying amounts of loans include $17,000 and $2,798,000 of          nonaccrual loans (loans that are not accruing interest) at December 31,          2005 and 2004, respectively. Management has determined that primarily          because of the uncertainty of predicting an observable market interest          rate, excessive amounts of time and money would be incurred to estimate          the fair values of nonperforming loans. As such, these loans are          recorded at their carrying amount in the estimated fair value columns.          The following aggregate information is provided at December 31, about          the contractual provisions of these loans:                                                        2005            2004                                                    ----------      ----------          Aggregate carrying amount                 $   17,000       2,798,000          Effective rate                                 13.11%           6.98%          Average term to maturity                    5 months        0 months                                         77                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003   (14)     Significant Group Concentrations of Credit Risk           Most of the Bank's business activity is with customers located within          San Mateo and San Francisco counties. Generally, the loans are secured          by assets of the borrowers. The loans are expected to be repaid from          cash flows or proceeds from the sale of selected assets of the          borrowers. The Bank does not have significant concentrations of loans          to any one industry.           The distribution of commitments to extend credit approximates the          distribution of loans outstanding. Commercial and standby letters of          credit were granted primarily to commercial borrowers.           The contractual amounts of credit-related financial instruments such as          commitments to extend credit, credit-card arrangements, and letters of          credit represent the amounts of potential accounting loss should the          contract be fully drawn upon, the customer default, and the value of          any existing collateral become worthless.  (15)     Regulatory matters           The Company, as a bank holding company, is subject to regulation by the          Board of Governors of the Federal Reserve System under the Bank Holding          Company Act of 1956, as amended.           The Bank is subject to various regulatory capital requirements          administered by the federal banking agencies. Failure to meet minimum          capital requirements can initiate certain mandatory and possibly          additional discretionary actions by regulators that, if undertaken,          could have a direct material effect on the Company's financial          statements. Under capital adequacy guidelines and the regulatory          framework for prompt corrective action, the Company and the Bank must          meet specific capital guidelines that involve quantitative measures of          the Company's and the Bank's assets, liabilities and certain off          balance-sheet items as calculated under regulatory accounting          practices. The 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 Company and the Bank to maintain minimum amounts          and ratios (set forth in the table below) of total and Tier 1 capital          (as defined in the regulations) to risk-weighted assets (as defined),          and of Tier 1 capital (as defined) to average assets (as defined).          Management believes, as of December 31, 2005, that the Company and the          Bank have met all capital adequacy requirements to which they are          subject.                                         78                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            As of December 31, 2005, the most recent notification from the          regulatory agencies categorized the Bank as well capitalized under the          regulatory framework for prompt corrective action. To be categorized as          well capitalized the Bank must maintain minimum total risk-based, Tier          1 risk-based, and Tier 1 leverage ratios as set forth in the table.          There are no conditions or events since that notification that          management believes have changed the Bank's categories.                                         79                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            The consolidated actual capital amounts and ratios of FNB Bancorp and          Subsidiary are also presented in the following table:                                                                                               To be well capitalized under                                                                         For capital          prompt corrective action                                                  Actual               adequacy purposes            provisions                                         -----------------------    -----------------------   ------------------------                                            Amount       Ratio         Amount       Ratio        Amount        Ratio                                         ------------   --------    ------------   --------   ------------    --------              December 31, 2005:          Total risk-based capital             (to risk weighted assets)          Consolidated Company           $ 57,181,000      11.59%     39,478,000       8.00%     49,347,000        n/a          Bank                             57,045,000      11.56      39,478,000       8.00      49,347,000      10.00%           Tier 1 capital (to risk             Weighted assets)          Consolidated Company             52,634,000      10.67      19,739,000       4.00      29,608,000        n/a          Bank                             52,498,000      10.64      19,739,000       4.00      29,608,000       6.00           Tier 1 capital (to average             assets)          Consolidated Company             52,634,000       9.50      22,172,000       4.00      27,715,000        n/a          Bank                             52,498,000       9.47      22,172,000       4.00      27,715,000       5.00                                                                                               To be well capitalized under                                                                         For capital          prompt corrective action                                                  Actual               adequacy purposes            provisions                                         -----------------------    -----------------------   ------------------------                                            Amount       Ratio         Amount       Ratio        Amount        Ratio                                         ------------   --------    ------------   --------   ------------    --------        December 31, 2004:          Total risk-based capital             (to risk weighted assets)          Consolidated Company           $ 55,397,000      13.50      32,815,000       8.00%     41,019,000        n/a          Bank                             55,366,000      13.50      32,815,000       8.00      41,019,000      10.00%           Tier 1 capital (to risk             Weighted assets)          Consolidated Company             52,063,000      12.69      16,407,000       4.00      24,611,000        n/a          Bank                             52,032,000      12.69      16,407,000       4.00      24,611,000       6.00           Tier 1 capital (to average             assets)          Consolidated Company             52,063,000      10.72      19,434,000       4.00      24,293,000        n/a          Bank                             52,032,000      10.71      19,434,000       4.00      24,293,000       5.00   (16)     Stock Option Plan           In 1997, the Company adopted an incentive employee stock option plan,          known as the 1997 FNB Bancorp Plan. In 2002, the Company adopted an          incentive employee option plan known as the 2002 FNB Bancorp Plan. The          Plans allow the Company to grant options to employees of up to 348,997          shares, which includes the effect of stock                                         80                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                         December 31, 2005, 2004 and 2003            dividends of common stock. Options currently outstanding become          exercisable in one to five years from the grant date, based on a          vesting schedule of 20% per year and expire 10 years after the grant          date. The options exercise price is the fair value of the options at          the grant date.           The fair value of each option granted is estimated on the date of grant          using the fair value method with the following weighted average          assumptions used for grants in 2005; dividend yield of 6.98% for the          year; risk-free interest rate of 3.91%; expected volatility of 10%;          expected life of 5.0 years; and weighted average fair value of $0.75.          The assumptions used for grants in 2004; dividend yield of 6.85% for          the year; risk-free interest rate of 3.73%; expected volatility of 10%;          expected life of 5.0 years; and weighted average fair value of $0.76.          The assumptions used for grants in 2003; dividend yield of 7% for the          year; risk-free interest rate of 4.2%; expected volatility of 12%;          expected life of 9.7 years; and weighted average fair value of $2.15.           A summary of the status of the Company's stock option plans as of          December 31, 2005, 2004 and 2003 is presented below:                                                                                   Weighted                                                                                average                                                                                exercise                                                                   Shares        price                                                                 ----------    ----------                      2002 FNB Bancorp plan:                      Outstanding at December 31, 2002               36,801         22.62                         Granted                                     46,255         22.55                         Exercised                                     (242)        22.62                         Expired/forfeited                           (1,542)        22.16                                                                 ----------    ----------                      Outstanding at December 31, 2003               81,272         22.05                         Granted                                     43,459         29.48                         Exercised                                   (1,296)        22.28                         Expired/forfeited                           (7,053)        23.30                                                                 ----------    ----------                      Outstanding at December 31, 2004              116,382    $    24.75                         Granted                                     44,610         28.62                         Exercised                                   (1,620)        23.38                         Expired/forfeited                           (4,473)        26.38                                                                 ----------    ----------                      Outstanding at December 31, 2005              154,899         25.83                                                                 ==========    ==========                       Options exercisable at December 31, 2005       49,117    $    23.99                       Options exercisable at December 31, 2004       26,237         22.90                       Options exercisable at December 31, 2003       10,540         22.42                                          81                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            The following information applies to options outstanding at December          31, 2005:                 Range of exercise prices                           $21.60 - 29.48                Options outstanding                                    154,899                Weighted average remaining contractual life (years)      8.1            A summary of the status of the Company's stock option plans as of          December 31, 2005, 2004 and 2003 is presented below:                                                                                   Weighted                                                                                Average                                                                                exercise                                                                   Shares        Price                                                                 ----------    ----------                      1997 FNB Bancorp plan:                      Outstanding at December 31, 2002               97,183         19.79                         Exercised                                   (2,550)        20.10                         Expired/forfeited                           (4,462)        19.47                                                                 ----------    ----------                      Outstanding at December 31, 2003               90,171         19.80                         Exercised                                  (12,449)        19.61                         Expired/forfeited                           (3,001)        19.37                                                                 ----------    ----------                      Outstanding at December 31, 2004               74,721    $    19.85                         Exercised                                   (5,624)        19.95                         Expired/forfeited                             (358)        19.51                                                                 ----------    ----------                      Outstanding at December 31, 2005               68,739         19.84                                                                 ==========    ==========                       Options exercisable at December 31, 2005       64,006    $    19.86                       Options exercisable at December 31, 2004       60,148         19.96                       Options exercisable at December 31, 2003       60,046         20.02             The following information applies to options outstanding at December          31, 2005:                    Range of exercise prices                        $18.75 - 21.66                   Options outstanding                                  68,739                   Weighted average remaining contractual life (years)   4.2                                         82                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003   (17)     Quarterly Data (Unaudited)                                                 First        Second       Third        Fourth                                            ----------   ----------   ----------   ----------               2005:             Interest income                $6,515,000    7,455,000    8,033,000    8,729,000             Interest expense                  965,000    1,208,000    1,567,000    1,793,000                                            ----------   ----------   ----------   ----------                    Net interest income      5,550,000    6,247,000    6,466,000    6,936,000             Provision for loan losses         120,000      150,000      165,000      165,000                                            ----------   ----------   ----------   ----------                    Net interest income,                       after provision                          for loan losses    5,430,000    6,097,000    6,301,000    6,771,000              Non-interest income               903,000    1,009,000      993,000      936,000             Non-interest expense            4,902,000    5,229,000    5,067,000    5,085,000                                            ----------   ----------   ----------   ----------             Income before income taxes      1,431,000    1,877,000    2,227,000    2,622,000              Provision for income taxes        415,000      595,000      674,000      745,000                                            ----------   ----------   ----------   ----------                    Net earnings            $1,016,000    1,282,000    1,553,000    1,877,000                                            ==========   ==========   ==========   ==========              Basic earnings per share       $     0.37         0.48         0.58         0.69             Diluted earnings per share           0.36         0.47         0.57         0.68                                                 First        Second       Third        Fourth                                            ----------   ----------   ----------   ----------          2004:             Interest income                $5,737,000    5,685,000    6,206,000    6,418,000             Interest expense                  563,000      576,000      639,000      755,000                                            ----------   ----------   ----------   ----------                    Net interest income      5,174,000    5,109,000    5,567,000    5,663,000             Provision for loan losses         120,000      120,000      120,000      120,000                                            ----------   ----------   ----------   ----------                    Net interest income,                      after provision                         for loan losses     5,054,000    4,989,000    5,447,000    5,543,000              Non-interest income               923,000      958,000      956,000      950,000             Non-interest expense            4,745,000    4,743,000    4,624,000    4,443,000                                            ----------   ----------   ----------   ----------             Income before income taxes      1,232,000    1,204,000    1,779,000    2,050,000              Provision for income taxes        329,000      241,000      437,000      570,000                                            ----------   ----------   ----------   ----------                    Net earnings            $  903,000      963,000    1,342,000    1,480,000                                            ==========   ==========   ==========   ==========              Basic earnings per share       $     0.33         0.35         0.49         0.54             Diluted earnings per share           0.32         0.34         0.48         0.53   (18)     Recent Accounting Changes           On December 12, 2003, AICPA issued Statement of Position 03-3 which addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans with evidence of deterioration of credit quality since origination acquired by completion of a transfer, including such loans acquired in purchase business combinations. SOP 03-3 is effective prospectively for loans acquired beginning January 1, 2005.                                         83                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                          December 31, 2005, 2004 and 2003            In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No. 123(R) requires the Company to measure the cost of employee services received in exchange for an award of equity instruments using a fair-value method, and to record such expense in its financial statements, for annual reporting periods beginning after June 15, 2005. The revised Statement eliminates an entity's ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. This accounting change is not expected to have a material effect on the consolidated financial statements.  (19)     Condensed Financial Information of Parent Company           The parent company-only condensed balance sheets, condensed statements of income, and condensed statements of cash flows information are presented as of and for the year ended December 31, as follows:           FNB Bancorp        Condensed balance sheets                                     2005           2004                                                                 ------------   ------------             Assets:             Cash and due from banks                             $    146,000        350,000             Investments in subsidiary                             55,107,000     52,598,000             Other assets                                                  --             --                                                                 ------------   ------------                    Total assets                                 $ 55,253,000     52,948,000                                                                 ============   ============          Liabilities:             Other liabilities                                   $     10,000        319,000          Stockholders' equity                                     55,243,000     52,629,000                                                                 ------------   ------------                    Total liabilities and stockholders' equity   $ 55,253,000     52,948,000                                                                 ============   ============                                          84                              FNB BANCORP AND SUBSIDIARY                     Notes to Consolidated Financial Statements                             December 31, 2005 and 2004           FNB Bancorp        Condensed statements of income                               2005            2004        ----------------------------------------------------     ------------    ------------             Income:             Dividend from subsidiary                            $  2,269,000       3,446,000             Other income                                                  --           1,000                                                                 ------------    ------------                    Total income                                    2,269,000       3,447,000                                                                 ------------    ------------          Expense:             Other expense                                             17,000          10,000                                                                 ------------    ------------                    Total expense                                      17,000          10,000                                                                 ------------    ------------                     Income before income taxes and equity                       in undistributed earnings of subsidiary      2,252,000       3,437,000          Income tax expense (credit)                                      --         (36,000)                                                                 ------------    ------------                    Income before equity in undistributed                       earnings of subsidiary                       2,252,000       3,473,000          Equity in undistributed earnings of subsidiary            3,476,000       1,215,000                                                                 ------------    ------------                    Net earnings                                 $  5,728,000       4,688,000                                                                 ============    ============             FNB Bancorp          Condensed statements of cash flows                         2005            2004          Net earnings                                           $  5,728,000       4,688,000          Change in other assets                                           --         403,000          Change in other liabilities                                (309,000)        (19,000)          Undistributed earnings of subsidiary                     (3,476,000)     (1,215,000)          Stock-based compensation expense                             10,000           6,000                                                                 ------------    ------------               Cash flows provided by operating activities          1,953,000       3,863,000                                                                 ------------    ------------           Increase in investment to subsidiary                             --              --                                                                 ------------    ------------               Cash flows used in investing activities                     --              --                                                                 ------------    ------------           Proceeds from exercise of common stock                      150,000         272,000          Dividends paid                                           (1,542,000)     (1,526,000)          Repurchases of common stock                                (765,000)     (2,324,000)                                                                 ------------    ------------               Cash flows provided by financing activities         (2,157,000)     (3,578,000)                                                                 ------------    ------------                Net (decrease) increase in cash                       (204,000)        285,000          Cash, beginning of year                                     350,000          65,000                                                                 ------------    ------------          Cash, end of year                                      $    146,000         350,000                                                                 ============    ============                                          85
Not applicable.
Disclosure Controls and Procedures. Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.           Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting. The Company's management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2005. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Pursuant to policy, Director Daniel J. Modena retired from the Boards of Directors of the Company and the Bank effective December 31, 2005.                                       PART III
The information required by Item 10 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.                                         86
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.                                        PART IV
(2)      Financial Statement Schedules. All schedules have been omitted since          the required information is not present in amounts sufficient to          require submission of the schedule or because the information required          is included in the Financial Statements or notes thereto.   (3)      Exhibits.         Exhibit        Number                        Document Description        ------------- -----------------------------------------------------------           **2.1        (deleted)             2.2        Acquisition Agreement dated November 5, 2004, signed among                              First National Bank of Northern California, Sequoia                              National Bank and Hemisphere National Bank                              (incorporated by reference from Exhibit 2.2 to the                              Company's Current Report on Form 8-K filed with the                              Commission on November 9, 2004)             2.3        First Addendum to Acquisition Agreement, dated December                              13, 2004, signed among First National Bank of                              Northern California, Sequoia National Bank,                              Hemisphere National Bank and Privee Financial, Inc.                              (incorporated by reference from Exhibit 2.5 to the                              Company's Current Report on Form 8-K filed with the                              Commission on December 17, 2004)             2.4        Second Addendum to Acquisition Agreement, dated as of                              April 15, 2005, signed among First National Bank of                              Northern California, Sequoia National Bank,                              Hemisphere National Bank and Privee Financial, Inc.                              (incorporated by Reference from Exhibit 2.4 to the                              Company's Current Report on Form 8-K Filed with the                              Commission on May 2, 2005)                                         87            **3.1        Articles of Incorporation of FNB Bancorp.           **3.2        Bylaws of FNB Bancorp.           **4.1        Specimen of the Registrant's common stock certificate.          **10.1        Lease agreement dated April 24, 1995, as amended, for                       Eureka Square Branch Office of First National Bank of                       Northern California at Eureka Square Shopping Center,                       Pacifica, California.          **10.2        Lease agreement dated June 8, 1999, as amended, for Linda                       Mar Branch Office of First National Bank of Northern                       California at Linda Mar Shopping Center, Pacifica,                       California.          **10.3        Lease agreement dated August 21, 1996, as amended, for the                       Flower Mart facility of First National Bank of Northern                       California at 640 Brannan Street, Suite 102, San                       Francisco, California.          **10.4        (deleted)          **10.5        (deleted)          **10.6        First National Bank of Northern California 1997 Stock                       Option Plan.*          **10.7        Form of Nonstatutory Stock Option Agreement under the                       First National Bank of Northern California 1997 Stock                       Option Plan.*          **10.8(a)     Form of Incentive Stock Option Agreement under the First                       National Bank of Northern California 1997 Stock Option                       Plan.*          **10.8(b)     Form of Incentive Stock Option Agreement (Standard                       Provisions under the First National Bank of Northern                       California 1997 Stock Option Plan.*          **10.9        First National Bank Profit Sharing and 401(k) Plan dated                       August 26, 1969.*          **10.10       First National Bank Deferred Compensation Plan dated                       November 1, 1997.*          **10.11       Salary Continuation Agreement between First National Bank                       of Northern California And Michael R. Wyman, dated                       December 20, 1996.*          **10.12       Salary Continuation Agreement between First National Bank                       of Northern California And Paul B. Hogan dated December                       20, 1996.*          **10.13       Salary Continuation Agreement between First National Bank                       of Northern California And James B. Ramsey, dated December                       23, 1999.*          **10.14       Form of Management Continuity Agreement signed on July 20,                       2000, between First National Bank of Northern California                       and Jim D. Black, Charles R. Key and Anthony J. Clifford.*                                         88           **10.15       (deleted)          **10.16       Communications Site Lease Agreement as amended dated March                       30, 1999, between First National Bank of Northern                       California, as Lessor and Nextel of California, Inc., as                       Lessee, with respect to Redwood City Branch Office.          **10.17       (deleted)          **10.18       Separation Agreement between First National Bank of                       Northern California and Paul B. Hogan, dated December 5,                       2001.*         ***10.19       First Amendment to Separation Agreement between First                       National Bank of Northern California and Paul B. Hogan,                       dated March 22, 2002.*        ****10.20       FNB Bancorp Stock Option Plan (effective March 15, 2002).*        ****10.21       FNB Bancorp Stock Option Plan, Form of Incentive Stock                       Option Agreement.*        ****10.22       FNB Bancorp Stock Option Plan, Form of Nonstatutory Stock                       Option Agreement.*       *****10.23       FNB Bancorp 2002 Stock Option Plan (adopted June 28,                       2002).*       *****10.24       FNB Bancorp 2002 Stock Option Plan, Form of Incentive                       Stock Option Agreement.*       *****10.25       FNB Bancorp 2002 Stock Option Plan, Form of Nonstatutory                       Stock Option Agreement.*      ******10.26       Lease agreement dated August 13, 2003, for San Mateo                       Branch Office of First National Bank of Northern                       California, located at 150 East Third Avenue, San Mateo,                       CA 94401.            10.27       Salary Continuation Agreement and Split-Dollar Agreement                       for Jim D. Black (incorporated by reference from Exhibit                       10.27 to the Company's Current Report on Form 8-K filed                       with the Commission on September 10, 2004)*            10.28       Salary Continuation Agreement and Split-Dollar Agreement                       for Anthony J. Clifford (incorporated by reference from                       Exhibit 10.28 to the Company's Current Report on Form 8-K                       filed with the Commission on September 10, 2004)*            10.29       Amended and Restated Salary Continuation Agreement and                       Split-Dollar Agreement for James B. Ramsey (incorporated                       by reference from Exhibit 10.29 to the Company's Current                       Report on Form 8-K filed with the Commission on September                       10, 2004)*            10.30       Lease Agreement dated May 1, 2003, as amended by                       Assignment, Assumption and Consent Agreement for the                       Financial District Branch Office of First National Bank of                       Northern California located at 65 Post Street, San                       Francisco, California.            10.31       Lease Agreement dated July 1, 1999, as amended by                       Assignment, Assumption and Consent Agreement for the                       Portola Branch Office of First National Bank of Northern                       California located at 699 Portola Drive, San Francisco,                       California.                                         89      ******14.0        Code of Ethics            21.1        The Registrant has one subsidiary, First National Bank of                       Northern California.            23.1        Consent of Moss Adams LLP            23.2        Consent of KPMG LLP            31.1        Rule 13a-14(a)/15d-14(a) Certification (principal                       executive officer)            31.2        Rule 13a-14(a)/15d-14(a) Certification (principal                       financial officer)            32.0        Section 1350 Certifications  - --------------------------------------------------------------------------------            *        Denotes management contracts, compensatory plans or                   arrangements.           **       Incorporated by reference to registrant's Registration                   Statement on Form S-4 (No. 333-74954) filed with the                   Commission on December 12, 2001.           ***      Incorporated by reference to registrant's Annual Report on                   Form 10-K filed with the Commission on March 31, 2002.           ****     Incorporated by reference to registrant's Statement on Form                   S-8 (No. 333-91596) filed with the Commission on July 1, 2002.           *****    Incorporated by reference to registrant's Registration                   Statement on Form S-8 (No. 333-98293) filed with the                   Commission on August 16, 2002.           ******   Incorporated by reference to registrant's Annual Report on                   Form 10-K filed with the Commission on March 30, 2003.              An Annual Report for the fiscal year ended December 31, 2005, and Notice of Annual Meeting and Proxy Statement for the Company's 2006 Annual Meeting will be mailed to security holders subsequent to the date of filing this report. Copies of said materials will be furnished to the Commission in accordance with the Commission's Rules and Regulations.                                         90                                      SIGNATURES           Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                          FNB BANCORP    Dated: March 24, 2006                   By: /s/ THOMAS C. MCGRAW                                             -----------------------------------                                             Thomas C. McGraw                                             Chief Executive Officer                                             (Principal Executive Officer)           Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.          Signature                     Title                         Date    /s/ MICHAEL R. WYMAN            Chairman of the Board          March 24, 2006 - ---------------------------     of Directors Michael R. Wyman    /s/ THOMAS C. MCGRAW            Director, Chief Executive      March 24, 2006 - ---------------------------     Officer and Secretary Thomas C. McGraw    /s/ JAMES B. RAMSEY             Senior Vice President and      March 24, 2006 - ---------------------------     Chief Financial Officer James B. Ramsey                 (Principal Financial Officer                                 and Principal Accounting                                 Officer)   /s/ NEIL J. VANNUCCI            Director                       March 24, 2006 - --------------------------- Neil J. Vannucci                                         91   /s/ EDWARD J. WATSON            Director                       March 24, 2006 - --------------------------- Edward J. Watson    /s/ LISA ANGELOT                Director                       March 24, 2006 - --------------------------- Lisa Angelot    /s/ JIM D. BLACK                Director and President         March 24, 2006 - --------------------------- Jim D. Black    /s/ ANTHONY J. CLIFFORD         Director and Executive         March 24, 2006 - ---------------------------     Vice President and Chief Anthony J. Clifford             Operating Officer    /s/ R. ALBERT ROENSCH           Director                       March 24, 2006 - --------------------------- R. Albert Roensch                                         92    EX-10.30 2 ex10_30.txt EXHIBIT 10.30                                                                     Exhibit 10.30                                         LEASE                                       -----         This lease {"Lease"), dated for reference purposes as of May 1, 2003, is made between The Mechanics' Institute, a California Nonprofit Public Benefit Corporation ("Landlord") and Sequoia National Bank, a California Corporation ("Tenant"), who agree as follows:  1.     PREMISES         1.1    General: Landlord leases to Tenant and Tenant leases from Landlord premises commonly known as 65 Post Street, San Francisco, California (the "Building"), consisting of approximate1y 2,826 square feet of street level area,approximately 1,322 square feet of basement area, and approximately 1,077 square feet of mezzanine area (plus that portion of the area under the skylight {"Mezzanine Skylight Area" also known as "Atrium w / SkI Inaccessib1e"} if Landlord elects to cover or repair such skylight, which it may do in its sole and absolute discretion), as delineated on the attached Exhibit A (the "Premises").         1.2    Acceptance of Premises: Tenant has examined the Premises fully and completely to determine the suitability of the Premises for Tenant's use. Tenant is fully informed of the condition of the Premises and Tenant agrees that the Premises (including without limitation the Mezzanine Skylight Area) are accepted on an "AS IS" basis. The taking of possession or use of the Premises by Tenant for any purpose shall conclusively establish that the Premises and the Building were at such time in satisfactory condition and in conformity with the provisions of this Lease and all Laws (defined below) in all respects. Tenant acknowledges that Landlord has made no representation or warranty regarding the condition of the Premises or the Building except as specifically set forth in this Lease.         1.3    Construction of Tenant Improvements:         (a)    Tenant shall exercise due di1l1gence in preparation of space plans, detailed construction plans, elevations of the facade, and paint schemes ("Tenant's Plans") for all improvements desired by Tenant or required for operation of Tenant's business, including without limitation all changes to the facade of the premises, construction of Automatic Teller Machines and exterior deposit boxes and all sidewalk improvements appurtenant thereto (the "Improvements"), and shall submit Tenant's Plans to Landlord for approval. Landlord shall have fifteen (15) business days from receipt of Tenants Plans in which to review and approve or disapprove them. If Landlord disapproves of Tenants Plans, Landlord shall provide Tenant with written notification of the items of disapproval and Tenant shall modify Tenant's Plans accordingly. Landlord's approval will not be unreasonably withheld. Tenant shall cause the Improvements to be designed and constructed in compliance with all applicable laws, building codes and regulations, including but not limited to all laws, ordinances, rules and regulations relating to the Landmark status o! the Building, the Federal Americans with Disabilities Act of 1990 (Pub. L. No. 101-336, 104 Stat. 327), as amended, 42 U.S.C. ss.ss.12101 et seq., California Civil Code Sections 51 and 54.1, Title 24 of the California Administrative code, as amended,   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        1   including without limitation all of its access, and labor, energy and economy, requirements, and all statutes, rules and regulations supporting and supplementing the foregoing, any and all other laws, rules and regulations relating to the accessibility of the Premises to disabled persons, and all applicable federal, state and local building codes, energy conservation ordinances and inspection and permit requirements, and any and all rules, regulations and requirements promulgated thereunder or under any similar laws, ordinances, rules, regulations and orders (collectively, the "Laws"). Any requests by Tenant during the term of this Lease and any option periods and subsequent terms to alter, add to or remove Improvements, or to make subsequent improvements, or for change orders during construction(any and all of which shall be referred to herein as "Subsequent Alterations"), shall be governed by the forgoing. During construction, Tenant shall permit Landlords representatives access to the work in order to inspect the work for compliance with Tenant's Plans and all Laws. Such inspection shall not impose any liability or responsibility for the work on Landlord, it being understood and agreed that such inspection is solely for the protection of the interests of Landlord and not intended to confer any benefit or protection upon Tenant.         (b)    Tenant assumes the sale responsibility and cost to design and construct all Tenant Improvements and Subsequent Alterations. All Tenant improvements and Subsequent Alterations shall be constructed in accordance with plans, specifications and other requirements agreed to in writing by Landlord and Tenant.         (c)    On the Term Commencement Date, Landlord shall pay to Tenant Seventy Five Thousand Dollars ($75,000.00).         1.4    Lien and Completion Bond Requirements: In connection with the Improvements and any Subsequent Alterations, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Improvements and Subsequent Alterations, to insure landlord against any liability for mechanics' and materialmen's liens and to insure completion of the work, and this requirement shall be deemed a reasonable condition to Landlord's approval of Tenant's Plans, and to Landlord's approval of requests by Tenant to make Subsequent Alterations.         1.5    Conditions to Landlords Consent: If Landlord gives its consent to Tenant's Plans or to any Improvements or Subsequent Alterations, such consent shall be deemed conditioned upon (a) Tenant constructing all improvements and Subsequent Alterations in strict conformity with Tenant's Plans and all Laws (b) Tenant acquiring all necessary permits from appropriate government agencies, (c) the furnishing of copies of such permits to Landlord prior to commencement of work, and (d) the compliance by tenant with all conditions of said permits in a prompt and expeditious manner.         1.6    Removal of Improvements and Subsequent Alterations at Landlord's Election: As set forth in Section 7.1, all Improvements and Subsequent Alterations (excluding trade fixtures) will either remain on and be surrendered with the Premises on expiration or earlier termination of   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        2   the Lease, or be removed by Tenant prior to expiration or earlier termination of the Lease, at Landlord's election.         1.7    Notice to Landlord Prior to Commencement of Improvements or Alterations. No Improvements or Subsequent Alterations may be commenced until at least seven (7) days after Landlord has received notice from Tenant stating the date that design and construction of such Improvements or Subsequent Alterations are to commence, so that Land1ord can post and record an appropriate notice of non-responsibility.  2.     TERM         2.1    General: The term of this Lease shall commence upon the date of delivery of the Premises to Tenant in their current "AS IS" condition ("Term Commencement Date"), which shall be May 1, 2003, and will expire on the fifth anniversary of the Term Commencement Date, unless sooner terminated pursuant to any provision hereof.         2.2    [Intentionally blank.]         2.3    Option to Extend:         Provided that Tenant has not been in Default under this Lease for the twenty-four (24) months prior to its attempted exercise of either of its Options to Renew (defined below), Tenant shall have the right to extend the Original Term of the Lease for two (2) five-year terms (each, an "Option to Extend"). The "First Extended Term" shall commence on May 1, 2008 and expire on April 30, 2013, and the "Second Extended Term" shall commence on May 1, 2013 and expire on Apri130, 2018.Tenant's Option to Extend for the Second Extended Term is contingent on Tenant successfully exercising its Option to Extend for the First Extended Term.Tenant's occupancy and leasing of the Premises during both Extended Terms shall be governed by, and be upon the same terms, covenants, and conditions as are set forth in, this Lease. If Landlord does not receive from Tenant written notice of Tenant exercise of its Option to Extend by one hundred and eighty (180) days prior to the expiration of the Original Term (in the case of Tenant's attempt to exercise its Option to Extend for the First Extended Term), or by one hundred and eighty (180) days prior to the expiration of the First Extended Term(in the case of Tenant's attempt to exercise its Option to Extend for the Second Extended Term) (the "Option Notices") then regardless of whether Tenant holds over or attempts to hold over, all of Tenant's rights under this Section 2.3 and under the Lease shall automatically terminate. Tenant Option Notices, if any, shall be deemed effective on personal delivery or overnight delivery, receipt confirmed, to Landlord. During the Extended Terms, if any, Landlord and Tenant shall be bound by all of the obligations, covenants, and agreements of this Lease except that Tenant shall have no right to further extend the Term of this Lease beyond or after expiration of the Second Extended Term.References throughout this Lease to the "Term" shall include both the Original Term and the Extended Terms, if any, unless otherwise indicated. Options to Extend contained herein are personal to Tenant and may not be assigned, voluntarily or involuntarily, separate from or as a part of the Lease;   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        3   provided, however that if Tenant attempts to assign either or both of its Options to Extend, such assignment shall not limit the liability of Tenant under the Lease. Notwithstanding the timely giving of the Option Notice, if Tenant is in Default of any provision of the Lease on the date of commencement of either of the Extended Terms, at Landlord's election, all rights of Tenant under this Section 2.3 shall terminate and be of no force or effect. Time is of the essence as to all provisions of this Section 2.3.  3.     RENT         3.1    Base Monthly Rent: Tenant shall be liable to Landlord for Base Monthly Rent of ($12,250) per month. Such Base Monthly Rental shall be increased on each anniversary ("Rent Anniversary") of the Rent Commencement Date (defined below in Section 3.4), commencing with the first Rent Anniversary, in the same proportion that the Consumer Price Index figure (published by the United States Department of Labor, Bureau of Labor Statistics, all items for San Francisco-Oakland for the month of October prior to each Rent Anniversary) bears to the Consumer Price Index figure for the previous month of October (hereinafter "basic index figure"), provided however, that in no event shall the Base Monthly Rental adjustment for any year be less than a three percent (3%) annual increase nor more than a six percent (6%) annual increase ("Annual Increase"). If prior to the effective date of any Annual Increase the Bureau of Labor Statistics should revise or change the methods or basic data used in calculating the foregoing index, in such a way as to affect the direct comparability of such revised or changed index with the original index used herein, then the Bureau shall be requested to furnish a conversion factor designed to adjust the original index to the new basis. If the Consumer Price Index, as now constituted, compiled and published, shall cease to be compiled and published during the Term, then the Bureau of Labor Statistics shall be requested to furnish a statement converting the basic index figure to a figure that would be comparable in another index published by the Bureau of Labor Statistics and such other index shall be used in computing the Base Monthly Rental Annual Increase, subject to the same provisos. The term Base Monthly Rent as used herein shall include any and all Annual Increases.         3.2    Payment of Rent: Upon Tenant's execution of this Lease, Tenant shall pay to Landlord Ninety-Eight Thousand Dollars ($98,000), the total Base Monthly Rent from the Term Commencement Date through the end of 2003. Thereafter, Tenant shall pay to Landlord on January 1st of each subsequent calendar year during the Tern, the total amount of Base Monthly Rent due for the calendar year commencing that January 1st and ending on December 31st of that year.         3.3    Prorations: In the event that this Lease is terminated prior to the last day of its Term or any Extended Terms, Landlord shall return to Tenant the unused Base Monthly Rent or any portion thereof, prorated on the basis of a twelve (12) month year and a thirty (30) day month, after first deducting therefrom any amounts due from Tenant to Landlord under this Lease or by law.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        4          3.4    Commencement of Rent; Rent Prepayment: Tenant's obligation to pay Base Monthly Rent shall commence on May 1, 2003. ("Rent Commencement Date").         3.5    Security Deposit: Tenant shall pay to Landlord a security deposit in the amount of 0ne Hundred Thousand Dollars ($100,000), to be held in a non-interest bearing account insured by the FDIC in the Landlord's name in the Tenant's Bank as security for the performance by Tenant of all the provisions of this Lease. In addition, Tenant shall pay to Landlord on demand a sum equal to the portion of the security deposit expended or applied by Landlord as provided in this Section to maintain the security deposit in the sum initially deposited with Landlord; provided, however, that Tenant may draw down the Security Deposit by no more than Forty thousand Dollars to pay for a portion or all (whichever is applicable) of Tenant's last five (5) months of Base Monthly Rent. Landlord's obligations with respect to the security deposit are those of a debtor and not a trustee. Landlord may use the deposit or any portion thereof, and may claim from the deposit such amounts as are reasonably necessary to remedy Tenant defaults of any kind including in the payment of rent, to repair damages to the Premises caused by Tenant, to compensate Landlord for damages sustained by reason of Tenant's default, to clean the Premises upon termination of the tenancy, and to comply with all of Tenant's obligations under Section 7.1, below to remove the basement vault, if Landlord so elects.. Except as otherwise specifically set forth in this section 3.4, the security deposit is not applicable to the last month's rent unless Landlord elects in writing to so apply it.         If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant within thirty (30) days following expiration of the Lease Term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest.         3.6    All Financial Obligations are Rent: All financial obligations of Tenant to Landlord under this lease including without limitation, the obligations of Sections 3 (in its entirety), 4.1, 4.2, 5, 7.1, 8, 9.1, 10, 12.1, 12.3, 12.5 and 12.6, are agreed to be obligations to pay rent hereunder, the breach of which will permit Landlord to exercise any or all remedies permitted for failure to pay rent under this Lease.         (a)    All sums of money due to Landlord under this Lease and not specifically characterized as rent shall constitute additional rent and shall be due within thirty (30) days after receipt by Tenant of a billing. If any sum is not paid when due, it shall be collectible as additional rent with the next installment of rent falling due. Nothing contained in this Lease shall be deemed to suspend or delay the payment of any sum of money at the time it becomes due and payable under this lease, or to limit any other remedy of Landlord.         (b)    Tenant acknowledges that late Payment of rent and other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be difficult to ascertain. These costs include, but are not limited to, processing and accounting charges and late   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        5   charges which may be imposed on Landlord by the terms of any trust deed covering the Premises. Accordingly, if any installment of rent or any other sums due from Tenant are not received when due, or if a cure period is applicable under Section 15.1, prior to the expiration of the cure period, Tenant sha1l pay to Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that the 1ate charge represents a fair and reasonable estimate of the costs Landlord will incur because of late payment. Acceptance of the late charge by Landlord shall not constitute a waiver of Tenant's default for the overdue amount, nor prevent Landlord from exercising the other rights and remedies granted under this Lease.         (c)    Any amount due to Landlord, if not paid within five (5) days following the due date, will bear interest from the due date until paid at the rate of ten percent (10%) per annum or, if this rate exceeds the highest rate then legally permitted, then at that highest legally permitted rate. However interest shall not be payable on late charges incurred by Tenant nor on any amounts on which late charges are paid by Tenant to the extent this interest would cause the total interest to be in excess of that legally permitted. Payment of interest shall not excuse or cure any default by Tenant.         (d)    An payments due shall be paid to Landlord, without deduction or offset, in lawful money of the United States of America, at Landlord's address for notices under this Lease, or to such other person or at such other place as Landlord may designate by written notice to Tenant.  4.     TAXES AND ASSESSMENTS         4.1    Personal Property Taxes: Tenant will pay before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed against Tenant's personal property in or on the Premises, including without limitation its trade fixtures, furnishings and equipment. When possible, Tenant shall cause said personal property to be assessed and billed separately from the real property of Landlord.         4.2    Real Property Taxes: Tenant will pay, as additional rent, Sixteen and Seven- Tenths Percent (16.7%) of all real property taxes and general and special assessments. ("Real Property Taxes") levied and assessed against the Premises, the Building, the land underlying the Building, any legal or equitable interest of Landlord in the building and the land underlying the Building, and any portion of such Building, land or legal or interest, prorated during the first and last years of the Term so that Tenant pays only for those days actually within the Term, plus one hundred percent (100%) of all Real Property Taxes and general and special assessments, and one hundred percent (100%) of any increased Real Property Taxes in Lease years subsequent to the year in which such general or special assessments are made, which are caused by or attributable to Tenant's Improvements and any Subsequent Alterations to the Premises made by Tenant, all of which shall be considered "Tenant's Percentage Share" of Real Property Taxes. Periodically, Landlord will notify Tenant of the amount of Real Property Taxes and provide Tenant with a copy of the tax bill,   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        6   and Tenant will pay Tenant's Percentage Share to Landlord not later than ten (10) days after the Landlord presents the Real Property Tax bill to the Tenant. Landlord shall be obligated to pay all Real Property Taxes levied or assessed against the Premises prior to the delinquency date thereof. For purposes of this Section, Real Property Taxes means and includes all taxes and assessments assessed, imposed or levied during any fiscal tax year which occurs wholly or partially during the Term of this Lease, including taxes, assessments and reassessments which are special, unforeseen, or extraordinary as well as those which are regular, foreseen or ordinary, and including any transfer tax, license or permit fee, commercial rental tax, utility tax, improvement bond or bonds, levy or tax (other than inheritance or estate tax) imposed by any authority having the direct or indirect power to tax, including any city, county, state, or federal government, or any school, agricultural, sanitary, fire, street, drainage, transit, or other improvement district thereof. If any governmental authority imposes, assesses, or levies a tax on rent or any other tax upon Landlord as a substitute in whole or in part for any Real Property Tax or assessment, the substitute tax shall be deemed to be an increase in Real Property Tax and shall be deemed to have been levied and assessed against the Premises, to the extent of the amount allocable thereto. The term Real Property Tax shall also include any tax, fee, levy, assessment, or charge (i) in substitution of or in addition to, partially or totally, any tax, fee, levy, assessment, or charge included in this Section in the definition of Real Property Tax, (ii) the nature of which was included within the definition of Real Property Tax, (iii) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof, including without limitation those related to any loss of or change in Landlord's status as a nonprofit public benefit corporation under the laws of the State of California, or (iv) which is imposed directly, solely or partially as a result of any loss of or change in Landlord's status as a nonprofit public benefit corporation under the laws of the State of California. If Landlord is required to impound Real Property Taxes on a periodic basis during the Term, Tenant will pay its proportionate share of Real Property Taxes to Landlord in accordance with all such requirements.         4.3    Tenant's Right to Contest Assessment: Tenant, at its expense, shall have the right at any time to seek a reduction in the assessed valuation of the Premises or Building, other improvements, and land of which the Premises are a part, or to contest any Real Property Taxes or assessments for improvement districts that are to be paid by Tenant, but shall pay Tenant's share of Real Property Taxes when due notwithstanding the pendency of any such actions.         Landlord shall not be required to join in any proceeding or contest brought by Tenant unless the provisions of any law require that the proceeding or contest be brought by or in the name of Landlord or any owner of the Premises. In that case Landlord shall join in the proceeding or contest or permit it to be brought in Landlord's name, but only insofar as, and for as long as, Landlord is not required to bear any costs or fees, including without limitation attorneys' costs or fees. Tenant, on final determination of the proceeding or contest, shall immediately pay or discharge its share of any Real Property Taxes determined by any decision or judgment rendered, together with all costs, charges, interest, and penalties incidental to the decision or judgment.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        7   5.     IMPOSITIONS         Tenant shall be solely responsible to pay, as additional rent, all of any gross receipts taxes, assessment or other charges imposed upon it by any governmental entity, all transfer taxes, assessments and other charges imposed as a result of Tenant's transfer of its leasehold interest, and the following items (collectively, "Impositions"): (i) taxes, other than local, state, and federal personal or corporate income taxes measured by the net income of Landlord; (ii) assessments, including without limitation, all assessments for public improvements, services, or benefits, irrespective of when commenced or completed; (iii) excises; (iv) levies; (v) business taxes; (vi) license, permit, inspection, and other authorization fees; (vii) transit development fees; (viii) assessments or charges for housing funds; (ix) service payments, in lieu of taxes and; (x) any other fees or charges that are levied, assessed, confirmed, or imposed by a public authority; provided, however, that Impositions shall not include amounts otherwise included in Real Property Taxes. Tenant is obligated to pay only to the extent that the Impositions are (a) on, measured by, or reasonably attributed to, the cost or value of Tenant's equipment, furniture, fixtures, and other personal property located in the Premises, or the cost or value of any leasehold improvements made to the Premises by or for Tenant, regardless of whether title to the improvements shall be in Tenant or Landlord; (b) based on or measured by the monthly rental or other charges payable under this Lease, including without limitation, any gross receipts tax levied by a municipality, the State of California, the Federal Government, or any other governmental body with respect to the receipt of the rental; (c) based on the development, possession, leasing, operation, management, maintenance, alteration, repair, use, or occupancy by Tenant of the Premises or any portion of the Premises; or (d) on this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it is unlawful for Tenant to reimburse Landlord for the Impositions, but lawful to increase the monthly rental to take into account Landlord's payment of the Impositions, the monthly rental payable to Landlord shall be revised to net Landlord the same net return without reimbursement of the Impositions as would have been received by Landlord with reimbursement of the Impositions.  6.     USE AND LIMITATIONS ON USE.         6.1    Use: Tenant will use the premises for the operation of a first class banking institution. The Premises shall not be used for any other use without Landlord's prior written consent. Tenant will comply with all applicable laws concerning the Premises and Tenant's use of the Premises. Tenant is advised that portions of the Building are used as a library and for offices for other tenants, and will not use the Premises in any manner that will violate any law, covenant, condition or restriction affecting the Building or the certificate of occupancy for the Building, or constitute waste, nuisance, or unreasonable annoyance to other Tenants' uses of Building, including without limitations library users, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which violates the provisions herein or is declared by any governmental authority having jurisdiction to be a violation of law or of the certificate of occupancy. Tenant, at Tenant's sole cost and expense, shall comply with all laws, ordinances, regulations, rules, requirements and   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        8   directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy impose any duty upon Tenant or Landlord with respect to the Premises or the Building, or either of their use or occupation, including without limitation the provisions of all Laws and the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter: constituted, relating to or affecting the condition, use or occupancy of the Premises. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business or other activity carried on at the Premises or if a failure to procure such a license or permit might or would, in any way, affect Landlord, the Premises, or the ability of Tenant to operate its business, then Tenant, at Tenant's expense, shall, at all times, obtain and comply with the requirements of each such license or permit. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant.         6.2    Trade Name: Tenant agrees it will not conduct business at the Premises under the name of Sequoia National Bank, and shall not change the name of said business without Landlord's prior written consent. In the event that Tenant desires to change such name, Tenant will notify Landlord in writing of such proposed change, and Landlord agrees not to unreasonably withhold its approval thereto.  7.     MAINTENANCE         7.1    Tenant's Obligations. Tenant, at its sole cost and expense, whether the same shall be the property of Tenant or Landlord, shall promptly repair and at all times maintain in good condition the entire Premises, including without limitation the entire interior of the Premises, the fixtures, equipment, electrical and plumbing fixtures and equipment, walls, ceilings, floors, HVAC equipment and ducts, utilities lines whether or not exposed, boilers, all doors and windows including without limitation Tenant's entry doors, communications lines and equipment, all painting and decorations of every kind, elevator inside the Premises (including all repairs, maintenance, licensing and replacement, if necessary), sidewalk adjacent to the Premises and any exterior alterations including but not limited to Automatic Teller Machines, deposit boxes, and Tenant shall promptly replace all broken or damaged glass, including glass and plate glass. If both Tenant's and Landlord's insurance covers a repair or any damage to be repaired, Tenant's insurance shall be primary and Landlord's insurance shall be secondary, and the fact that Landlord's insurance covers such repair or damage shall not impose any obligations upon Landlord not otherwise expressly agreed to in this Lease. Tenant shall make all repairs and replacements to the Premises expeditiously in a first class and workmanlike manner using high quality new materials, by hiring persons approved in advance by Landlord, which approval shall not be unreasonably withheld.  In the event that Tenant fails to make or commence the making of necessary repairs to the Premises as required under terms of this Lease, or should Tenant fail to fulfill any of its obligations under this Lease, then after Tenant   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        9   receives ten (10) days prior written notice from Landlord, Landlord may enter and make such repairs at Tenant's expense, or may fulfill Tenant's obligations. If Landlord pays charges for repairs or services, or fulfills any obligation of Tenant under this Lease, then Tenant agrees to reimburse Landlord for said payment or costs upon presentation of bills or invoices for the necessary repairs and proof of payment or fulfillment thereof.         On the last day of the Term, or on any sooner termination, Tenants shall surrender the Premises and all improvements and Subsequent Alterations to Landlord in the same condition as they were when first completely installed, clean and free of debris, ordinary wear and tear excepted, unless Landlord elects to require Tenant to remove some or all of its Improvements or Subsequent Alternations, in which case Tenant shall, prior to such surrender, remove all or whichever of its Improvements as Landlord directs, and in addition, at Landlord's election, demolish and remove the entirety of the reinforced concrete vault in the basement, and repair all damage to the Premises or Building caused by such demolition and removal. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Tenant shall repair any damage to the Premises occasioned by the installation or removal of Tenant's trade fixtures, furnishings, equipment, Improvements or Subsequent Alterations.         7.2    Landlord's Obligations: Landlord, at it's so1e cost and expense, shall maintain and keep in good repair the structural components of the Building, including the structural components of load bearing and exterior walls, the structural components of the roof and foundation; the structural components of the subf1oor, and the Building sewer, electrical and water service; provided, however that the cost of any such repairs required as a result of the negligence or willful act of Tenant, its agents, suppliers, customers or employees, or as a result of any Improvements or Subsequent Alterations made by Tenant or its contractors, shall be borne by Tenant. In addition, Landlord shall have the right to make any and all additional repairs and alterations to the Building and the Premises at such times and in such a manner as it deems necessary or prudent. Landlord shall have no obligation it make repairs under this Section until a reasonable time after receipt of written notice from Tenant of the need for such repairs. Landlord shall not be liable for damages or loss of any kind or nature by reason of Landlord's making of any alterations or repairs, or by reason of Landlord's failure to furnish any services or to make any repairs when such failure is caused by accident, breakage, repairs, strikes, lockout, or other Jabot disturbances or disputes of any nature, or by any other cause beyond the reasonable control of Landlord. Tenant expressly waives the benefit of California Civil Code Sections 1941 and 1942, and all similar laws and regulations which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition, and repair.  8.     UTILITIES AND SERVICE$   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        10          (a)    Tenant will arrange and pay for all utilities and services furnished to or used by it, including, without limitation, gas, electricity, water, sewer, telephone service, refuse disposal, cleaning, janitorial services, and sprinklering, heating, ventilation and air conditioning services, including connection charges and taxes thereon. All such utilities shall be separately metered and contracted for directly by Tenant, and Tenant hereby holds Landlord harmless from all costs and charges associated therewith. If any such costs or charges are not paid when due, Landlord may, but is not required to, pay such costs or charges, in which case Tenant shall immediately pay to Landlord as additional rent under this Lease all amounts so paid by Landlord together with any other costs incurred by Landlord in connection with the handling of such payments, including without limitation reasonable attorneys' fees and costs. In the event that the Premises cannot be separately metered for any of the foregoing utilities or services, Tenant shall pay at Landlord's option either Tenant's pro rata share or a reasonable portion to be determined by Landlord of all charges jointly metered with other premises at the property. Landlord shall not be liable in damages or otherwise for any failure or interruption of (i) any utility service furnished to the Premises, or (ii) the heating, ventilating, or air conditioning system. No such failure or interruption shall entitle Tenant to terminate this Lease or abate rent in whole or in part or to stop making any other payments due hereunder.         (b)    Landlord shall have no obligation to furnish to Tenant any of the utilities or services described in this Section, and in addition shall have no obligation to furnish janitorial services or trash disposal services to the Premises. Tenant, at its sole cost, shall store and cause to be removed on no less frequently than a weekly basis all garbage, refuse and trash. Tenant shall purchase and use tightly sealing rubber or plastic containers for the storage of all garbage, refuse and trash within the Premises until removed.  9.     SIGNS         9.1    Tenant's Signs: Subject to Tenant's compliance with all applicable laws and regulations of government entities and agencies and subject to obtaining Landlord's written approval thereof, which approval shall not be unreasonably withheld, Tenant shall be permitted to install and maintain at Tenant's sole cost reasonable business signs and awnings on the exterior of the Premises displaying Tenant's name and logo. Tenant shall at its sole cost maintain its signs in strict conformity with all federal, state and local laws, including without limitation those applicable due to the landmark status of the Building. If Landlord requests replacement of Tenant's exterior sign(s) as part of a general refurbishment or redecoration of the front of the Building, and not as a result of any governmental requirements, Tenant shall replace the sign(s) with new signs acceptable to Landlord; provided that Landlord shall reimburse Tenant for the cost of such Landlord-requested sign replacements.         9.2    Landlord's Signs: Landlord may at Landlord's discretion, install customary "For Lease" or "For Sale" signs on the Building at any time.  10.    MECHANICS' LIENS/ENCUMBRANCES   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        11          Tenant will pay all costs for construction and alterations done by it or caused to be done by it on the Premises, including without limitation the Improvements, Subsequent Alterations, and all other alterations, maintenance and repairs. Tenant will keep the Premises free and clear of all mechanics' liens and other encumbrances resulting from construction or alterations done by or for Tenant. Tenant shall defend, indemnify and hold Landlord and Landlord's property and the other Tenants in the Building, as well as each of their agents, officers, directors, trustees, employees, members and volunteers, harmless from any and all costs, claims, damages, liabilities and reasonable attorneys' fees arising out of any construction performed by or at the request of Tenant, on or around the Premises. If Tenant shall in good faith contest the validity of any lien, claim or demand, then Tenant shall, at its sole expense, defend itself and Landlord against the same and shall pay and satisfy any adverse judgment that may be rendered thereon before the enforcement thereof against Landlord or the Premises or the property of which the Premises is a part. If Landlord shall require, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to such contested lien claim or demand indemnifying Landlord against liability for the same and holding the Premises and the property of which the Premises is a part free from the effect of such lien or claim. In addition, if Landlord shall require, Tenant shall pay Landlord's attorney's fees and costs in participating in any such action if Landlord decides in its sole discretion that it is in Landlord's best interest to do so.   11.    INDEMNITY AND EXCULPATION         11.1   Exculpation of Landlord: Tenant hereby agrees that neither Landlord nor Indemnitees (defined in Section 11.2, below) shall be liable to Tenant for any damage to Tenant or Tenant's business for any reason, including without limitation for loss of income or for damage to the any property of Tenant, Tenant's employees, invitees, or customers or any other person in or about the Premises, nor shall Landlord or Indemnitees be liable for injury to the person of Tenant, Tenant's employees, agents, or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction, or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning, lighting fixtures, boilers, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Building or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Neither Landlord nor Indemnitees shall be liable for any damages arising from any act or neglect or any other tenant, occupant, or user of the property of which this Premises is a part, nor from the failure of Landlord to enforce the provisions of any other lease at the property.         11.2   Indemnity: Tenant shall indemnify and hold harmless Landlord and its agents, officers, directors, trustees, employees, members and volunteers (collectively "Indemnitees") from and against any and all claims arising from Tenant's use, occupancy, and enjoyment of the Premises or any other portion of the property of which the Premises is a part, and from Tenants use or storage in the Premises of any materials, including without limitation Hazardous Materials   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        12   (as defined in Section 26.1, below), and from the conduct of Tenant's business or from any activity, work, or things done, permitted, or suffered by Tenant in or about the Premises or elsewhere, and shall further indemnify and hold harmless Landlord and Indemnitees from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease or arising from any act or omission of Tenant or any of Tenant's agents, contractors, or employees, and from and against all costs, attorneys fees, expenses, and liabilities incurred in the defense of any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord or Indemnitees of any of them, by reason or any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord, and Landlord shall cooperate with Tenant in such defense. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property of Tenant in, upon or about thy property of which the Premises are a part arising from any cause and Tenant hereby waives all claims in respect thereof against Landlord and Indemnitees. The foregoing indemnity obligations shall include reasonable attorney fees, investigation costs, and all other reasonable costs incurred by Landlord and Indemnitees from the first notice that any claim or demand is to be made. The provisions of this section shall survive the expiration or termination of this Lease.  12.    INSURANCE         12.1   Tenant obligation: Tenant covenants and agrees that from and after delivery of possession of the Premises, Tenant will carry and maintain, at its sole cost and expense, the following types of insurance, in the amount specified and in the form hereinafter provided for:         (a)    LIABILITY: A commercial general liability or commercial general               liability, policy, written on an occurrence basis, and including               insurance against assumed or contractual liability under this               Lease with respect to the Premises and the operations of Tenant on               or about the Premises in which the limits with respect to personal               liability and property damages shall not be less than Five Million               Dollars ($5,000,000) per occurance         (b)    TENANT IMPROVEMENTS: All-risk property insurance covering all of               the Improvements and Subsequent. Alterations constructed by               Tenant, as well as all trade fixtures, merchandise and personal               property from time to time in, on or upon the Premises, in an               amount of not less than one hundred percent (100%) of their full               current replacement cost during the Term and in an amount               sufficient to avoid a coinsurance penalty, providing protection               against any peril included in the coverage called "Causes of Loss               - Special Form"         (c)    BUSINESS INTERRUPTION INSURANCE. Tenant shall keep in full force               and effect business interruption insurance for the same perils as               included in Sections   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        13                 12.l (b) and (c), providing limits in an amount equal to actual               loss sustained of Tenant's anticipated gross sales at the               Premises, less Tenant's costs.         (d)    CONSTRUCTION. The insurance coverages required by Landlord in its               reasonable discretion in connection with any and all remodeling,               alterations, additions, and improvements made by Tenant during the               Term.         (e)    WORKERS' COMPENSATION AND EMPLOYERS LIABILITY INSURANCE. Tenant               shall carry California statutory Workers' Compensation insurance               covering all employees, and Employer's Liability insurance, with               limits of not less than One Million Dollars ($1,000,000.00) Bodily               Injury each Accident, One Million Dollars ($1,000,000.00) Bodily               Injury by Disease each employee/policy limit.         12.2   Form of Tenant's Policies. All policies of insurance carried by               Tenant pursuant hereto shall be issued by insurance companies               which have a Best's Rating of "A" or better and which are               qualified and admitted to do business in the State of California.               Landlord and its agents, officers, directors, trustees, lenders,               employees, members and volunteers shall be named as "additional               insureds" on Tenant's liability policies. Executed copies of such               policies of insurance or certificates thereof shall be delivered               to Landlord within ten (10) days after delivery of possession of               the Premises, and thereafter executed copies of renewal policies               or certificates shall be delivered to Landlord within thirty (30)               days prior to the expiration of the term of each such policy. All               liability policies shall contain a Separation of Insureds or               Severability of Interests section providing, among other things,               that Landlord, although named as an additional insured, shall               nevertheless be entitled to recover under said policies for any               loss occasioned to it, its agents, officers, directors, trustees,               employees, members and volunteers, by reason of the negligence of               Tenant. All policies and/ or certificates thereof delivered to               Landlord must specify thereon the amount of deductible, if any,               and shall contain a provision that the company writing the policy               shall give to Landlord thirty (30) days' notice in writing in               advance of any cancellation or lapse or the effective date of any               reduction in the amounts of insurance. All liability and property               damage and other casualty policies shall be written as primary               policies, not contributing with, and not in excess of, coverage               which Landlord may carry.         12.2   Landlord Right to Procure. In the event that Tenant fails to procure, maintain and or pay for, at the times, for the duration and on the terms specified in Section 12 or in the Work Letter, any insurance herein required, or fails to carry insurance required by law or governmental regulation, Landlord may (but shall have no obligation to) at any time or from time to time, without notice, procure such insurance and pay the premiums therefor, in which event Tenant shall repay Landlord all sums paid by Landlord together with interest thereon as provided   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        14   elsewhere herein and any costs or expenses incurred by Landlord in connection therewith within ten (10) days following Landlord's written demand to Tenant for such payment.         12.4   Increase in Insurance Limits. Landlord shall have the right from time to time during the Term by written notice to Tenant to increase the limits of insurance Tenant is required to carry hereunder.         12.5   Increase in Insurance Rates. Tenant agrees that it will not, at any time during the Term, do anything in or about the Premises which will in any way tend to increase the insurance rates upon any insurance from time to time carried by Landlord in respect of the Building. Tenant agrees to pay to Landlord upon demand the amount of any increase in premiums for insurance against loss by fire or other casualty that may be charged; during the Term on the insurance carried by Landlord on the improvements of which the Premises are a part resulting from the foregoing or from Tenant doing any act in or about the Premises which does so increase the insurance rates, whether or not Landlord shall have consented to such act on the part of Tenant. If Tenant installs upon the Premises any equipment which would constitute an overload of the utilities of the Premises, Tenant shall, at its own expense, make in advance whatever changes are necessary to comply with the requirements of the insurance underwriters and any federal, state or local governmental authority having jurisdiction thereover, but nothing herein contained shall be deemed to constitute Landlord's consent to such overloading. Tenant shall, at its own expense, comply with all requirements of the insurance underwriters or any governmental authority having jurisdiction thereover which are necessary for the maintenance of reasonable all-risk property insurance for the Premises, including the installation of fire extinguishers or automatic dry chemical fire repressant and extinguishing systems.         12.6   Payment for Landlord's Insurance. Tenant shall pay, as additional rent, in accordance with Exhibit B, nine and one-half percent (9.5%) of all liability and property damage insurance which Landlord now carries or elects to carry in the future insuring itself, its agents, officers, directors, trustees, employees, volunteers and members, and the Building, the land upon which the Building and Premises are located, and the Premises, if any. Periodically, Landlord will notify Tenant of the cost of Landlord's insurance, and Tenant shall within ten (10) days of such notification pay in accordance with Exhibit B, nine and one-half percent (9.5%) of such sum to Landlord. Nothing in this Section shall require Landlord to carry liability or property damage insurance or to insure itself or the Building, land or Premises.  13.    DESTRUCTION         13.1   General: If, during the Term, at least one third (33-1/3 %)of the then replacement value of the Premises or the Building is damaged or destroyed from any cause other than Tenant's negligence or willful act (in which event Tenant shall complete all repairs at Tenant's sole expense), rendering them totally or partially inaccessible or unusable, Landlord at its sole election may either terminate this Lease or restore the Premises within a reasonable time and this Lease will in the latter event continue in full force and effect. If Landlord does not restore the Premises to a   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        15   tenantable condition within one hundred eighty (180) days after the date of the casualty, Tenant may terminate this Lease as Tenant's exclusive remedy. If Landlord elects to restore the Premises, Landlord will not be required to restore alterations made by Tenant, Tenant's improvements, Tenant's trade fixtures, or Tenant's personal property, such excluded items being the sole responsibility of Tenant to restore. If the destruction is less than one third (33 1/3J%) of the then replacement value, provided the damage is covered by insurance proceeds available to Landlord under Landlord's insurance policy, Landlord shall cause the damage to be repaired as reasonably economically and promptly as possible, reasonable allowance to be made for causes beyond Landlord's control. If destruction is less than on third (33 1/3%) of the then replacement value and is not covered by insurance proceeds available to the Landlord under Landlord's insurance policy, then Landlord at its sole election may either terminate this Lease or repair the destruction at Landlord's expense. If Landlord does not restore the Premises to a tenantable condition within one hundred and eighty (180) days after the date of the casualty, Tenant may terminate this Lease, as Tenant's exclusive remedy. During the period of any repairs to the Premises, rent shall abate proportionately to the extent of actual interference with Tenant's business, which extent shall be determined in Landlord's absolute discretion.         13.2   Waiver of Civil Code Sections: Tenant waives the provisions of Civil Code Section 1932(2) and Section 1933(4) with respect to any damage or destruction of the Premises.         13.3   Damage Near End of Term. If at any time during the last year of the Term there is substantial damage, as determined by Landlord in its absolute discretion, whether or not the loss occasioned by such damage is insured, Landlord may at Landlord's' option cancel and terminate this Lease by giving thirty (30) days' prior written notice to Tenant of Landlord's election to do so within sixty (60) days after the date of occurrence of such damage.  14.    CONDEMNATION         If the Premises are totally taken by condemnation, this Lease will terminate on the date of taking. Either Landlord or Tenant may elect to terminate this Lease if fifty percent (50%) or more of the total number of square feet of the Premises is taken, or if, in Landlord's sole discretion, the remaining portion of the Building rendered unsuitable for Tenant's continued use of the Premises for the purposes permitted herein.         If either party elects to terminate this Lease as permitted herein, that party must exercise its right to do so by giving notice to the other party within ninety (90) days after the nature and extent of the taking have been finally determined. If a party elects to terminate this Lease as permitted herein, that party shall also notify the other party of the date of termination, which date shall not be earlier than thirty (30) days nor later than one hundred twenty (120) days after the terminating party has notified the other party of its election to terminate; except that this Lease shall terminate on the date of taking if the date of taking falls on a date before the date of termination as designated by the terminating party. If neither party elects to terminate this Lease within the ninety (90) day period, this full force and effect, except that minimum monthly rent shall be reduced as set forth herein.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        16          If any portion of the Premises is taken by condemnation and this Lease remains in full force and effect, on the date of taking the monthly rent shall be reduced by an amount that is in the same ratio to monthly rent as the total number of square feet in the Premises taken bears to the total number of square feet in the Premises immediately before the date of taking.         If there is a partial taking of the Premises and this Lease remains in full force and effect, Tenant shall, at its expense, restore, with due diligence, the remainder of the improvements occupied by Tenant so far as practicable to a complete unit bf like quality, character and condition as that which existed immediately prior to the taking.         Rent shall be abated or reduced during the period from the date of taking until the completion of restoration. The abatement or reduction of rent shall be based on the extent to which the restoration interferes with Tenant's use of the Premises.         Landlord shall be entitled to receive and retain the entire award or compensation for the affected lands, Building and improvements of which the Premises are apart, and Tenant shall not be entitled to any portion thereof. This provision will not bar Tenant from seeking any compensation to which Tenant may be entitled directly from the condemning agency.  15.    DEFAULT         15.1   Tenant's Default: The occurrence of any of the following will constitute an "Event of Default" by Tenant:         (a)    Failure to pay any rent or any other financial obligation of               Tenant under this Lease when due if not cured within ten (10) days               after written notice of such failure to pay.         (b)    Abandonment or vacation of the Premises (once Tenant's bank has               opened for business, failure to occupy and operate Tenant's               business in the Premises for thirty (30) consecutive business days               will be4eemed an abandonment and vacation).         (c)    Failure to perform any provision of this Lease other than a               provision to pay rent or any other financial obligation, if not               cured within thirty (30) days after written notice has been given               to Tenant, provided that if the Tenant has commenced to cure               within such thirty (30) day period and is diligently pursuing a               cure, Tenant shall have an additional thirty (30) days to complete               the cure.         (d)    Failure to keep the Premises open for business during regular               business hours for reasons other than force majeure.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        17          (e)    Appointment of a receiver by or for Tenant's business, or the               assignment of all or substantial portion of Tenant's assets for               the benefit of creditors, or any unauthorized assignment,               encumbrance or sublease as described in Section .15.2 below.         15.2   Assignment and Subletting: Tenant will neither voluntarily nor involuntarily assign or encumber its interest in this Lease or in the Premises, or sublease the Premises, or allow any other person or entity to occupy or use the Premises without first obtaining Landlord's written consent, which may not be unreasonably withheld, conditioned or delayed.         (a)    Any of the previous acts without consent shall be void and shall,               at the option of Landlord, constitute a noncurable default under               this Lease. In connection with each consent requested by Tenant               hereunder, Tenant shall submit to Landlord in writing the terms of               the proposed transaction, the identity of the parties to the               transaction, the proposed documentation for the transaction, and               all other information reasonably requested by Landlord concerning               the proposed transaction and the parties involved.         (b)    Without limiting other instances in which Landlord may reasonably               withhold consent to an assignment or subletting, Landlord and               Tenant acknowledge that it shall be reasonable for Landlord to               withhold consent in any of the following instances:                (i)    if at the time consent is requested or at any time prior to                      the granting of consent, an Event of Default has occurred                      under this Lease or if Tenant is in monetary default under                      this Lease or would be in monetary default under this Lease                      but for the pendency of any grace or cure period under                      Section 15.1;                (ii)   if the proposed assignee or subtenant is a governmental                      agency;                (iii)  if, in Landlord's reasonable judgment, use of the Premises                      by the proposed assignee or subtenant would not be                      compatible to the use by other tenants in the Building,                      would entail alterations that would materially lessen the                      value of the Improvements or Subsequent Alterations in the                      Premises (unless Tenant provides adequate security to                      ensure that the Premises will be restored to their prior                      condition pursuant to Sections 1.5 and 7.1), would result                      in more than a reasonable number of occupants per floor, or                      would require substantially increased services by Landlord;   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        18                 (iv)   if Landlord reasonably determines that circumstances                      warrant a consideration of the financial worth of a                      proposed assignee or subtenant, and the financial worth, in                      Landlord's reasonable judgment, does not meet the credit                      standards applied by Landlord for other tenants under                      leases with comparable terms; or                (v)    if, in Landlord's reasonable judgment, the character,                      reputation, or business of the proposed assignee or                      subtenant is not consistent with the quality and character                      of the Building and the Post Street east of Mason Street                      area, or other comparably high-value location, of the San                      Francisco Union Square retail district.         The foregoing is not deemed to be an exhaustive statement of the standards to be applied and other commercially reasonable considerations may properly enter into Landlord's decision. Consent to any assignment or subletting shall not be deemed to release Tenant from any obligations under this Lease, all of which obligations shall continue as joint and several with the assignee or subtenant, and shall not be deemed to constitute consent to any subsequently attempted assignment or subletting. The acceptance of a rental by Landlord from any other person shall not be deemed a waiver by Landlord of any provision of this Lease.         Any assignment, encumbrance, or sublease without Landlord's written consent will be voidable and, at Landlord's election, will constitute a non-curable default and ground for termination of this Lease.         Except as permitted herein, voluntary assignment includes a transfer of fifty-one percent (51%) of the stock of Tenant (either in a single transaction or cumulatively in successive transactions), or change in ownership by Tenant in any form.         If Tenant requests Landlord to consent to a proposed assignment or subletting, Tenant will pay to Landlord, whether or not consent is ultimately given, Landlord's reasonable attorneys' fees and other costs incurred in connection with each such request. As an alternative to approving any requested assignment or sublease, Landlord shall have the option upon receipt of a request from Tenant for approval of an assignment or sublease, to sublet the Premises or that portion proposed to be assigned or sublet from Tenant at the rental and other terms in Tenant's notice or, in the alternative, to cancel this Lease with respect to the portion or all of the Premises proposed to be assigned or subleased and to recover possession thereof for Landlord's use or lease to any party, including without limitation Tenant's proposed assignee or subtenant.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        19          No interest of Tenant in this Lease will be assignable by operation of law. Each of the following acts without limitation will be considered an involuntary assignment and a breach of this Lease:         (a)    Levy or writ of attachment or execution on this Lease;         (b)    Appointment of a receiver to take possession of the Premises,               which receiver is not dismissed within sixty (60) days.         (c)    Dissolution or suspension of corporate good standing of Tenant.         An involuntary assignment will constitute a breach by Tenant and Landlord will have the right to elect to terminate this Lease, in which case this Lease will not be treated as an asset of Tenant.  16.    LANDLORD'S REMEDIES         16.1   Cumulative Nature of Remedies: Landlord will have the remedies provided in this Section if Tenant commits a default or an event of Default occurs. These remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law or equity.         16.2   Tenant's Right to Possession Not Terminated: Landlord has the remedy described in California Civil Code Section 1951.4, to continue this Lease in full force and effect after Tenant's breach and abandonment and to recover rent as it becomes due, in light of the provisions of Section 15.2 of this Lease regarding Tenant's right to sublet or assign subject to Landlords' reasonable limitations, as long as Landlord does not terminate Tenant's right to possession, and in that case Landlord will have the right to collect rent and enforce other obligations when due. During the period Tenant is in default or an Event of Default has occurred and after expiration of the applicable cure period, Landlord may enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant will be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling if remodeling is reasonably necessary to more promptly secure a replacement tenant in mitigation of Landlord's damages, and like costs.         Reletting maybe for a period shorter or longer than the remaining term of this Lease. Tenant will pay to Landlord the rent and other charges due under this Lease on the date the rent and other changes are due, less the rent Landlord receives for any reletting. No act by Landlord allowed by this Section will terminate this Lease unless Landlord notifies Tenant in writing that Landlord expressly elects to terminate this Lease. After Tenant's default or an Event of Default and for as long as Landlord does not terminate Tenant's right to possession of the Premises, if Tenant obtains Landlord's written consent in accordance with the provisions of Section 15.2,   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        20   Tenant will have the right to assign or sublet its interest in this Lease in accordance with Section 15.2, but Tenant will not be released from any liability hereunder.         If Landlord elects to relet the Premises as provided in this Section, rent that Landlord receives from reletting will be applied to the payment of:         First, any indebtedness from Tenant to Landlord other than rent and other        charges due from Tenant;         Second, all costs, including maintenance, incurred by Landlord in        reletting;         Third, rent and all other charges due and unpaid under this Lease.         After deducting the above payments, any sum remaining from the rent Landlord receives from reletting will be held by Landlord and applied in payment of future rent as rent and all other charges become due under this Lease. In no event will Tenant be entitled to any excess rent received by Landlord. If, on the date rent is due under this Lease, the rent received from the reletting is less than the rent due on the date, Tenant will pay to Landlord, in addition to the remaining rent due, all costs, including maintenance, Landlord incurs in reletting as provided in this Section.         16.3   Termination of Tenant's Right to Possession: Landlord may terminate Tenant's right to possession of the Premises at any time after Tenant's default or an Event of Default and after expiration of the applicable cure period. No act by Landlord other than giving express written notice of termination to Tenant will terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease will not constitute a termination of Tenant's right to" possession or obligation to pay rent. On termination, Landlord has the right to recover from Tenant:         (a)    The worth, at the time of the award, of the unpaid rent that had               been earned at the time of termination of this Lease;         (b)    The worth, at the time of the award, of the amount by which the               unpaid rent that would have been earned after the date of               termination of this Lease until the time of the award exceeds the               amount of the loss of rent that Tenant proves could have been               reasonably avoided;         (c)    The worth, at the time of the award, of the amount by which the               unpaid rent or the balance of the Term after the time of award               exceeds the amount of the loss of rent that Tenant proves could be               reasonably avoided; and   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        21          (d)    Any other amount, including reasonable attorneys' and/or experts'               fees and expenses and court costs, necessary to compensate               Landlord for all detriment proximately caused by Tenant's default               and the Event of Default.         "The worth, at the time of the award," as used in subsections (a) and (b) above, will be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth, at the time of the award," as referred to in (c) above, will be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1 %).         16.4   Landlord's Right to Cure Tenant's Default: Landlord, at any time after Tenant commits a default, may (but is under no obligation to) cure the default at Tenant's expense. If Landlord at any time, by reason of Tenant's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord will be due immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date will bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, will be additional rent.  17.    LANDLORD'S ENTRY ON PREMISES         Landlord and its authorized representatives will have the right to enter the Premises at reasonable times on reasonable advance notice for any of the following purposes, always providing that the entrance to the Premises shall not be blocked thereby during Tenant's normal business hours, and further providing that the business of Tenant shall not be unreasonably interfered with:         (a)    To determine whether the Premises are in good condition and               whether Tenant is complying with its obligations under this Lease.         (b)    To do any necessary maintenance and repairs, and to make any               restorations to the Premises or to protect the Premises from               adjacent construction. Landlord's exercise of this right to enter               for maintenance and repairs shall not be construed to impose any               obligation upon Landlord not otherwise expressly provided for in               this Lease.         (c)    To post notices of "for sale," "for lease" or "for rent" as               appropriate or to show the Premises to brokers, agents, buyers,               tenants, or other persons interested in the Premises at any time               during the term.         Landlord shall have the further right to enter the Premises for the purposes of: installing and maintaining, pipes, ducts, conduits and other utility lines in or through the Premises to serve other Premises in the Building; access to the space in the Building immediately south of the Premises to aid in the work of constructing a rear exit system serving the Premises and other   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        22   portions of the Building; and installation and maintenance of features designed to improve the safety and life safety systems of the Building. Landlord's exercise of this right shall not impose any obligation upon Landlord not otherwise expressly provided for in this Lease.  18.    NOTICE AND SERVICE         18.1   General Notices: All notices and other matters shall be sent to:  Landlord:  In Duplicate to:  The President and The Executive Director and The Building Manager of the Mechanic's Institute 57 Post Street San Francisco, CA 94104  Tenant:  Sequoia National Bank  /s/ GARY CRISTOFANI  - --------------------------  - --------------------------   With a copy to:  - --------------------------------  - --------------------------------  - --------------------------------   or to any other address that a party may designate in writing from time to time during the term of this Lease. Any notices required to be given hereunder by any party hereto shall be deemed have been properly and sufficiently given if sent by certified mail, facsimile or hand delivery at the address of the other party as set forth in this Lease or at such other address as the other party may from time to time direct in writing. Any such notice shall be deemed to have been received if sent by certified mail, five (5) days after the date of mailing; if faxed, forty-eight (48) hours after the time of telecopying or faxing; and if hand delivered, upon the date of delivery. If mailing or fax is interrupted by strike, slowdown, force majeure or other cause, a notice sent by the impaired means of communication will not be deemed to have been received until actually received, and the party sending the notice shall utilize any other such services which have not been so interrupted or shall hand deliver such notice in order to ensure prompt receipt thereof.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        23          18.2   Legal Notice and Process: Tenant may be served by Landlord or its agent or successors by delivery of a copy of any legal process to the above person and address or to the person apparently in charge of the Premises during normal business hours.  19.    WAIVER         No delay or omission in the exercise of any right or remedy of Landlord on any default by Tenant will impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any default or Event of Default must be expressly made in writing and will not be a waiver of any other default or Event of Default concerning the same or any other provision of the Lease.  20.    ATTORNEYS FEES  If Landlord becomes a party to any litigation concerning this Lease, the Premises, the Building, the land on which the Building is situated, or other improvements situated upon that land, Tenant will be liable to Landlord for Landlord's reasonable attorneys' and experts' fees and court costs incurred by Landlord in the litigation, unless such litigation is primarily concerning issues relating to Landlord's ownership or operation of the Building, arid is not related to this Lease. Tenant shall also reimburse Landlord on demand for all reasonable legal, engineering and other professional services expenses incurred by Landlord in connection with all requests by Tenant for consent or approval hereunder, and for all reasonable legal and other professional fees and expenses incurred in the preparation and service of notices of default or other notices hereunder, whether or not such notices result in the filing of any legal proceedings against Tenant.         If either Landlord or Tenant commences an action against the other arising out of or in connection with this Lease, the prevailing party will be entitled to have and recover from the other party reasonable attorneys' and experts' fees and costs of suit.  21.    SURRENDER OF PREMISES AND HOLDING OVER         21.1   Surrender of Premises: As set forth in Sections 1.5 and 7.1, upon expiration of the Term, Tenant will surrender the Premises and all Improvements and Subsequent Alterations to Landlord in the same condition as when they were first completely installed, clean and free of debris, ordinary wear and tear excepted, unless Landlord elects to require Tenant to remove some or all of its Improvements or Subsequent Alterations, and Tenant will remove all its personal property from the Premises.         Landlord may elect, without any liability to Landlord at Tenant's cost, to retain or dispose of in any manner any alterations personal property the Tenant doesn't remove from the Premises on expiration or termination of the Term by giving ten (10) days' notice to Tenant.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        24   Title to any such alterations or Tenant's personal property that Landlord elects to retain or dispose of on expiration of the ten (10) day period will vest in Landlord.         21.2   Holding Over: If Tenant with Landlord's consent, remains in possession of the Premises after expiration or termination of the Term, or after the date in any notice given by Landlord to Tenant terminating this Lease, such possession by Tenant will deemed to be a month-to-month tenancy terminable on thirty (30) days notice given at any time by either party. All provisions of this Lease, except those pertaining to Term, rent, and Option to Extend, will apply to the month-to-month tenancy, except that the Base Monthly Rent payable during said tenancy shall be one hundred and fifty percent (150 %) of the Base Monthly Rent payable hereunder in the month preceding such termination or expiration.  22.    TENANT'S FIXTURES         Tenant shall have the right to install, at its expense, such fixtures as it may require in the conduct of its trade or business, providing that the same shall not be installed so as to damage the Building (except that it is understood and agreed that some minor damage may occur, which damage shall be repaired by Tenant at its sole expense) and providing that all such installations are approved by Landlord as part of Tenant's Plans.  23.    FORCE MAJEURE         If either Landlord or Tenant is delayed or hindered in or prevented from the performance or any term, covenant, or act required hereunder by reasons of strikes, labor troubles, inability to procure materials or services, power failure, restrictive governmental laws or regulations, riots, insurrection, sabotage, rebellion, war, terrorism, act of God, or other reason of a like nature which is beyond the control of the party affected, then the performance of that term, covenant, or act is excused for the period of the delay and the party delayed will be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay.  24.    MISCELLANEOUS PROVISIONS         24.1   Exhibits: All Exhibits referred to and attached to this Lease are incorporated by reference as part of this Lease.         24.2   Interpretation, Jurisdiction and Venue: This Lease will be construed and interpreted in accordance with the laws of the State of California, as if made, executed and performed entirely in California. Tenant hereby expressly agrees that jurisdiction and venue for purposes of any action or proceeding arising out of or in connection with this Lease or brought by, between or among Landlord or its representatives or successors, and Tenant or its representatives or successors, shall be in the Superior Court for the State of California in and for the City and County of San Francisco, and Tenant hereby expressly waives any and all rights it   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        25   now has or may in the future have to bring or remove any action or proceeding arising out of or in connection with this Lease in or to Federal Court, and waives all Federal Court jurisdiction for any and all such claims.         24.3   Integration; Modification: This Lease contains, inc1uding all Exhibits, all the agreements of the parties and cannot be amended or modified except by written agreement. There are no understandings, representations, promises or agreements between the parties relating to Tenant's occupancy of the Premises or this Lease which are not set forth in this Lease, and all previous documentation and agreements between the parties are hereby superceded and cancelled, and this Lease represents the full and final agreement between the parties.         24.4   Covenants and Conditions: All provisions whether covenants or conditions on the part of Tenant will be deemed to be both covenants and conditions.         24.5   Captions, Singular and Plural: The captions of this Lease will have no effect on its interpretation. When required by the context of this Lease the singular will include the plural.         24.6   Joint and Several Obligations: "Party" will mean Landlord or Tenant; and if more than one person or entity is Landlord or Tenant, the obligations imposed on that party will be join and several.         24.7   Severability: The unenforceability, invalidity, or illegality of any provision of this Lease will not render any other provisions unenforceable, invalid or illegal.         24.8   Estoppel Certificate: At any time during the Term, from time to time, at Landlord's or Tenant's written request and with twenty (20) days' notice, either party shall promptly execute and deliver to the requesting party, or to any prospective purchaser or mortgagee of all or any part of the property of which the Premises is a part, an Estoppel Certificate containing such certifications and statements about this Lease and the Premises as Landlord or Tenant may reasonably request. It is intended that any such Estoppel certificate may be relied on as complete and truthful by any such prospective purchaser or mortgagee.         24.9   Time is of the Essence: Time is of the essence in the performance of each and every obligation of the Tenant under this Lease.         24.10  Liability of Landlord: The liability of Landlord and its agents, officers, directors, trustees, employees, members and volunteers to Tenant and under this Lease is expressly limited to the value of Landlord's current interest in the Building the property upon which it is located and any applicable insurance maintained by Landlord covering liabilities arising from this Lease. No recourse shall be had to any other assets of Landlord or its agents, officers, directors, trustees, members or volunteers.   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        26          24.11  Corporate Authority: Each individual signing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant, and that this Lease is binding on Tenant in accordance with its terms. Upon delivery of this Lease executed by Tenant, Tenant shall also deliver to Landlord a certified copy of a resolution of its board of directors authorizing such execution and delivery.         24.12  Brokerage Fees: Landlord and Tenant warrant and represent to each other that neither has dealt with any real estate broker or agent, in connection with this Lease or its negotiation. Landlord and Tenant shall indemnify and hold each other harmless, from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Landlord or Tenant. This provision shall survive termination of this Lease.         24.13  Notice and Consents in Writing: All notices that tenant shall be required to give to Landlord, and all consents that tenant shall be required to obtain from Landlord shall be given or obtained in writing.  25.    COMPLIANCE WITH LAWS         Except as otherwise provided in this Lease, Tenant shall at Tenant's sole cost and expense, fully, diligently, and in a timely manner, comply with all Laws, covenants, easements and restrictions of records, permits, the requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to the Premises, the Environmental Laws, applicable building codes, and the California Building Code now in effect or which may hereafter come into effect. Tenant's obligations hereunder shall include the obligation to make all required alterations and improvements to the Premises and any area of the Building to which such Applicable Law is or in the future is applied (other than improvements to the structural components of the roof, exterior walls, subfloor or foundation, which shaft be the Landlord's responsibility), and which is required or occasioned by Tenant's occupancy, Improvements or alterations. Tenant shall, within ten (10) days after receipt of Landlord's written request, provide Landlord with copies of all documents and information, including, but not limited to, permits, registrations, manifests, application, reports and certificates, evidencing Tenant's compliance with all of the foregoing, and shall immediately upon receipt, notify Landlord in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure or the alleged failure by Tenant or of the Premises comply with any Law or other matter specified herein.  26.    HAZARDOUS MATERIALS         26.1   Definition: As used in this Lease, the term "Hazardous Material" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, inc1uding any substances defined as or included in the definition of   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        27   "hazardous substances", "hazardous wastes", "hazardous materials", or "toxic substance" now or subsequently regulated under any applicable federal, state or local laws or regulations ("Environmental Laws"), including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. As used in this Lease, the terms "disposal" and "release" shall have the same meaning as set forth in the Environmental Laws. As used in this Lease, "Post-Lease Date Hazardous Material" means any Hazardous Material which is generated, produced, brought upon, used, stored, released, treated or disposed or in, on or about the premises or which migrated there from at any time (commencing with Tenant's occupancy of the Premises) and including during the Term of this Lease and during the term of any prior lease of the Premises to Tenant or any affiliated entity, by reason of any act or omission of Tenant, its agents, employees, contractors, subtenants or invitees or such affiliated prior tenant.         26.2   Tenant's Obligations as to Hazardous Material: Landlord is not aware of the presence of any Hazardous Materials in the Premises. Tenant shall make a thorough inspection of the Premises in connection with design and construction of the Improvements and notify Landlord immediately if any Hazardous Materials are discovered. Except for Hazardous Materials so discovered by Tenant and reported to Landlord in writing within ten (10) days after possession of the Premises is delivered to Tenant, which shall be Landlord's responsibility, any and all Hazardous Materials found to exist in the Premises shall be conclusively deemed to be Post-Lease Date Hazardous Material. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, released, treated or disposed of in or about the Premises by Tenant, its agents, employees, contractors, subtenants or invitees without the prior written consent of Landlord and any lender holding a security interest in the Premises (collectively "Lender"), and any such activity consented to by Landlord and Lender ("Consented to Hazardous Materials Activity") shall be conducted in compliance with all applicable federal, state and local laws, regulations and ordinances, including without limitation the Environmental Laws. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed Consented to Hazardous Materials Activity. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Premises.  With respect to Consented to Hazardous Material Activity, Tenant shall (i) bear all legal, financial and other responsibility for ensuring that such Hazardous Material shall be used, kept and stored in a manner which strictly complies with all Environmental Laws; (ii) take any necessary remedial action if and when so ordered by governmental authorities with jurisdiction over such Hazardous Material; (iii) remove, in a manner consistent with the Environmental Laws, all such Hazardous Material from the Premises before the end of the Term or earlier termination of the Lease; and (iv) indemnify, defend and hold Landlord and Indemnitees (as defined in Section 11.2, above) harmless from any and all claims, demands, damages and liabilities caused in whole or in part, directly or indirectly, by such Hazardous Material (which is   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        28   in addition to any other indemnity set forth in this Lease) Tenant's obligations under this Section shall survive the termination of this Lease whether by expiration of the Term or any other or earlier termination.         If Tenant knows, or has reasonable cause to believe, that a Hazardous Material (other than ordinary cleaning materials or materials customarily used in Tenant's business in de minimis quantities and in full compliance with all Environmental Laws), or a condition involving or resulting from Hazardous Materials, has come to be located in, on, under or about the Premises, other than as previously consented to by Landlord and Lender, Tenant shall immediately give written notice of such fact to Landlord. Tenant shall also immediately give Landlord a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Material or contamination in, on or about the Premises, including but not limited to all such documents as may be involved in any permitted use of Hazardous Material on the Premises.         Tenant authorizesL~d.1ord and its agents to enter upon the Premises to make inspections and tests as they may deem appropriate to determine Tenant's compliance with this Section 26. Such entry will be after reasonable notice at reasonable times and without material interference to Tenant's business unless an emergency is reasonably believed to exist, in which case no notice is required.  27.    SUBORDINATION AND NON-DISTURBANCE         This Lease is and at all times during the term of this Lease shall be superior and have priority over any lien, mortgage, deed of trust, or encumbrance (collectively referred to as "encumbrance") recorded after the date of this Lease affecting the Premises, Building, other improvements, and land of which the Premises are a part. If, however, a lender requires that this Lease be subordinate to any such encumbrance, this Lease shall be subordinate to that encumbrance, provided that such lender has delivered a non-disturbance agreement reasonably acceptable to Tenant.         Tenant shall attorn to any purchaser of Landlord, whether in the ordinary course of a sale of the Building or property, at any foreclosure sale, or to any grantee or transferee designated in any deed given in lieu of foreclosure.         Upon twenty (20) days' written notice, Tenant shall execute such written agreements and other documents reasonably required by the Lender to accomplish the purposes of this Section.  28.    CONFIDENTIALITY   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        29          Both parties agree to keep the terms of this Lease strictly confidential and neither part will voluntarily disclose such terms to any third party whatsoever, including without limitation Villeroy & Boch Tableware LTD or any of its parents companies, subsidiaries, agents, employees, or attorneys, without the prior written consent of the other, which consent may be withheld in that other party's sole and absolute discretion. Disclosure by either party pursuant to judicial process, or disclosure by Landlord to its auditors or advisors, or by Landlord in connection with any contest of real property taxes, or by Landlord in connection with a proposed sale or financing of the property in which the Premises are located, or disclosure by Tenant to Tenant's accountant, business advisors or others for confidential purposes only and subject to a confidentiality agreement identical to this Section 28, is specifically permitted.  29.    ADDITIONAL PROVISIONS         The exhibits listed below are incorporated by reference in this lease.         Exhibit "A" (3 pages) - Premises commonly known as 65 Post Street, San Francisco California, consisting of Street level area, basement area, and mezzanine area         Exhibit "B" (2 pages) - January 28, 2003 Expense Calculation for taxes and insurance        IN WITNESS WHEREOF Landlord and Tenant have executed this Lease on       This 1st day of May 2003.   Landlord:                                 Tenant: Mechanics' Institute,                     Sequoia National Bank, A California Nonprofit Public             A California Corporation Benefit Corporation   By: /s/ JAMES M. FLACK                    By: /s/ GARY CRISTOFANI     ---------------------------------         ----------------------------------   Its: Executive Director                   Its:  CFO     ---------------------------------         ----------------------------------   Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        30                                EXHIBIT "A" page 1 of 3 Premises commonly known as 65 Post Street, San Francisco, California, consisting             of Street level area, basement area, and mezzanine area                                     [GRAPHIC OMITTED]     Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        31                                EXHIBIT "A" page 2 of 3 Premises commonly known as 65 Post Street, San Francisco, California, consisting             of Street level area, basement area, and mezzanine area                                     [GRAPHIC OMITTED]      Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        32                                EXHIBIT "A" page 3 of 3 Premises commonly known as 65 Post Street, San Francisco, California, consisting             of Street level area, basement area, and mezzanine area                                     [GRAPHIC OMITTED]      Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        33                                  [GRAPHIC OMITTED]                               MECHANICS' INSTITUTE                     A GENERAL-INTEREST LIBRARY & CHESS ROOM  JAMES M. FLACK                                                   415-393-0117 Executive Director                                     Fax:      415-421-1770                                                        net: jflack@MILibrary.org                              EXHIBIT "B" page 1 of 2           January 28, 2003 Expense Calculation for Taxes and Insurance                                                         January 28, 2003  Sequoia Bank Lease - ------------------  Expense calculations: - ---------------------  Sequoia Bank premises is                 5,225 sq ft Net Rentable Area  Sequoia Bank premises is                 5,747 sq ft Gross Rentable Area (@ 10%                                          Net to Gross)  Mechanics' Institute occupies           25,750 sq ft of Gross building area. Tenants occupy                          34,483 sq ft of Gross building area.                                         ------ 57 Post Street is                       60,233 sq ft Gross Building Area  Taxes: - ------  Mechanics' Institute's 25,750 sq ft GBA area is not taxed. The balance of the building (34,483 sq ft GBA) was taxed $16,772 last year.  Sequoia Bank's proportional share of the tax bill is: 5,747 / 34,483 = 16.7%  Last year this would have been 16.67% x $16,772 = $2,800 which is only 49 cents/ sq ft/yr.  Insurance: - ----------  Sequoia Bank's proportional share of the building's insurance bill is 5,747 / 60,233 = 9.5%  Last year this would have been 9.5% x $28,056 = $2,665 which is only 46 cents/ sq ft/yr.  Attached is the insurance bill allocation between the building at 57 Post Street and Mechanics' Institute as a business.               Mechanics' Institute   57 Post Street   San Francisco CA 94104                                 www.MILibrary.org     Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        34                               EXHIBIT "B" page 2 of 2           January 28,2003 Expense Calculation for Taxes and Insurance                                 Mechanics' Institute                           Insurance Premium Allocation                              September 1, 2002-2004                                                                                    9-1-02 to 8-31-03 Building                                  Premiums            years          Current Yr Building Insurance                          18,957              2                 9,479 Rental Income                                1,064              2                   532 Liability                                   15,727              2                 7,864 Liability (Building rented to others)       12,609              2                 6,305 Umbrella (other than Mechanics')             7,755              2                 3,878                                            -------                              -------                    Subtotal                          56,112                                    $  28,056  Mechanics' Institute Contents                  705              1* Mechanics' Institute Business Income         1,103              2 Liability - Library                         13,848              1* Liability - Clubs                            2,726              2 Non-owned and hired auto                     1,960              2 Library computers                              290              1* Umbrella - Mechanics' Institute              8,863              2                                            -------                     Subtotal                          29,495                                                     -------                  Grand Total                          85,607   Note Package Premium is on a 2 year rate lock term                  70,764 Property Floater is on a 1 year term*                          14,843                                                               -------                                                                85,607       Mechanics' Bank Institute / Sequoia Bank Lease CLEAN (V -3 03 25 03 SRCM)                                        35                     ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT            THIS ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT ("Agreement") is made and entered into to be effective as of April 30, 2005 ("Effective Date"), by and among THE MECHANICS INSTITUTE, a California Nonprofit Public Benefit Corporation ("Landlord"), SEQUOIA NATIONAL BANK, a California corporation ("Assignor") and FIRST NATIONAL BANK OF NORTHERN CALIFORNIA, a California corporation ("Assignee"), with reference to the following facts.                                      RECITALS         A.     Assignor is the existing tenant under that certain Lease dated May 1, 2003, by and between Landlord and Assignor, as tenant (the "Lease") pursuant to which Landlord leased to Assignor, and Assignor leased from Landlord, those certain premises located at 65 Post Street, San Francisco, California, as more particularly described in the Lease ("Premises"). All capitalized terms used in this Agreement and not defined in this Agreement will have the respective meanings ascribed to such terms in the Lease.         B.     Assignor desires to assign all of its right, title and interest in, and obligations under, the Lease to Assignee, and Assignee desires to accept such assignment and assume such obligations, all on the terms and conditions set forth below.         C.     Landlord agrees to consent to the proposed assignment on the conditions set forth below.         NOW, THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:         1.     Assignment. Effective as of the Effective Date, Assignor hereby grants, transfers and assigns to Assignee all of its right, title and interest in, and delegates to Assignee all of its obligations under, the Lease. A true, correct and complete copy of the Lease is attached hereto as Exhibit A and is by this reference incorporated herein.         2.     Assumption. Assignee accepts such assignment and delegation, assumes the Lease, agrees to pay all rent and other charges accruing under the Lease from and after the Effective Date, and agrees to observe and perform all of the other covenants, agreements and obligations to be observed and/or performed by the tenant under the Lease from and after the Effective Date. Assignee agrees that it has inspected the Premises and hereby agrees to take the Premises in the condition existing upon the Effective Date.         3.     Assignor's Continuing Liability, Assignor shall remain obligated to Landlord for the full performance of all covenants, conditions, obligations and duties required of it as tenant under the Lease and shall not be relieved of any such performance thereunder as a result of this Agreement. However, as of the Effective Date, Assignor shall have no continuing or                                          1   future possessory rights in and to the Premises and thereafter waives any rights it may possess to receive notice from Landlord relative to this Agreement or the Lease.         4.     Assignor's Representations and Covenants. Assignor represents and warrants as follows:                a.     That the Lease is in full force and effect; that Assignor's interest therein is free and clear of all encumbrances; and that Assignor has fully performed all covenants and obligations under the Lease and has not done or permitted any acts in violation of the covenants contained in the Lease.                b.     That Assignor has not heretofore assigned, mortgaged, hypothecated or otherwise transferred, amended or encumbered, voluntarily or involuntarily, the Lease or its interest therein.                c.     That Landlord has fully performed all of the covenants and obligations on its part to be performed and observed under the Lease; that Landlord has not done or permitted any act or acts in violation of any of the covenants, provisions or terms thereof; and that there is not now in existence any reason or claim to offset, deduct, or decrease any payments due under the Lease.         5.     Trade Name. Assignee agrees that it will conduct business at the Premises under the name of First National Bank of Northern California, and shall not change the name of said business without Landlord's prior written consent. In the event that Assignee desires to change such name, Assignee will notify Landlord in writing of such proposed change, and Landlord agrees not to unreasonably withhold its approval thereto.         6.     Insurance for Tenant Improvements. From and after the Effective Date, the reference in Section 12(b) of the Lease to "Improvements and Subsequent Alterations constructed by Tenant" shall mean and refer to Improvements and Subsequent Alterations constructed both by Assignor and by Assignee.         7.     Consent: Options to Extend. Landlord hereby consents to this Agreement and to the assignment and assumption made herein; provided, that such consent is limited to the assignment and assumption made herein and shall not relieve Assignee from the obligation to obtain the consent of Landlord to any future assignment of the Lease or sublease of the Premises, or any portion thereof or interest thereof. Notwithstanding the provision in Section 2.3 of the Lease that provides that the Options to Extend are personal to Assignor and may not be assigned, Landlord grants Assignee the right to exercise the Options to Extend on the terms and conditions set forth in Section 2.3 of the Lease.         8.     Security Deposit. The parties acknowledge that Landlord now holds the sum of One Hundred Thousand Dollars ($100,000.00) to be applied subject to the Provisions of the Lease. Assignor releases all claims to that sum, and agrees that the sum shall be held by Landlord in accordance with Section 3.5 of the Lease.                                          2          9.     General Provisions.                a.     Time is of the essence in the performance of the parties' respective obligations set forth in this Agreement.                b.     Captions to the sections in this Agreement are included for convenience only and do not modify any of the terms of this Agreement.                c.     In the event that any time after the date hereof either Landlord, Assignor or Assignee shall institute any action or proceeding against the other(s) relating to this Agreement, then and in that event, the party(ies) not prevailing in such action or proceeding shall reimburse the prevailing party for its reasonable attorneys' fees and all other fees, costs and expenses incurred by the prevailing party in connection with such action or proceeding. In addition to the foregoing award of fees, the prevailing party shall also be entitled to its attorneys' fees and all other fees, costs and expenses incurred in any post-judgment proceedings to collect and enforce the judgment.                d.     Assignee's address for notices shall be as follows unless changed in accordance with the Lease:                       Jim D. Black                      President                      First National Bank of Northern California                      975 El Camino Real                      South San Francisco, CA 94080                      Telephone: (650) 588-6800                      Facsimile: (650) 588-9695                      Email: jblack@familybank.com                e.     This Agreement shall inure to the benefit of and be binding upon the parties to this Agreement and their respective representatives, successors and assigns.                f.     This Agreement shall be governed by and constructed in accordance with the laws of the State of California.                g.     The parties to this Agreement represent and warrant to each other that neither party dealt with any broker or finder in connection with the consummation of this Assignment and each party agrees to protect, defend, indemnify, and hold the other party harmless from and against any and all claims or liabilities for brokerage commissions or finder's fees arising out of that party's acts in connection with this Agreement. The provisions of this Section 9(g) shall survive the expiration or earlier termination of this Agreement and the Lease.                h.     This Agreement expresses the entire agreement of the parties and supercedes any previous agreements, between the parties with regard to its subject matter. None of the parties has been induced to enter into this Agreement by, nor is any party relying on any representation or warranty outside those expressly set forth in this Agreement. Any amendment to this agreement will be effective only if it is in writing and signed by the parties hereto.                                          3                 i.     This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute but one agreement.                j.     Each party to this Agreement will, at its own cost and expense, execute and deliver such further documents and instruments and will take such other actions as may be reasonably required or appropriate to evidence or carry out the intent and purpose of this Agreement.                k.     Each individual executing this Agreement on behalf of a corporation represents that he or she is duly authorized to execute and deliver this Agreement on behalf of the corporation which is a party to this Agreement and agrees to deliver evidence of his or her authority to other party(ies) upon request.         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.  ASSIGNOR:                                 ASSIGNEE:  SEQUOIA NATIONAL BANK,                    FIRST NATIONAL BANK OF NORTHERN a California corporation                  CALIFORNIA, a California corporation  By: /s/ PETER PAUL                        By: /s/ JIM D. BLACK     --------------------------------          ----------------------------------  Name:       Peter Paul                    Name:       Jim D. Black     --------------------------------          ----------------------------------  Its:        CEO                           Its:        President     --------------------------------          ----------------------------------     LANDLORD:  THE MECHANICS' INSTITUTE, a California Nonprofit Public Benefit Corporation  By: /s/ J.M. FLACK     --------------------------------  Name:    J.M. Flack     --------------------------------  Its:     Executive Director     --------------------------------                                         4                                       EXHIBIT A                               Lease dated May 1, 2003                                                       1    EX-10.31 3 ex10_31.txt EXHIBIT 10.31                                                                     EXHIBIT 10.31                              PORTOLA/FOWLER PROPERTIES                                  LEASE AGREEMENT   ARTICLE ONE:  BASIC TERMS           Section 1.01.  Date of Lease:   July 1, 1999           Section.1.02.  Landlord:        Michael J. Flynn, Gail S. Flynn,                                          Alan Burns, Carol Burns                                          c/o Michael Miyagishima, CCIM                                          P.O. Box 225098                                          San Francisco, CA 94122-5098           Section 1.03.  Tenant:          Sequoia National Bank                                          65 Post Street                                          San Francisco, CA 94101           Section. 1.04. Property: The Property is part of Landlord's multi-tenant building located on the comer of Portola Drive and Fowler Avenue in San Francisco, California. The Leased property is 1325 square feet and is described in Exhibit A and commonly known as 699 Portola Drive, San Francisco, California.           Section 1.05. Lease Term: 5 years and 0 months beginning on July 1, 1999, and ending on June 30, 2004. The Tenant has an option to extend for an additional 5 years as specified in Section 2.03.           Section 1.06. Permitted Uses: (See Article Five) Retail Banking.           Section 1.07. Initial Security Deposit: Seven Thousand and no/100 Dollars. ($7,000.00)           Section 1.08. Rent and Other Charges Payable by Tenant:           (a) BASE RENT: Five thousand Dollars and zero cents ($5,000.00) per month.           (b) OTHER PERIODIC PAYMENTS: (i) Utilities (See Section 4.02); (ii) Maintenance, Repairs, and Alterations (See Article Six); (iii) Personal Property Taxes {See section 4.01 (b)); (iv) Liability insurance (See section 4.03 (a)).           Section 1.09. Costs and Charges Payable by Landlord: (a) Real Property Taxes (See Section 4.01); (b) Insurance Premiums (See Section 4.03(b)): (c) Maintenance and Repair (See Article Six}.           Section 1.10. Riders: The following Riders are attached to and made a part of this Lease:          (a)      Map of leased premises Exhibit A          (b)      Landlord's Rules and Regulations. Exhibit B  ARTICLE TWO:  LEASE TERM           Section 2.01. Lease of Property For Lease Term. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease.           Section 2.02. Holding Over. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for, and indemnify Landlord against, all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable                                         1   to a "month-to-month" tenancy, except that the Base Rent then if effect shall be increased by twenty-five percent (25%).           Section 2.03. Option to Extend. Landlord hereby grants Tenant an option to extend the term of the Lease for one (1) additional period of five (5) years, commencing immediately after the expiration of the term of the Lease, upon the same terms and conditions contained therein, except that (i) the Base Rent for the Premises shall be the greater of (a) the then current monthly rental rate increased by the CPI or (b) the fair market value of the Property determined pursuant to Section 2.04 (ii) Tenant shal1 accept the Premises in an ''as is" condition without any obligation of Landlord to repaint, remodel, repair, improve or alter the Premises, and (iii) there shall be no further options to extend the term of the Lease. Tenant's election to exercise the option granted herein must be given to Landlord in writing no less than six (6) months prior to the expiration of the term. If Tenant properly exercises the option granted herein, references in the Lease to the term of the Lease shall be deemed to mean the option term unless the context clearly provides otherwise. Notwithstanding, anything to the contrary contained herein, all option rights of Tenant pursuant to this Paragraph shall automatically terminate without notice and shall be of no further force and effect, whether or not Tenant has timely exercised the option granted herein, if (a) a default on the part of Tenant exists under the Lease at the time of exercise of tile option or at the time of commencement of the option term, or (b) Tenant has assigned its interest in the Lease or subleased in aggregate greater than fifty percent (50%) of the floor area of the Premises.           Section 2.04. Determination of Fair Value. At any time within six (6) months of the expiration or the initial term of this lease, Tenant may request the Landlord's opinion of fair market value for the option period. Landlord shall provide that opinion in writing to Tenant within 15days of receipt of Tenant's request. If Tenant agrees with Landlord's opinion in writing, Tenant shall notify the Landlord in writing. If Tenant disagrees, Tenant shall submit its opinion within 10 days of receipt of Landlords request. In the event of disagreement the Landlord and Tenant shall meet and try in good faith to resolve any difference within 10 days of receipt of Tenant's notice of disagreement. If the Landlord and Tenant cannot agree, the issue shall be determined by a rea1estate broker selected by the Landlord and Tenant who is familiar with the rental market in San Francisco. If the parties cannot agree, upon a petition from either party, the Superior Court shall select a broker who has never had any personal of business dealings with either of the parties. The decision of that single broker shall be given in writing, and shall be binding on the parties. If the Tenant's written opinion of fair market value is closer to the decision of the broker, than the written opinion of the Landlord, then tile Landlord shall pay all attorneys and court costs as well as the costs of the broker arbitrator. Otherwise, the Tenant shall pay for those costs (including attorneys fees).           Section 2.05. Tenant's right to Early Termination. Tenant shall, as soon as possible, apply for and pursue, in good faith, an application to the Office of the Controller of the Currency to maintain a retail bank at the premises. In the event that despite the Tenant's good faith efforts, Tenant is unable to obtain the required permission within 120 days from the execution of this Lease then Tenant shall have the right to provide written notice to the Landlord within that 120 day period that Tenant wished to terminate this lease. In the event that Tenant does not obtain the permit from the Office of the Controller of the Currency and exercises this option and provided the required written notice to landlord, this lease will automatically terminate on June 30, 2000.  ARTICLE THREE: BASE RENT           Section 3.01. Time and Manner of Payment. Tenant has paid to Landlord the base rent in the amount stated in Paragraph 1.08(a) above for the first month of the Lease Term. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing.           Section 3.02. Cost of Living Increases. The Base Rent shall be increased on the first day of the July 2000, and each anniversary thereafter (the "Rental Adjustment Date") stated above in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics Consumer Price                                         2   Index for All Urban Consumers (all items for the geographical Statistical Area in which the Property is located on the basis of 1982-1984 = 100(the "index") as fo1lows:           (a) The Base Rent (the "Comparison Base Rent") in effect immediately before each Rental Adjustment Date shall be increased by the percentage that the Index has increased from the date (the "Comparison Date") on which payment of the Comparison Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of such computation. Landlord shall notify Tenant of each increase by a written statement which shall include the Index for the applicable Comparison Date, the Index for the applicable Rental Adjustment Date, the percentage Increase between those two indices, and the new Base Rent.           (b) Notwithstanding any other provision in the Article Three shall the Comparison Price Index increase be less than 3.0% nor more than 7% on any Rental. Adjustment Date.  ARTICLE FOUR: PROPERTY EXPENSES           Section 4.01. Property Taxes.           (a) Real Property Taxes. Landlord shall pay the real property taxes on the Property during Lease Term.           (b) Personal Property Taxes. Tenant shall pay all taxes charged against trade fixtures furnishings, equipment or any other personal property belonging to Tenant.           Section 4.02. Utilities. Tenant shall pay directly to the appropriate supplier the cost of all natural gas, heat, light, power, sewer, service, telephone, water, refuse disposal and other utilities and services supplied to the Property. If any services or utilities are jointly metered with other Tenants Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement.  Section 4.03.  Insurance Policies.           (a) Liability Insurance. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage, (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy. The initial amount of such insurance shall be One Million Dollars ($1,000,000) per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisers and other relevant factors. The liability insurance obtained by Tenant under this Paragraph 4.03(a) shall (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant's performance under Section 5.05 resulting from the actions of Tenant. The amount and coverage of such insurance shall not 1imit tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance.           (b) Property and Rental Income Insurance. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall not obtain insurance for Tenant's fixture's or equipment or building improvements installed by Tenant on the Property. During the Lease Term, Tenant shall also maintain an income disruption insurance policy, with loss payable to Landlord, in an amount equal to one year's Base Rent.                                         3            (c) General Insurance Provisions.                    (i) Any insurance which Tenant is required to maintain under                   this Lease shall include a provision which requires the                   insurance carrier to give Landlord not less than thirty (30)                   days written notice prior to any cancellation or modification                   of such coverage.                    (ii) If Tenant fails to deliver any policy, certificate or                   renewal to Landlord required under this Lease within the                   prescribed time period or if any such policy is canceled or                   modified during the Lease Term without Landlord's consent,                   Landlord may obtain such insurance, in which case Tenant shall                   reimburse Landlord for the cost of such insurance within                   fifteen (15) days after receipt of a statement that indicates                   the cost of such insurance.                    (iii) Tenant shall maintain all insurance required under this                   Lease with companies holding a "General Policy Rating" of A-12                   or better, as set forth in the most current issue of "Best Key                   Rating Guide". Landlord and Tenant acknowledge the insurance                   markets are rapidly changing and that insurance in the form                   and amounts described in this Section 4.03 may not be                   available in the future. Tenant acknowledges that the                   insurance described in this Section 4.03 is for the primary                   benefit of Landlord. if at any time during the Lease Term,                   Tenant is unable to maintain the insurance required under the                   Lease, Tenant shall nevertheless maintain insurance coverage                   which is customary and commercially reasonable in the                   insurance industry for Tenant's type of business, as that                   coverage may change from time to time. Landlord makes no                   representation as to the adequacy of such insurance to protect                   Landlord's or tenant's interests. Therefore, Tenant shall                   obtain any such additional property or liability insurance                   which Tenant deems necessary to protect Landlord and Tenant.                    (iv) Unless prohibited under any applicable insurance policies                   maintained. Landlord and Tenant each hereby waive any and all                   rights of recovery against the other, or against the officers,                   employees, agents or representatives of the other, for loss or                   damage to its property or the property of others under its                   control, if such loss or damage is covered by any insurance                   policy in force (whether or not described in this Lease) at                   the time of such loss or damage. Upon obtaining the required                   policies of insurance, Landlord and Tenant shall give notice                   to the insurance carriers of this mutual waiver of                   subrogation.           Section 4.04. Late Charges. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive an rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the cost Landlord will incur by reason of such late payment.           Section 4.05. Interest on Past Due Obligations. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law.  ARTICLE FIVE: USE OF PROPERTY           Section 5.01. Permitted Uses. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above, or such other purpose as Landlord may approve which approval shall not be unreasonably withheld.                                         4            Section 5.02. Manner of Use. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of tenants of the Project, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a certificate of Occupancy, required for Tenant's occupancy of the Property and shall promptly take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act.           Section 5.03. Hazardous Materials. As used in this Lease, the term "Hazardous Materials" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials" or "toxic substances" now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT; printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors. sublessees or invitees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed activity, with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property.           Section 5.04. Signs and Auctions. Tenant shall not be permitted to place any sign, signage or advertising in the window or on the Property without the Landlord's written consent which consent shall not be unreasonably withheld. Tenant shall not conduct or permit any auctions or sheriffs sales at the Property.           Section 5.05. Indemnity. Tenant shall Indemnify Landlord against land hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of tile Property; (b) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Property, including any contamination of the Property resulting from the presence or use of Hazardous Materials caused or permitted by the Tenant; (c) any breach or default in the performance of Tenant's obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; (e) other acts or omissions of Tenant; or (f) any act caused by its banking activities. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's gross negligence or willful misconduct. As used in this Section the term "Tenant" shall include employees, agents, contractors and invitees, if applicable.           Section 5.06. Landlord's Access. Landlord or its agents may enter the Property at all reasonable times upon 24 hour prior notice to show the Property to potential buyers, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material; or for any other purpose Landlord deems necessary. Landlord shall give Tenant prior notice of such entry, except in the case of emergency. Landlord may place customary "For Sale" or "For Lease" signs on the Property, only after tenant has exercised its right to early termination or during the last 6 months of the lease.           Section 5.07. Quiet Possession. If Tenant pays the rent and complies with all other terms of this Lease, tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease.                                         5   ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS.           Section 6.01. Existing Conditions. Tenant has inspected the Property and accepts the condition of the Property in its "AS-IS" condition. Tenants acceptance of the property shall preclude Tenant from thereafter claiming that there is any defect in the condition of the property, if such deficiency would be apparent by a careful inspection, Tenant's possessions shall thereafter be subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord or any Broker with respect thereto.           Section 6.02. Exemption of Landlord from Liability. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting fixtures or any other cause; (c) conditions arising in or about the Property or upon other portions of the Project, or from other sources or places; or (d) any act or omission of any other Tenant of the Project. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such; damage or injury are not accessible to Tenant. The provisions of Section 6.02 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct.           Section 6.03. Landlord's Obligations. Subject to provisions of Article Seven (Damage or Destruction} and Article Eight (Condemnation); and except for damage caused by any act or omission of Tenant or Tenant's employees, agents, contractors or invitees. Landlord shall keep the foundation, roof and structural portions of exterior wall of the improvements on the Property in good order, condition and repair. However, Landlord shall not be obligated to maintain the interior of the premise Property. Landlord shall not be obligated to make any repairs under this Section 6.03 until a reasonable time after receipt of a written notice from Tenant of the need for such repairs. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord's expense or to terminate the right to repair the Property at Landlord's expense or to terminate the Lease because of the condition of the Property.           Section 6.04. Tenant's Obligations.           (a) Except as provided in Section 6.03, Article Seven (Damage or Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of the Property (including structural, nonstructural, interior, systems and equipment) in good order, condition, and repair (including interior repainting and refinishing, as needed), Tenant shall, at Tenant's expense, repair, any damage to the Property caused by Tenant or Tenant's agents or invitees acts or omissions.           (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace tile Property as required by this Section 6.04, Landlord may, upon ten (10) days prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand.           Section 6.05. Alterations, Additions, and Improvements.           (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, except for non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in cost cumulatively over the Lease Term and which are not visible from the outside                                         6   of any building of which the Property is part. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in confoffi1ity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work Tenant shall provide Landlord with ''as built" plans, copies of all construction contracts, and proof of payment for all labor and materials.           (b) Tenant shall pay when due all claims for labor and materials furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property.           Section 6.06. Condition Upon Termination. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of Lease. In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration of the Lease and to restore the Property to its prior-condition, al1 at Tenant's expense. All alterations, additions improvements which Landlord has not-required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenant's machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shal1 be deemed Landlord's property) without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings: carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decoration.  ARTICLE SEVEN: DAMAGE OR DESTRUCTION           Section 7.01. Partial Damage to Property.           (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant's operations are materially impaired) and if the proceeds received by Landlord from the insurance policies described in Paragraph 4.03 are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect (but is not required) to repair any damage to Tenant's fixtures, equipment, or improvements.           (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.03, Landlord may elect either to (i) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If the damage was due to an act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, Tenant shall pay the difference between the actual cost of repair and all other damages incurred by Landlord and any insurance proceeds received by Landlord. If LaJ1dlord elects to terminate the Lease, Tenant may elect to continue this Lease in full and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs, except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant.                                         7   Tenant shall give Landlord written notice of such n within ten (10) days after receiving Landlord's termination notice.           (c) If the damage to the Properly occurs during the last six (6) months of the Lease Term and such damage will require more than thirty (30) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant's notice to Landlord of the occurrence of the damage.           Section 7.02. Substantial or Total Destruction. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within 6 (six) months after the date of destruction, Landlord may elect to rebuild the Property at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within 30 (thirty) days after Tenants notice of the occurrence of total or substantial destruction. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense. Notwithstanding any other provision in this Lease to the contrary, if the destruction was caused by an actor omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and all other damages and any insurance proceeds received by Landlord.           Section 7.03. Temporary Reduction of Rent. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven. Any rent payable during the period of such damage repair and/or restoration shall be reduced according to the degree if any, to which Tenant's use of the Property is impaired. Except for such possible reduction, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property.           Section 7.04. Waiver Tenant waives the protection of any statute code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the Leased property. Tenant agrees that the provisions of this Article Seven above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the property.  ARTICLE EIGHT: CONDEMNATION           If all or an portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation", this Lease shall terminate as to the part taken or sold on the date on the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord or Tenant terminates the Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the rent and shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage in the value of the leasehold, the taking of the fee or otherwise.                                         8   ARTICLE NINE: ASSIGNMENT AND SUBLETTING           Section 9.01. Landlord's Consent Required. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, which shall not be unreasonably withheld or delayed except as provided in Section 9.02 below. Any attempted transfer without consent shall be void and shall constitute a non-curable' breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than twenty percent (20%) of the partnership interests shall require Landlord's consent.           Section 9.02. Tenant Affiliate. Tenant may assign this Lease or sublease the Property, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger, of or consolidation with Tenant ("Tenant Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease.           Section 9.03. No Release of Tenant. No transfer permitted by the Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent form any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modification of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease.           Section 9.04. Offer to Terminate. If Tenant desires to assign the Lease or sublease the Property, Tenant shall first offer to the Landlord a right to offer, in writing, to terminate the Lease as of the date in the proposed sublease or assignment. This offer shall be in writing and given at least 30 days in advance. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until otherwise terminated and the provisions of Section 9.0.5 with respect to any proposed transfer shall continue to apply.           Section 9.05. Landlord's Consent.           (a)Tenant's request for consent to any transfer described in Section 9.01 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent based on the following factors: (i) the business of the proposed assignee or subtenant and the proposed use of the Property; (ii) the net worth and financial reputation of the proposed assignee or subtenant; (iii) Tenant's compliance with all of its obligations under the Lease; and (iv) such other factors as Landlord may reasonably deem relevant.           Section 9.06. No Merger. No merger shall result from Tenant's sublease of the Property under this article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies.  ARTICLE TEN: DEFAULTS; REMEDIES           Section 10.01. Covenants and Conditions. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions.                                         9            Section 10.02. Defaults. Tenant shall be in material default under this Lease:           (a) If Tenant abandons the Property or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.03;           (b) If Tenant fails to pay rent or any other charge when due;           (c) If Tenant fails to perform any of Tenant's non monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement.           (d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors: (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days: (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder then Landlord shall receive as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease.           (e) If any guarantor of the Lease revokes or otherwise terminates, or purports to revoke or otherwise terminate, any guaranty of all or any portion of Tenant's obligations under the Lease. Unless otherwise expressly provided no guaranty of the Lease is revocable.           Section 10.03. Remedies. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter will or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have:  (a) Terminate. Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the work at the time of the award of the unpaid Base Rent, Additional rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the work at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord's reasonable attorneys' fees incurred in connection therewith. and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lessor amount as may then be the maximum lawful rate.                                         10   As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1 %). If Tenant has abandoned the Property, Landlord shall have the option of {i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03 (a), or (ii) proceeding under Paragraph 10.03 (b).           (b) Maintain Tenant's right to possession, in which case this lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due;           {c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located.           Cumulative Remedies. Landlord exercising any other right or remedy shall not prevent it from exercising any other right or remedy.  ARTICLE ELEVEN: PROTECTION OF LENDERS           Section 11.01: Subordination. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring. a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed or trust or mortgage or the date of recording thereof,           Section 11.02: Attornment. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest.           Section 11.03. Signing of Documents. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so Within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document.           Section 11.04. Estoppel Certificates.           (a) Upon Landlord's written request. Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (I) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this lease has not been canceled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease or, if Landlord is claimed to be in default, stating why; and (v) such other representations or infom1ation with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or                                         11   encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct.           (b) If Tenant does not deliver such statement to Landlord within such ten (10) day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been canceled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts.           Section 11.05. Tenant's Financial Condition. Within (10)days after written request from Landlord, Tenant shal1 deliver to Landlord its most current public annual report.  ARTICLE TWELVE: LEGAL COSTS           Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in breach or default under this Lease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses; demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by an third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person: or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding, or other proceeding under Title II of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action.           Section 12.02. Landlord's Consent. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent.  ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS           Section 13.01. Non-Discrimination. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof.           Section 13.02. Landlord's Liability; Certain Duties.           (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or Projector the leasehold estate under a ground lease of the Property or Project at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease.                                         12            (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this lease unless Landlord (or such ground lessor mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion. ...           (c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property, and neither the Landlord nor its partners, shareholders, officers or other principal shall have any personal liability under this Lease.           Section 13.03. Severability. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect.           Section 13.04. Interpretation. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors; invitees, successors or others using the Property with Tenant's express or implied permission.           Section 13.05. Incorporation of Prior Agreements; Modifications. This Lease is the only agreement between the parties pertaining to the lease of the Property and not other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void.           Section 13.06. Notices. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party.           Section 13.07. Waivers. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement.           Section 13.08. No Recordation. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may require that a "Short Form" memorandum of this Lease executed by both parties be recorded. The party requiring such recording shall pay all transfer taxes and recording fees.           Section 13.09. Binding Effect; Choice of Law. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However. Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease.           Section 13.10. Corporate Authority; Partnership Authority. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed, Tenant shall                                         13   deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person or entity signing this Lease for Tenant represents and warrants that he or it is a general partner of the partnership, that he or it has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner's withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership.           Section 13.11. Joint and Several Liability. All parties signing this leas as Tenant shall be jointly and severally liable for all obligations of Tenant.           Section 13.12. Force Majeure. If Landlord cannot perform any of its obligations due to events beyond Landlord's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions.           Section 13.13. Execution of Lease. This Lease may be executed in counterparts and, when all counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties.           Section 13.14. Survival. All representatives and warranties of Landlord and Tenant shall survive the termination of this Lease.  Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference in this Lease.                                       'LANDLORD'  Signed on  April 26 , 1999            at    San Francisco, Ca            --------     ----                ------------------------------------                                              /s/ MICHAEL L. FLYNN                                             ------------------------------------                                             Michael L. Flynn                                              /s/ GAIL S. FLYNN                                             ------------------------------------                                             Gail S. Flynn                                              /s/ ALAN BURNS                                             ------------------------------------                                             Alan Burns                                              /s/ JAMES M. FLACK                                             ------------------------------------                                             Carol Burns   Signed on  April 27 , 1999            at    San Francisco, Ca            --------     ----                ------------------------------------                                              Sequoia National Bank                                        By:   /s/ JOHN F. HENTZ                                            -------------------------------------                                            John F. Hentz                                       Its: Acting Chief Operating Officer                                         14                                       EXHIBIT A                                  [GRAPHIC OMITTED]                              PORTOLA FOWLER PROPERTIES                                     1ST FLOOR                                 699 PORTOLA DR.                            SAN FRANCISCO, CALIFORNIA                                           15                                       EXHIBIT B                                     ---------                                 Rules and Regulations                               ---------------------           1. Common Areas. The sidewalks, parking areas, driveways, exits and entrances of the Project shall not be obstructed by Tenant or used for any purpose other than for ingress to and egress from the Project and/or Property. Landlord shall in all cases have the right to control and prevent access to the common areas.           2. Signs. No sign, placard, picture, name, advertisement or notice visible from the exterior of the Property shall be inscribed, painted, affixed or otherwise displayed by Tenant on any pan of the Project or the Property without the prior written consent of Landlord. Landlord will adopt and furnish to Tenants general guidelines relating to signs. Tenant agrees to conform to such guidelines. All approved signs pr lettering shall be primed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord.           3. Prohibited Uses. The Property shall not be used for lodging or cooking except that private use by Tenant of microwave ovens and Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages will be permitted, provided that such use is in accordance with all applicable federal, state and municipal laws., codes, ordinances, rules and regulations Tenant shall not use electricity for lighting, machines or equipment in excess of four (4) watts per square foot.           4. No Nuisances. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or inflammable or reasonably necessary for the operation or maintenance of office equipment. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord. Tenant shall not use or keep or permit to be used or kept any foul or noxious gas or substance in the premises, or permit or suffer the premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, or interfere in any way with other tenants or those having business in the Building, nor shall any animals be brought or kept in the Premises or the Building.           5. Change of Address. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name or street address of the Building or the room or suite number of the Premises.           6. Procedures when Leaving. Tenant shall ensure that the doors of the Premises are closed and locked and that all water faucets, water apparatus and utilities are shut off before Tenant and its employees leave the Property so as to prevent \\'aste or damage. For any default or carelessness in this regard, Tenant shall be liable and pay for all damage and injuries sustained by Landlord or other tenants or occupants of the Project.           7. No Antenna. Tenant shall not install any radio or television antenna, loudspeaker, or other device on the rood or exterior walls of the Building. No television or radio recorder shall be played in such a manner as to cause a nuisance to any other tenant.           8. Waiver. Landlord may waive anyone or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building.           9. Supplemental to Lease. These Rules and regulations are in addition to, and shall not be construed to in anyway modify or amend, in whole or in part, the covenants of this Lease.           10 Amendments and Additions. Landlord reserves the right to make such other rules al1d regulations, and to amend or repeal these Rules and Regulations, as in Landlord's judgment may from time to time be desirable for the safety, care and cleanliness of the Building and for the preservation of good order therein.                                         16                     ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT            THIS ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT ("Agreement") is made and entered into to be effective as of April 30, 2005 ("Effective Date"), by and among PORTOLA PROPERTIES, a California corporation ("Landlord"), SEQUOIA NATIONAL BANK, a California corporation ("Assignor") and FIRST NATIONAL BANK OF NORTHERN CALIFORNIA, a California corporation ("Assignee"), with reference to the following facts.                                      RECITALS           A.       Assignor is the existing tenant under that certain Lease Agreement dated July 1, 1999, by and between Landlord's predecessor-in-interest Michael J. Flynn, Gail S. Flynn, Alan Burns and Carol Burns, as landlord, and Assignor, as tenant, as subsequently amended pursuant to that certain Extension of Lease dated as of July 1, 2004 (collectively, the "Lease") pursuant to which Landlord leased to Assignor, and Assignor leased from Landlord, those certain premises located at 699 Portola Drive, San Francisco, California, as more particularly described in the Lease (the "Property"). All capitalized terms used in this Agreement and not defined in this Agreement will have the respective meanings ascribed to such terms in the Lease.           B.       Assignor desires to assign all of its right, title and interest in, and obligations under, the Lease to Assignee, and Assignee desires to accept such assignment and assume such obligations, all on the terms and conditions set forth below.           C.       Landlord agrees to consent to the proposed assignment on the conditions set forth below.            NOW, THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:           1.       Assignment. Effective as of the Effective Date, Assignor hereby grants, transfers and assigns to Assignee all of its right, title and interest in, and delegates to Assignee all of its obligations under, the Lease. A true, correct and complete copy of the Lease is attached hereto as Exhibit A.           2.       Assumption. Assignee accepts such assignment and delegation, assumes the Lease, agrees to pay all rent and other charges accruing under the Lease from and after the Effective Date, and agrees to observe and perform all of the other covenants, agreements and obligations to be observed and/or performed by the tenant under the Lease from and after the Effective Date.           3.       Consent. Landlord hereby consents to this Agreement and to the assignment and assumption made herein; provided, that such consent is limited to the assignment and assumption made herein and shall not relieve Assignee from                                         1   the obligation to obtain the consent of Landlord to any future assignment of the Lease or sublease of the Premises, or any portion thereof or interest thereof. Notwithstanding Section 9.04 of the Lease, Landlord hereby waives any obligation of Assignor to offer to the Landlord a right to terminate in connection with this Agreement and to the assignment and assumption made herein.           4.       Security Deposit. The parties acknowledge that Landlord now holds the sum of Seven Thousand Dollars ($7,000.00) to be applied subject to the provisions of the Lease. Assignor releases all claims to that sum, and agrees that the sum shall be held by Landlord for the benefit of Assignee, subject to the provisions of the Lease.           5.       General Provisions.                   ------------------                    a.       Time is of the essence in the performance of the parties' respective obligations set forth in this Agreement.                    b.       Assignee's address for notices shall be as follows unless changed in'\ ' accordance with the Lease:                             Jim D. Black                            President                            First National Bank of Northern California                            975 El Camino Real                            South San Francisco, CA 94080                            Telephone: (650) 588-6800                            Facsimile: (650) 588-9695                            Email: jblack@familybank.com                    c.       This Agreement shall inure to the benefit of and be binding upon the parties to this Agreement and their respective successors and assigns.                    d.       This Agreement shall be governed by and construed in accordance with the laws of the State of California.                    e.       This Agreement expresses the entire agreement of the parties and supersedes any previous agreements between the parties with regard to its subject matter. Any amendment to this Agreement will be effective only if it is in writing and signed by the parties hereto.                    f.       This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute but one agreement                    g.       The following Exhibit is attached to this Agreement and by this reference made a part hereof:                     Exhibit A    Lease Agreement dated July 1,1999                                         2            IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.  ASSIGNOR:                              ASSIGNEE:  SEQUOIA NATIONAL BANK,                 FIRST NATIONAL BANK OF NORTHERN a California corporation               CALIFORNIA,                                        a California corporation  By:   /s/ PETER PAUL                   By:   /s/ JIM D. BLACK       ----------------------------           ----------------------------------- Name:     Peter Paul                   Name:     Jim D. Black       ----------------------------           ----------------------------------- Its:      CEO                          Its:      President       ----------------------------           -----------------------------------   LANDLORD:  PORTOLA PROPERTIES a California corporation  By:      /s/ LEYLA PENG       ---------------------------- Name:        Leyla Peng       ---------------------------- Its:         Owner       ----------------------------                                           3                                        EXHIBIT A                         Lease Agreement dated July 1, 1999    EX-23.1 4 ex23_1.txt EXHIBIT 23.1                                                                       Exhibit 23.1  [GRAPHIC LOGO OMITTED] MOSS-ADAMS LLP - ------------------------------------------------------------------------------- CERTIFIED PUBLIC ACCOUNTANTS               CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Board of Directors FNB Bancorp   We consent to the incorporation by reference in the registration statements on Form S-8 of FNB Bancorp (No. 333-91596, 333-98293 and 333-106363) of our report dated March 28, 2006 with respect to the consolidated balance sheet of FNB Bancorp and Subsidiary as of December 31, 2005 and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for the year ended December 31, 2005 appearing in this Annual Report on Form 10-K.   /s/ Moss Adams LLP - ----------------------------------- Stockton, California March 28, 2006    EX-23.2 5 ex23_2.txt EXHIBIT 23.2                                                                      Exhibit 23.2               Consent of Independent Registered Public Accounting Firm    The Board of Directors FNB Bancorp:   We consent to the incorporation by reference in the registration statements (No. 333-91596, 333-98293 and 333-106363) on Form S-8 of FNB Bancorp of our report dated March 3, 2005, with respect to the consolidated balance sheets of FNB Bancorp as of December 31, 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, cash flows for each of the years in the two-year period ending December 31, 2004, which report appears in the December 31, 2005 annual report on Form 10-K of FNB Bancorp.    /s/ KPMG LLP - -------------------------  San Francisco, California March 28, 2006    EX-31.1 6 ex31_1.txt EXHIBIT 31.1                                                                      Exhibit 31.1                       Rule 13a-14(a)/15d-14(a) Certifications           I, Thomas C. McGraw, certify that:  1.       I have reviewed this annual report on Form 10-K of FNB Bancorp;  2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  3.       Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  4.       The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:        a) Designed such disclosure controls and procedures, or caused such          disclosure controls and procedures to be designed under our          supervision, to ensure that material information relating to the          registrant, including its consolidated subsidiaries, is made known to          us by others within those entities, particularly during the period in          which this report is being prepared;        b) Designed such internal control over financial reporting, or caused such          internal control over financial reporting to be designed under our          supervision, to provide reasonable assurance regarding the reliability          of financial reporting and the preparation of financial statements for          external purposes in accordance with generally accepted accounting          principles;        c) Evaluated the effectiveness of the registrant's disclosure controls and          procedures and presented in this report our conclusions about the          effectiveness of the disclosure controls and procedures, as of the end          of the period covered by this report based on such evaluation; and        d) Disclosed in this report any change in the registrant's internal          control over financial reporting that occurred during the registrant's          fourth fiscal quarter that has materially affected, or is reasonably          likely to materially affect, the registrant's internal control over          financial reporting; and  5.       The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors :        a) All significant deficiencies and material weaknesses in the design or          operation of internal control over financial reporting which are          reasonably likely to adversely affect the registrant's ability to          record, process, summarize and report financial information; and        b) Any fraud, whether or not material, that involves management or other          employees who have a significant role in the registrant's internal          control over financial reporting.  Date: March 24, 2006    /s/ THOMAS C. MCGRAW - --------------------------- Thomas C. McGraw Chief Executive Officer    EX-31.2 7 ex31_2.txt EXHIBIT 31.2                                                                      Exhibit 31.2                      Rule 13a-14(a)/15d-14(a) Certifications           I, James B. Ramsey, certify that:  1.       I have reviewed this annual report on Form 10-K of FNB Bancorp;  2.       Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  4.       The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:        a) Designed such disclosure controls and procedures, or caused such          disclosure controls and procedures to be designed under our          supervision, to ensure that material information relating to the          registrant, including its consolidated subsidiaries, is made known to          us by others within those entities, particularly during the period in          which this annual report is being prepared;        b) Designed such internal control over financial reporting, or caused such          internal control over financial reporting to be designed under our          supervision, to provide reasonable assurance regarding the reliability          of financial reporting and the preparation of financial statements for          external purposes in accordance with generally accepted accounting          principles;        c) Evaluated the effectiveness of the registrant's disclosure controls and          procedures and presented in this report our conclusions about the          effectiveness of the disclosure controls and procedures, as of the end          of the period covered by this report based on such evaluation; and        d) Disclosed in this report any change in the registrant's internal          control over financial reporting that occurred during the registrant's          fourth fiscal quarter that has materially affected, or is reasonably          likely to materially affect, the registrant's internal control over          financial reporting; and  5.       The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:        a) All significant deficiencies and material weaknesses in the design or          operation of internal control over financial reporting which are          reasonably likely to adversely affect the registrant's ability to          record, process, summarize and report financial information; and        b) Any fraud, whether or not material, that involves management or other          employees who have a significant role in the registrant's internal          control over financial reporting.   Date: March 24, 2006.   /s/ JAMES B. RAMSEY - ------------------------------------------------- James B. Ramsey Senior Vice President and Chief Financial Officer    EX-32 8 ex_32.txt EXHIBIT 32                                                                         Exhibit 32                               Section 1350 Certifications              Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of Title 18, United Stated Code), each of the undersigned officers of FNB Bancorp, a California corporation (the "Company"). Does hereby certify that:           1.       The Company's Annual Report on Form 10-K for the year ended                   December 31, 2005 (the "Form 10-K") fully complies with the                   requirements of Section 13(a) or 15(d) of the Securities                   Exchange Act of 1934, as amended; and           2.       Information contained in the Form 10-K fairly presents, in all                   material aspects, The financial condition and results of                   operations of the Company.    Dated: March 24, 2006                        /s/ THOMAS C. MCGRAW                                              ----------------------------                                              Thomas C. McGraw                                              Chief Executive Officer    Dated: March 24, 2006                        /s/ JAMES B. RAMSEY                                              ----------------------------                                              James B. Ramsey                                              Senior Vice President                                              and Chief Financial Officer             A signed original of this statement required by Section 906 has been provided to FNB Bancorp and will be retained by FNB Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.    -----END PRIVACY-ENHANCED MESSAGE-----