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FIRST NORTHERN COMMUNITY BANCORP - Quarter Report: 2006 September (Form 10-Q)

First Northern Community Bancorp Form 10Q 3rd Qtr 2006
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————————
FORM 10-Q

x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006

OR

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 



Commission File Number 000-30707

First Northern Community Bancorp
(Exact name of registrant as specified in its charter)


California
68-0450397
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

195 N. First Street, Dixon, CA
95620
(Address of principal executive offices)
(Zip Code)


707-678-3041
(Registrant’s telephone number including area code)




Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x
No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the Exchange Act. 

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨
No x

The number of shares of Common Stock outstanding as of November 6, 2006 was 7,955,101.


 
 




FIRST NORTHERN COMMUNITY BANCORP

INDEX

   
Page
     
PART I: FINANCIAL INFORMATION
   
   
 
   
Item 1
 
Financial Statements
   
         
   
Unaudited Condensed Consolidated Balance Sheets
 
3
         
   
Unaudited Condensed Consolidated Statements of Income
 
4
         
   
Unaudited Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income
 
5
         
   
Unaudited Condensed Consolidated Statements of Cash Flows
 
6
         
   
Notes to Unaudited Condensed Consolidated Financial Statements
 
7
         
Item 2
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
16
         
Item 3
 
Quantitative and Qualitative Disclosures About Market Risk
 
30
         
Item 4
 
Controls and Procedures
 
30
         
PART II: OTHER INFORMATION
   
         
Item 1A
 
Risk Factors
 
31
         
Item 2
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
31
         
Item 6
 
Exhibits
 
32
         
   
Signatures
 
32


 
 
2




PART I - FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

   
(UNAUDITED)
     
   
September 30, 2006
 
December 31, 2005
 
ASSETS
         
Cash and due from banks
 
$
25,406
 
$
35,507
 
Federal funds sold
   
39,495
   
87,185
 
Investment securities - available for sale
   
70,461
   
48,788
 
Loans, net of allowance for loan losses of
             
$8,400 at September 30, 2006 and $7,917 at December 31, 2005
   
485,775
   
456,061
 
Loans held-for-sale
   
4,629
   
4,440
 
Premises and equipment, net
   
8,093
   
8,311
 
Other Real Estate Owned
   
   
268
 
Accrued interest receivable and other assets
   
21,958
   
20,087
 
       TOTAL ASSETS
 
$
655,817
 
$
660,647
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Liabilities
             
               
Deposits
             
Demand deposits
 
$
175,124
 
$
192,436
 
Interest-bearing transaction deposits
   
102,287
   
85,560
 
Savings & MMDA's
   
187,445
   
185,878
 
Time, under $100,000
   
47,954
   
51,921
 
Time, $100,000 and over
   
64,609
   
65,986
 
       Total deposits
   
577,419
   
581,781
 
FHLB Advance and other borrowings
   
10,878
   
14,969
 
Accrued interest payable and other liabilities
   
6,924
   
7,095
 
       TOTAL LIABILITIES
   
595,221
   
603,845
 
               
Stockholders' equity
             
Common stock, no par value; 16,000,000 shares authorized;
             
7,973,364 shares issued and outstanding at September 30, 2006 and 7,558,759 shares issued and outstanding at December 31, 2005
   
45,925
   
36,100
 
Additional paid in capital
   
977
   
977
 
Retained earnings
   
13,810
   
19,606
 
Accumulated other comprehensive (loss) income
   
(116
)
 
119
 
       TOTAL STOCKHOLDERS' EQUITY
   
60,596
   
56,802
 
               
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
655,817
 
$
660,647
 

See notes to unaudited condensed consolidated financial statements.

 
 
3



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)


.
 
Three months
 
Three months
 
Nine months
 
Nine months
 
   
ended
 
ended
 
ended
 
ended
 
   
September 30, 2006
 
September 30, 2005
 
September 30, 2006
 
September 30, 2005
 
Interest Income
                 
     Loans
 
$
11,070
 
$
9,331
 
$
31,189
 
$
26,233
 
     Federal funds sold
   
506
   
671
   
2,117
   
1,602
 
     Investment securities
                         
          Taxable
   
670
   
452
   
1,893
   
1,489
 
          Non-taxable
   
162
   
136
   
436
   
427
 
               Total interest income
   
12,408
   
10,590
   
35,635
   
29,751
 
                           
Interest Expense
                         
     Deposits
   
2,483
   
1,445
   
6,326
   
3,556
 
     Other borrowings
   
68
   
123
   
284
   
371
 
               Total interest expense
   
2,551
   
1,568
   
6,610
   
3,927
 
               Net interest income
   
9,857
   
9,022
   
29,025
   
25,824
 
Provision for (recovery of) loan losses
   
810
   
(69
)
 
585
   
 
                           
               Net interest income after provision for
                         
                     (recovery of) loan losses
   
9,047
   
9,091
   
28,440
   
25,824
 
                           
Other operating income
                         
     Service charges on deposit accounts
   
749
   
618
   
2,050
   
1,788
 
     Gain on sales of other real estate owned
   
   
27
   
6
   
27
 
     Gains on sales of loans held-for-sale
   
100
   
147
   
192
   
328
 
     Investment and brokerage services income
   
61
   
45
   
173
   
210
 
     Mortgage brokerage income
   
101
   
142
   
310
   
325
 
     Loan servicing income
   
49
   
156
   
193
   
343
 
     Fiduciary activities income
   
39
   
32
   
114
   
88
 
     ATM fees
   
70
   
80
   
203
   
195
 
     Signature based transaction fees
   
102
   
72
   
272
   
201
 
     Gains on sales of available for sale securities
   
   
15
   
   
15
 
     Other income
   
175
   
172
   
505
   
565
 
               Total other operating income
   
1,446
   
1,506
   
4,018
   
4,085
 
                           
Other operating expenses
                         
     Salaries and employee benefits
   
4,347
   
4,132
   
13,237
   
11,961
 
     Occupancy and equipment
   
983
   
826
   
2,723
   
2,387
 
     Data processing
   
368
   
308
   
1,082
   
892
 
     Stationery and supplies
   
135
   
106
   
375
   
360
 
     Advertising
   
162
   
198
   
611
   
491
 
     Directors’ fees
   
42
   
31
   
108
   
88
 
     Other real estate owned expense
   
   
21
   
   
21
 
     Other expense
   
1,213
   
1,138
   
3,582
   
3,757
 
               Total other operating expenses
   
7,250
   
6,760
   
21,718
   
19,957
 
                           
               Income before income tax expense
   
3,243
   
3,837
   
10,740
   
9,952
 
Provision for income taxes
   
1,195
   
1,419
   
3,996
   
3,519
 
                           
               Net income
 
$
2,048
 
$
2,418
 
$
6,744
 
$
6,433
 
                           
Basic Income per share 
 
$
0.26
 
$
0.30
 
$
0.84
 
$
0.80
 
Diluted Income per share
 
$
0.25
 
$
0.29
 
$
0.81
 
$
0.77
 
                           
Other comprehensive income
                         
Unrealized gain (loss) on available for sale
                         
securities, net of tax effect
   
345
   
(132
)
 
(235
)
 
(706
)
Total comprehensive income
   
2,393
   
2,286
   
6,509
   
5,727
 
                           

See notes to unaudited condensed consolidated financial statements.

 
 
4



UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share amounts)
 
   
                       
Accumulated
     
               
Additional
     
Other
     
   
Common Stock
 
Comprehensive
 
Paid-in
 
Retained
 
Comprehensive
     
Description
 
Shares
 
Amounts
 
Income
 
Capital
 
Earnings
 
Income / (Loss)
 
Total
 
                               
Balance at December 31, 2005
   
7,558,759
 
$
36,100
       
$
977
 
$
19,606
 
$
119
 
$
56,802
 
                                             
Comprehensive income:
                                           
Net income
             
$
6,744
         
6,744
         
6,744
 
Other comprehensive loss:
                                           
                                             
Unrealized holding losses on securities arising during the current period, net of tax effect of $157
               
(235
)
                       
Reclassification adjustment due to gains realized on sales of securities, net of tax effect of $0
               
                         
Total other comprehensive loss, net of tax effect of $157
               
(235
)
             
(235
)
 
(235
)
                                             
Comprehensive income
             
$
6,509
                         
                                             
6% stock dividend
   
455,472
   
12,525
               
(12,525
)
       
 
Cash in lieu of fractional shares
                           
(15
)
       
(15
)
Stock-based compensation and related tax benefits
         
599
                           
599
 
Stock options exercised, net of swapped shares
   
84,733
   
138
                           
138
 
Stock repurchase and retirement
   
(125,600
)
 
(3,437
)
                         
(3,437
)
                                             
Balance at September 30, 2006
   
7,973,364
 
$
45,925
       
$
977
 
$
13,810
 
$
(116
)
$
60,596
 

See notes to unaudited condensed consolidated financial statements.

 
 
5



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
(in thousands)
 
   
Nine months Ended September 30, 2006
 
Nine months Ended September 30, 2005
 
Operating Activities
         
          Net Income
 
$
6,744
 
$
6,433
 
          Adjustments to reconcile net income to net
             
 cash provided by operating activities:
             
Depreciation
   
780
   
760
 
Provision for loan losses
   
585
   
 
Stock plan accruals
   
292
   
307
 
Tax benefit for stock options
   
307
   
 
Gains on sales of available for sale securities
   
   
15
 
Gains on sales of loans
   
(192
)
 
(313
)
Gains on sales of other real estate owned
   
(6
)
 
(27
)
Proceeds from sales of loans held-for-sale
   
28,897
   
43,848
 
Originations of loans held-for-sale
   
(28,894
)
 
(46,903
)
Increase in accrued interest receivable and other assets
   
(1,956
)
 
(3,548
)
(Decrease) increase in accrued interest payable and other liabilities
   
(171
)
 
1,771
 
                    Net cash provided by operating activities
   
6,386
   
2,343
 
               
Investing Activities
             
          Net (increase) decrease in investment securities
   
(21,516
)
 
8,808
 
          Net increase in loans
   
(30,299
)
 
(19,954
)
          Net decrease in other real estate owned
   
274
   
1,402
 
          Purchases of premises and equipment, net
   
(562
)
 
(1,864
)
                    Net cash used in investing activities
   
(52,103
)
 
(11,608
)
               
Financing Activities
             
          Net (decrease) increase in deposits
   
(4,362
)
 
16,891
 
          Net decrease in FHLB advances
   
(4,091
)
 
(833
)
          Cash dividends paid
   
(15
)
 
(16
)
          Proceeds from stock options exercised 
   
138
   
96
 
Tax benefit for stock options
   
(307
)
 
 
          Repurchase of stock
   
(3,437
)
 
(2,948
)
                    Net cash (used in) provided by financing activities
   
(12,074
)
 
13,190
 
   
             
                    Net (decrease) increase in cash and cash equivalents
   
(57,791
)
 
3,925
 
Cash and cash equivalents at beginning of period
   
122,692
   
116,704
 
Cash and cash equivalents at end of period
 
$
64,901
 
$
120,629
 
               
Supplemental disclosures of cash flow information:
             
Cash paid during the period for:
             
                    Interest
 
$
6,524
 
$
3,917
 
                    Income Taxes
 
$
4,615
 
$
4,846
 
               
Supplemental disclosures of non-cash investing and financing activities:
             
Transfer of loans held-to-maturity to OREO
   
 
$
3,226
 
Stock dividend distributed
 
$
12,525
 
$
6,158
 

See notes to unaudited condensed consolidated financial statements.


 
 
6



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 and 2005 and December 31, 2005

1.
BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements of First Northern Community Bancorp (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Articles 9 and 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report to stockholders and Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with GAAP also requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. All material intercompany balances and transactions have been eliminated in consolidation.

 
Reclassifications 
 
Certain reclassifications have been made to prior period balances in order to conform to the current year presentation.


 
 
7


2.    ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at levels considered adequate by management to provide for loan losses that can be reasonably anticipated. The allowance is based on management's assessment of various factors affecting the loan portfolio, including problem loans, economic conditions and loan loss experience, and an overall evaluation of the quality of the underlying collateral.

Changes in the allowance for loan losses during the nine-month periods ended September 30, 2006 and 2005 and for the year ended December 31, 2005 were as follows:
   
(in thousands)
 
           
   
Nine months ended
September 30,
 
Year ended December 31,
 
   
2006
 
2005
 
2005
 
Balance, beginning of period
 
$
7,917
 
$
7,445
 
$
7,445
 
Provision for loan losses
   
585
   
   
600
 
Loan charge-offs
   
(717
)
 
(201
)
 
(855
)
Loan recoveries
   
615
   
704
   
727
 
Balance, end of period
 
$
8,400
 
$
7,948
 
$
7,917
 
 
 
3.
MORTGAGE OPERATIONS

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate.

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold substantially all of its conforming long-term residential mortgage loans originated during the nine months ended September 30, 2006 for cash proceeds equal to the fair value of the loans.

The recorded value of mortgage servicing rights is included in other assets, and is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum.

At September 30, 2006, the Company had $4,629,000 of mortgage loans held-for-sale. At September 30, 2006 and December 31, 2005, the Company serviced real estate mortgage loans for others of $111,705,000 and $112,743,000, respectively.

The following table summarizes the Company’s mortgage servicing rights assets as of September 30, 2006 and December 31, 2005.
 
   
(in thousands)
 
   
December 31, 2005
 
Additions
 
Reductions
 
September 30, 2006
 
                   
Mortgage servicing rights
 
$
973
 
$
95
 
$
116
 
$
952
 

There was no valuation allowance recorded for mortgage servicing rights as of September 30, 2006 and December 31, 2005.

 
 
8



4.
OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 26, 2006, the Board of Directors of the Company declared a 6% stock dividend payable as of March 31, 2006 to stockholders of record as of February 28, 2006.

Earnings per share amounts have been adjusted to reflect the effects of the stock dividend.

Earnings Per Share (EPS)

Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS includes all common stock equivalents (“in-the-money” stock options, warrants and rights, convertible bonds and preferred stock), which reflects the potential dilution of securities that could share in the earnings of an entity.


The following table presents a reconciliation of basic and diluted EPS for the three-month and nine-month periods ended September 30, 2006 and 2005.

   
(in thousands, except share and earnings per share amounts)
 
   
Three months ended September 30,
 
Nine months ended September 30,
 
   
2006
 
2005
 
2006
 
2005
 
Basic earnings per share:
                 
Net income
 
$
2,048
 
$
2,418
 
$
6,744
 
$
6,433
 
                           
Weighted average common shares outstanding
   
7,978,274
   
8,019,459
   
7,998,922
   
8,067,433
 
Basic EPS
 
$
0.26
 
$
0. 30
 
$
0.84
 
$
0. 80
 
                           
Diluted earnings per share:
                         
Net income
 
$
2,048
 
$
2,418
 
$
6,744
 
$
6,433
 
                           
Weighted average common shares outstanding
   
7,978,274
   
8,019,459
   
7,998,922
   
8,067,433
 
                           
Effect of dilutive options
   
262,573
   
383,868
   
288,426
   
335,063
 
                           
     
8,240,847
   
8,403,327
   
8,287,348
   
8,402,496
 
Diluted EPS
 
$
0.25
 
$
0.29
 
$
0.81
 
$
0.77
 


 
 
9



5.
STOCK OPTION PLAN
 
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payments,” which addresses the accounting for stock-based payment transactions whereby an entity receives employee services in exchange for equity instruments, including stock options. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and instead generally requires that such transactions be accounted for using a fair-value based method. The Company has elected the modified prospective transition method as permitted under SFAS No. 123R, and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006. Stock-based compensation for awards granted prior to January 1, 2006 is based upon the grant-date fair value of such compensation as determined under the pro forma provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company issues new shares of common stock upon the exercise of stock options.
 
 
Prior to the adoption of SFAS No. 123R, the Company during the first quarter of fiscal 2003, adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123, for stock-based employee compensation, effective as of the beginning of the fiscal year. Under the prospective method of adoption selected by the Company, stock-based employee compensation recognized for all stock options granted after January 1, 2003 is based on the fair value recognition provisions of Statement 123. For stock options issued prior to January 1, 2003, the Company is using the intrinsic value method, under which compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.
 
 
The following table presents basic and diluted EPS for the three months and nine months ended September 30, 2005.
 

 
(in thousands, except earnings per share amounts)
 
 
Three months
 
Nine months
ended September 30,
ended September 30,
   
2005
 
2005
 
         
Net income, as reported
 
$2,418
 
$6,433
         
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
 
72
 
215
         
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
 
(90)
 
(268)
         
Pro forma net income under SFAS No. 123
 
$2,400
 
$6,380
         
Basic earnings per share:
       
As reported
 
$0.30
 
$0.80
Pro forma under SFAS No. 123
 
$0.30
 
$0.79
         
Diluted earnings per share:
       
As reported
 
$0.29
 
$0.77
Pro forma under SFAS No. 123
 
$0.29
 
$0.76



 
 
10



 
As of January 1, 2006, the Company has the following share-based compensation plans:
 
The Company has two fixed stock option plans. Under the 2000 Employee Stock Option Plan, the Company may grant options to an employee for an amount up to 25,000 shares of common stock each year. There are 1,657,746 shares authorized under the plan. The plan will terminate February 27, 2007. The Compensation Committee of the Board of Directors is authorized to prescribe the terms and conditions of each option, including exercise price, vestings or duration of the option. Generally, options vest at a rate of 25% per year after the first anniversary of the date of grant. Options are granted at the fair value of the related common stock on the date of grant.
 
Under the 2000 Outside Directors Non-statutory Stock Option Plan, the Company may grant options to an outside director for an amount up to 19,881 shares of common stock during the director’s lifetime. There are 497,315 shares authorized under the Plan. The Plan will terminate February 27, 2007. The exercise price of each option equals the fair value of the Company’s stock on the date of grant, and an option’s maximum term is five years. Options vest at the rate of 20% per year beginning on the grant date. Other than a grant of 19,881 shares to a new director, any future grants require stockholder approval.
 
 
The following table presents the activity related to stock options for the three months ended September 30, 2006.

   
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
 
Weighted Average Remaining Contractual Term
 
Options outstanding at Beginning of Period
   
540,282
 
$
10.84
             
                           
Granted
   
   
             
                           
Cancelled / Forfeited
   
   
             
                           
Exercised
   
(4,000
)
 
4.50
 
$
86,000
       
                           
Options outstanding at End of Period
   
536,282
 
$
10.88
 
$
7,723,978
   
6.16
 
                           
Exercisable (vested) at End of Period
   
353,178
 
$
8.18
 
$
6,028,509
   
5.09
 

 

 
The following table presents the activity related to stock options for the nine months ended September 30, 2006.

   
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
 
Weighted Average Remaining Contractual Term
 
Options outstanding at Beginning of Period
   
602,696
 
$
8.84
             
                           
Granted
   
57,790
   
24.98
             
                           
Cancelled / Forfeited
   
(10,425
)
 
10.48
             
                           
Exercised
   
(113,779
)
 
7.23
 
$
2,148,200
       
                           
Options outstanding at End of Period
   
536,282
 
$
10.88
 
$
7,723,978
   
6.16
 
                           
Exercisable (vested) at End of Period
   
353,178
 
$
8.18
 
$
6,028,509
   
5.09
 

The weighted average fair value of options granted during the nine-month period ended September 30, 2006 was $7.75 per share.

 
 
11




As of September 30, 2006, there was $733,063 of total unrecognized compensation related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 1.9 years.

The Company determines fair value at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the risk free interest rate, the volatility of the underlying stock and the expected life of the option.

The weighted average assumptions used in the pricing model are noted in the following table. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on both the implied volatilities from the traded option on the Company’s stock and historical volatility on the Company’s stock.

For options granted prior to January 1, 2006, and valued in accordance with FAS 123, the expected volatility used to estimate the fair value of the options was based solely on the historical volatility of First Northern Bank’s (the “Bank”) stock. The Bank recognized option forfeitures as they occurred.
 
The Bank expenses the fair value of the option on a straight line basis over the vesting period. The Bank estimates forfeitures and only recognizes expense for those shares expected to vest. The Bank’s estimated forfeiture rate in the first nine months of 2006, based on historical forfeiture experience, is approximately 0.0%.
 
 
A summary of the weighted average assumptions used in valuing stock options during the three and nine months ended September 30, 2006 is presented below:
 

 
Three Months Ended
 
Nine Months Ended
September 30, 2006*
September 30, 2006
Risk Free Interest Rate
 
4.57%
       
Expected Dividend Yield
 
0.00%
       
Expected Life in Years
 
4.67
       
Expected Price Volatility
 
26.39%
 
 * There were no stock options granted during the three month period ended September 30, 2006.
 

 

 
 
12


 

 
The Company has a 2000 Employee Stock Purchase Plan (“ESPP”). Under the plan, the Company is authorized to issue to an eligible employee shares of common stock. There are 1,657,746 shares authorized under the Plan. The Plan will terminate February 27, 2007. The Plan is implemented by participation periods of not more than twenty-seven months each. The Board of Directors determines the commencement date and duration of each participation period. An eligible employee is one who has been continually employed for at least ninety (90) days prior to commencement of a participation period. Under the terms of the Plan, employees can choose to have up to 10 percent of their compensation withheld to purchase the Company’s common stock each participation period. The purchase price of the stock is 85 percent of the lower of the fair market value on the last trading day before the Date of Participation or the fair market value on the last trading day during the participation period.
 
As of September 30, 2006, there was $54,000 of recognized compensation and $18,000 of unrecognized compensation related to ESPP options. This cost is expected to be recognized over a weighted average period of approximately 0.25 years.

The weighted average fair value at grant date is $3.51.

A summary of the weighted average assumptions used in valuing ESPP options during the three and nine months ended September 30, 2006 is presented below:
 

 
Three Months Ended
 
Nine Months Ended
September 30, 2006
September 30, 2006
Risk Free Interest Rate
1.36%
 
1.36%
       
Expected Dividend Yield
0.00%
 
0.00%
       
Expected Life in Years
2.00
 
2.00
       
Expected Price Volatility
23.80%
 
23.80%

 

 
 
13



6.
FIRST NORTHERN BANK - EXECUTIVE SALARY CONTINUATION PLAN

The Bank has an unfunded non-contributory defined benefit pension plan ("Executive Salary Continuation Plan") for a select group of highly compensated employees. The Executive Salary Continuation Plan provides defined benefit levels between $50,000 and $125,000 annually, depending on responsibilities at the Bank. The retirement benefits are paid for 10 years following retirement at age 65. Reduced retirement benefits are available for retirement after age 55 and 10 years of service.

   
Three months ended September 30,
 
   
2006
 
2005
 
Components of Net Periodic Benefit Cost
             
Service Cost
 
$
51,326
 
$
40,049
 
Interest Cost
   
16,332
   
13,321
 
Amortization of prior service cost
   
3,257
   
3,257
 
Net periodic benefit cost
 
$
70,915
 
$
56,627
 

The Bank estimates that the annual net periodic benefit cost will be $260,592 for the year ended December 31, 2006. This compares to annual net periodic benefit costs of $226,506 for the year ended December 31, 2005.

Estimated Contributions for Fiscal 2006

For unfunded plans, contributions to the “Executive Salary Continuation Plan” are the benefit payments made to participants. At December 31, 2005 the Bank expected to make benefit payments of $49,500 in connection with the “Executive Salary Continuation Plan” during fiscal 2006.

Patrick Day, Chief Credit Officer, was hired June 1, 2006, and was included in the plan. Mr. Day's Normal Retirement benefit is $50,000 per annum paid for 10 years following retirement at age 65.

Additionally, in September 2006 the Financial Accounting Standards Board released SFAS No. 158 amending accounting requirements under SFAS No. 87 & 132. SFAS No. 158 is generally effective for fiscal years ending after December 15, 2006. The estimated impact of reflecting SFAS No. 158 at year end is an after-tax reduction of equity of $79,657. Expense recognized for fiscal 2006 is unaffected by SFAS No. 158.

 
 
14



7.  
   FIRST NORTHERN BANK - DIRECTORS’ RETIREMENT PLAN

The Bank has an unfunded non-contributory defined benefit pension plan ("Directors’ Retirement Plan") for directors of the Bank. The plan provides a retirement benefit equal to $1,000 per year of service as a director, up to a maximum of $15,000. The retirement benefit is payable for 10 years following retirement at age of 65. Reduced retirement benefits are available for retirement after age 55 and 10 years of service.

   
Three months ended September 30,
 
   
2006
 
2005
 
Components of Net Periodic Benefit Cost
             
Service Cost
 
$
13,518
 
$
18,218
 
Interest Cost
   
5,943
   
5,233
 
Amortization of net loss
   
234
   
1,295
 
Net periodic benefit cost
 
$
19,695
 
$
24,746
 
 
The Bank estimates that the annual net periodic benefit cost will be $78,774 for the year ended December 31, 2006. This compares to annual net periodic benefit costs of $98,984 for the year ended December 31, 2005.

Estimated Contributions for Fiscal 2006

For unfunded plans, contributions to the “Directors’ Retirement Plan” are the benefit payments made to participants. At December 31, 2005 the Bank expected to make cash contributions of $15,000 to the “Directors’ Retirement Plan” during fiscal 2006.

In September 2006 the Financial Accounting Standards Board released SFAS No. 158 amending accounting requirements under SFAS No. 87 & 132. SFAS No. 158 is generally effective for fiscal years ending after December 15, 2006. The estimated impact of reflecting SFAS No.158 at year end is an after-tax reduction of equity of $27,606. Expense recognized for fiscal 2006 is unaffected by SFAS No. 158.


 
 
15




ITEM 2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the "safe harbor" created by those sections. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements also include statements in which words such as "expect," "anticipate," "intend," "plan," "believe," estimate," "consider" or similar expressions are used, and include assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based upon current expectations and are subject to risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Some factors that may cause actual results to differ from the forward-looking statements include the following: (i) the effect of changing regional and national economic conditions, including the continuing fiscal challenges for the State of California; (ii) uncertainty regarding the economic outlook resulting from the continuing hostilities in Iraq and the war on terrorism, as well as actions taken or to be taken by the United States or other governments as a result of further acts or threats of terrorism; (iii) significant changes in interest rates and prepayment speeds; (iv) credit risks of commercial, agricultural, real estate, consumer and other lending activities; (v) adverse effects of current and future federal and state banking or other laws and regulations or governmental fiscal or monetary policies; (vi) competition in the banking industry; (vii) changes in accounting standards; and (viii) other external developments which could materially impact the Company's operational and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and Item 1A. of Part II of this Report.

The following is a discussion and analysis of the significant changes in the Company’s Unaudited Condensed Consolidated Balance Sheets and of the significant changes in income and expenses reported in the Company’s Unaudited Condensed Consolidated Statements of Income and Stockholders’ Equity and Comprehensive Income as of and for the nine-month periods ended September 30, 2006 and 2005 and should be read in conjunction with the Company's consolidated 2005 financial statements and the notes thereto contained in the Company’s Annual Report to Stockholders and Form 10-K for the year ended December 31, 2005, along with other financial information included in this report.


 
 
16



INTRODUCTION

This overview of Management’s Discussion and Analysis highlights selected information in this quarterly report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire quarterly report, together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.

Our subsidiary, First Northern Bank of Dixon (the “Bank”), is a California state-chartered bank that derives most of its revenues from lending and deposit taking in the Sacramento Valley region of Northern California. Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory environment and competition can challenge our ability to generate those revenues.

The Company experienced significant earnings growth through the third quarter of 2006 due to a combination of loan and investment securities growth in addition to strong net interest margins. Significant results and developments during the third quarter 2006 and year-to-date include:

·  
Year-to-date net income of $6.74 million, up 4.8% over the $6.43 million earned in the same fiscal period last year.
 
·  
Diluted earnings per share for the nine months ended September 30, 2006 of $0.81, up 5.2% from the $0.77 reported in the same period last year (all 2005 per share earnings have been adjusted for a 6% stock dividend issued March 31, 2006).
 
·  
Provision for loan losses of $585,000 for the nine-month period ended September 30, 2006 compared to no provision for the same period in 2005.
 
·  
Annualized Return on Average Assets for the nine-month period ended September 30, 2006 of 1.36%, compared to 1.35% for the same period in 2005.
 
·  
Annualized Return on Beginning Core Equity for the nine-month period ended September 30, 2006 of 15.86%, compared to 16.85% one year ago.
 
·  
Total assets at September 30, 2006 of $655.8 million, an increase of $6.2 million, or 1.0% from prior-year third quarter levels.
 
·  
Total deposits of $577.4 million at September 30, 2006, an increase of $3.3 million or 0.6% compared to September 30, 2005 figures.
 
·  
Total net loans at September 30, 2006 (including loans held-for-sale) increased $37.7 million, or 8.3%, to $490.4 million compared to September 30, 2005 figures.
 
·  
Total investment securities at September 30, 2006 increased $23.7 million, or 50.6%, to $70.5 million compared to September 30, 2005 figures.
 
·  
Net income for the quarter of $2.05 million, down 15.3% from the $2.42 million earned in the third quarter of 2005. (Third quarter 2005 net income was increased through a $41 thousand, net of tax, recovery of provision for loan losses from a prior period, compared to a $478 thousand, net of tax, provision for loan losses for the current quarter.)
 
·  
Diluted earnings per share for the quarter of $0.25 compared to $0.29 per diluted share earned a year ago.
 
·  
During the third quarter of 2006, the Company also opened its Folsom Financial Center in Folsom at 2360 East Bidwell Street. The Bank has a strong team of local financial experts managing the Center which offers full service banking, commercial loans, real estate mortgage loans, investment & brokerage services, as well as trust administration.
 

 
 
17



SUMMARY

The Company recorded net income of $6,744,000 for the nine-month period ended September 30, 2006, representing an increase of $311,000 or 4.8% from net income of $6,433,000 for the same period in 2005.

The Company recorded net income of $2,048,000 for the three-month period ended September 30, 2006, representing a decrease of $370,000 or 15.3% from net income of $2,418,000 for the same period in 2005.

The following table presents a summary of the results for the three-month and nine-month periods ended September 30, 2006 and 2005.

   
(in thousands, except earnings per share and percentage amounts)
                               
 
 
     
 
            Three months
 
Three months
 
Nine months
 
Nine months
       
            ended
ended
 
ended
   
ended
 
     
September 30, 2006
   
September 30, 2005
   
September 30, 2006
   
September 30, 2005
 
                             
 
For the Period:
                         
                               
 
Net Income
   
$2,048
   
$2,418
   
$6,744  
   
$6,433
 
                   
 
   
 
 
 
 Basic Income Per Share*
 
$0.26
   
$0.30
   
$0.84
   
$0.80
 
                     
 
   
 
 
 
Diluted Income Per share*
 
$0.25
   
$0.29
   
$0.81
   
$0.77
 
                 
 
   
 
 
 
Return on Average Assets
 
1.25%
   
1.50%
   
1.36%
   
1.35%
 
                             
 
Net Income / Beginning Equity
 
14.45%
   
19.00%
   
15.86%
   
16.85% 
 
                   
 
   
 
 
                               
 
At Period End:
             
 
   
 
 
                 
 
   
 
 
 
Total Assets
 
$655,817
   
$649,668
   
$655,817
   
$649,668
 
                 
 
   
 
 
 
 Total Loans, Net (including loans held-for-sale)
 
$490,404
   
$452,687
   
$490,404
   
$452,687
 
                             
 
Total Deposits
 
$577,419
   
$574,077
   
$577,419 
   
$574,077 
 
                         
 
 Loan-To-Deposit Ratio
84.9%
   
78.9%
   
84.9%
   
78.9%
 
                               
 
*Adjusted for stock dividends
       
 
   
 
   



 
 
18




Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

 
Three months ended
 
Three months ended
 
September 30, 2006
 
September 30, 2005
 
Average
 
Yield/
 
Average
 
Yield/
 
Balance
Interest
Rate
 
Balance
Interest
Rate
Assets
             
Interest-earning assets:
             
Loans (1)
$489,094
$11,070
8.98%
 
$458,496
$9,331
8.07%
Investment securities, taxable
55,870
670
4.76%
 
37,106
452
4.83%
Investment securities, non-taxable (2)
14,098
162
4.56%
 
11,420
136
4.72%
Federal funds sold
37,982
506
5.29%
 
79,695
671
3.34%
Total interest-earning assets
597,044
12,408
8.25%
 
586,717
10,590
7.16%
Non-interest-earning assets:
             
Cash and due from banks
29,401
     
29,263
   
Premises and equipment, net
8,147
     
7,412
   
Other real estate owned
     
2,661
   
Accrued interest receivable and other assets
21,217
     
17,767
   
Total average assets
655,809
     
643,820
   
               
Liabilities and Stockholders’ Equity:
             
Interest-bearing liabilities:
             
Interest-bearing transaction deposits
96,590
473
1.94%
 
78,536
149
0.75%
Savings & MMDA’s
187,583
1,046
2.21%
 
188,196
655
1.38%
Time, under $100,000
49,301
356
2.86%
 
54,099
262
1.92%
Time, $100,000 and over
66,196
608
3.64%
 
63,649
379
2.36%
FHLB advances and other borrowings
10,601
68
2.54%
 
14,290
123
3.41%
Total interest-bearing liabilities
410,271
2,551
2.47%
 
398,770
1,568
1.56%
Non-interest-bearing liabilities:
             
Non-interest-bearing demand deposits
179,716
     
186,541
   
Accrued interest payable and other liabilities
6,226
     
4,884
   
Total liabilities
596,213
     
590,195
   
Total stockholders’ equity
59,596
     
53,625
   
Total average liabilities and stockholders’ equity
$655,809
     
$643,820
   
Net interest income and net interest margin (3)
 
$9,857
6.55%
   
$9,022
6.10%
               
1. Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-
    accrued interest thereon is excluded. Loan interest income includes loan fees of approximately $741 and $773 for the three months
ended September 30, 2006 and 2005, respectively.
2. Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
3. Net interest margin is computed by dividing net interest income by total average interest-earning assets.


 
 
19



Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

   
Nine months ended
 
Nine months ended
 
   
September 30, 2006
 
September 30, 2005
 
   
Average
     
Yield/
 
Average
     
Yield/
 
   
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Assets
                         
Interest-earning assets:
                                     
Loans (1)
 
$
477,398
 
$
31,189
   
8.73
%
$
451,539
 
$
26,233
   
7.77
%
Investment securities, taxable
   
52,423
   
1,893
   
4.83
%
 
39,803
   
1,489
   
5.00
%
Investment securities, non-taxable (2)
   
12,402
   
436
   
4.70
%
 
11,926
   
427
   
4.79
%
Federal funds sold
   
60,197
   
2,117
   
4.70
%
 
75,686
   
1,602
   
2.83
%
Total interest-earning assets
   
602,420
   
35,635
   
7.91
%
 
578,954
   
29,751
   
6.87
%
Non-interest-earning assets:
                                     
Cash and due from banks
   
30,189
               
31,382
             
Premises and equipment, net
   
8,193
               
7,491
             
Other real estate owned
   
76
               
932
             
Accrued interest receivable and other assets
   
20,378
               
17,403
             
Total average assets
   
661,256
               
636,162
             
                                       
Liabilities and Stockholders’ Equity:
                                     
Interest-bearing liabilities:
                                     
Interest-bearing transaction deposits
   
90,003
   
951
   
1.41
%
 
70,874
   
306
   
0.58
%
Savings & MMDA’s
   
190,990
   
2,704
   
1.89
%
 
191,978
   
1,541
   
1.07
%
Time, under $100,000
   
50,434
   
998
   
2.65
%
 
55,522
   
694
   
1.67
%
Time, $100,000 and over
   
67,756
   
1,673
   
3.30
%
 
66,864
   
1,015
   
2.03
%
FHLB advances and other borrowings
   
11,581
   
284
   
3.28
%
 
14,357
   
371
   
3.45
%
Total interest-bearing liabilities
   
410,764
   
6,610
   
2.15
%
 
399,595
   
3,927
   
1.31
%
Non-interest-bearing liabilities:
                                     
Non-interest-bearing demand deposits
   
186,540
               
179,440
             
Accrued interest payable and other liabilities
   
5,730
               
3,943
             
Total liabilities
   
603,034
               
582,978
             
Total stockholders’ equity
   
58,222
               
53,184
             
Total average liabilities and stockholders’ equity
 
$
661,256
             
$
636,162
             
Net interest income and net interest margin (3)
       
$
29,025
   
6.44
%
     
$
25,824
   
5.96
%
                                       
1. Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-
    accrued interest thereon is excluded. Loan interest income includes loan fees of approximately $2,171 and $2,239 for the nine months ended
months ended September 30, 2006 and 2005, respectively.
2. Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
3. Net interest margin is computed by dividing net interest income by total average interest-earning assets.


 
 
20



CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets showed a $10,101,000 decrease in cash & due from banks, a $47,690,000 decrease in Federal funds sold, a $21,673,000 increase in investment securities available-for-sale, a $29,714,000 increase in net loans held for investment, a $189,000 increase in loans held-for-sale, a $218,000 decrease in premises & equipment, a $268,000 decrease in other real estate owned and a $1,871,000 increase in accrued interest receivable and other assets from December 31, 2005 to September 30, 2006. The decrease in cash and due from banks was substantially the result of a decrease in items in process of collection. The decrease in Federal funds sold was largely due to an increase in loans and investment securities available-for-sale. The increase in investment securities available-for-sale was largely due to purchases of mortgage-backed investment securities, agency investment securities and tax exempt municipal investment securities, which was partially offset by a decrease in taxable municipal investment securities. The increase in loans was due to an increase in the following loan categories: commercial; agricultural; equipment; consumer; real estate commercial & construction, which were partially offset by a decrease in the following loan categories: equipment leases; real estate; small business administration real estate and home equity lines of credit. These fluctuations were due to changes in the demand for loan products by the Company’s borrowers. The increase in loans held-for-sale was in real estate loans and was due, for the most part, to an increase in the origination of loans. The Company originated approximately $28,894,000 in residential mortgage loans during the first nine months of 2006, which was offset by approximately $28,897,000 in loan sales during this period. The decrease in premises & equipment was due to increased depreciation, which was partially offset by an increase in furniture & equipment purchases. The increase in accrued interest receivable and other assets was mainly due to an increase in loan and securities interest receivables; income taxes receivable and an increase in the cash surrender value of bank owned life insurance and an increase in prepaid expenses.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets showed a decrease in total deposits of $4,362,000 at September 30, 2006 compared to the total at December 31, 2005. The decrease in deposits was due to lower demand, under $100,000 time deposit totals and over $100,000 time deposits, combined with higher interest-bearing transaction deposits and savings & money market deposits. These fluctuations were due to cyclical changes in deposit requirements of the Company’s depositors. Federal Home Loan Bank advances (“FHLB advances”) and other borrowings decreased $4,091,000 for the nine months ended September 30, 2006 compared to the year ended December 31, 2005, due to payments to FHLB combined with a decrease in treasury tax and loan note payable. Other liabilities decreased $171,000 from December 31, 2005 to September 30, 2006. The decrease in other liabilities was due to decreases in accrued profit sharing and incentive compensation expenses, which were partially offset by increases in accrued interest expense, accrued retirement expense, accrued taxes payable and deferred compensation expense.


 
 
21



CHANGES IN RESULTS OF OPERATIONS

Interest Income

The increase in general market interest rates increased the Company’s yields on earning assets. The Federal Open Market Committee increased the Federal funds rate by a total of 150 basis points during the twelve-month period ended September 30, 2006.

Interest income on loans for the nine-month period ended September 30, 2006 was up 18.9% from the same period in 2005, increasing from $26,233,000 to $31,189,000, and was up 18.6% for the three-month period ended September 30, 2006 over the same period in 2005, from $9,331,000 to $11,070,000. The increase in interest income on loans for the nine-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to an increase in average loans and a 97 basis point increase in loan yields. The increase for the three-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to an increase in average loans and a 91 basis point increase in loan yields.

Interest income on Federal funds sold for the nine-month period ended September 30, 2006 was up 32.2% from the same period in 2005, increasing from $1,602,000 to $2,117,000, and was down 24.6% for the three-month period ended September 30, 2006 over the same period in 2005, from $671,000 to $506,000. The increase in Federal funds income for the nine-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to a 187 basis point increase in Federal funds yields, which was partially offset by a decrease in average Federal funds sold. The decrease for the three-month period ended September 30, 2006 as compared to the same period a year ago, was primarily due to a decrease in average Federal funds sold, which was partially offset by a 195 basis point increase in Federal funds yield. The changes in average Federal funds sold were the result of the increase in average loans and investment securities.

Interest income on investment securities for the nine-month period ended September 30, 2006 was up 21.6% from the same period in 2005, increasing from $1,916,000 to $2,329,000 and was up 41.5% for the three-month period ended September 30, 2006 over the same period in 2005, from $588,000 to $832,000. The increase from the nine-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to an increase in average investment securities, which was partially offset by a 15 basis point decrease in securities yields. The increase from the three-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to an increase in average investment securities, which was partially offset by a 9 basis point decrease in securities yields.

Interest Expense

The increase in general market interest rates also increased the Company’s cost of funds.

Interest expense on deposits and other borrowings for the nine-month period ended September 30, 2006 was up 68.3% from the same period in 2005, increasing from $3,927,000 to $6,610,000, and was up 62.7% for the three-month period ended September 30, 2006 over the same period in 2005, from $1,568,000 to $2,551,000. The increase in interest expense from the nine-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to increased average interest bearing liabilities and an 84 basis point increase in the Company’s average cost of funds. The increase in interest expense from the three-month period ended September 30, 2006 as compared to the same period a year ago was primarily due to increased average interest bearing liabilities and a 91 basis point increase in the Company’s average cost of funds.


 
 
22



Provision for Loan Losses

There was a provision for loan losses of $585,000 for the nine-month period ended September 30, 2006 compared to no provision for the same period in 2005. The increase in the provision was due to an increase in non-accrual loans, combined with the Company’s evaluation of the quality of the loan portfolio. The September 30, 2006 allowance for loan losses of approximately $8,400,000 was 1.7% of total loans (excluding loans held for sale) compared to $7,917,000 or 1.7% of total loans (excluding loans held for sale) at December 31, 2005. The allowance for loan losses is maintained at a level considered adequate by management to provide for possible loan losses inherent in the loan portfolio.

Provision for Unfunded Lending Commitment Losses

There was a recovery of provision for unfunded lending commitment losses of $61,000 for the nine-month period ended September 30, 2006 compared to an $81,000 provision for the same period in 2005. The recovery of provision for unfunded lending commitment losses was due to a decrease in unfunded lending commitments.

There was a recovery of provision for unfunded lending commitment losses of $61,000 for the three-month period ended September 30, 2006 compared to no provision for the same period in 2005. The recovery of provision for unfunded lending commitment losses was due to a decrease in unfunded lending commitments.

The provision for unfunded lending commitment losses is included in other operating expenses.
 

Other Operating Income

Other operating income was down 1.6% for the nine-month period ended September 30, 2006 from the same period in 2005, decreasing from $4,085,000 to $4,018,000.

This decrease was primarily due to a decrease in loan servicing income, gain on sale of loans, mortgage brokerage income, investment and brokerage services income and miscellaneous other income, which was partially offset by an increase in service charges on deposit accounts, signature based transaction fees, fiduciary activities income and ATM fees. The decrease in loan servicing income was due to a decrease in booked income for the Company’s mortgage servicing asset. The decrease in gain on sale of loans was due to a decrease in the origination and sale of loans compared to the same period in 2005. The Company sold approximately $28,897,000 in residential mortgage loans during the nine-month period ended September 30, 2006, as compared to $43,848,000 for the same period in 2005. The decrease in mortgage brokerage income was due to a decline in mortgage brokerage activity. The decrease in investment and brokerage services income was due to a decline in the demand for investment and brokerage services. The decrease in other miscellaneous income was due to a decrease in net letter of credit fees, which was partially offset by increases in check sales fees, safe deposit fees and deferred compensation insurance earnings. The increase in service charges on deposit accounts was due to an increase in overdraft fees. The increase in signature based transaction fees was due to an increase in signature based transactions. The increase in fiduciary activity income was due to an increase in the demand for fiduciary activity. The increase in ATM fees was due to an increase in ATM usage.
 
Other operating income was down 4.0% for the three-month period ended September 30, 2006 from the same period in 2005, decreasing from $1,506,000 to $1,446,000.

This decrease was primarily due to a decrease in loan servicing income, gain on sale of loans, mortgage brokerage income and ATM fees, which was partially offset by an increase in service charges on deposit accounts, signature based transaction fees, investment and brokerage services income, fiduciary activities income and other miscellaneous income. The decrease in loan servicing income was due to a decrease in booked income for the Company’s mortgage servicing asset. The decrease in gain on sale of loans was due to a decrease in the origination and sale of loans compared to the same period in 2005. The decrease in mortgage brokerage income was due to a decline in mortgage brokerage activity. The decrease in ATM fees was due to a decrease in the ATM usage. The increase in service charges on deposit accounts was due to an increase in overdraft fees. The increase in signature based transaction fees was due to an increase in signature based transactions. The increase in investment and brokerage services income was due to a increase in the demand for investment and brokerage services. The increase in fiduciary activity income was due to an increase in the demand for fiduciary activity. The increase in other miscellaneous income was primarily due to an increase in deferred compensation insurance earnings.
 

 
 
23



Other Operating Expenses

Total other operating expenses was up 7.3% for the three-month period ended September 30, 2006 from the same period in 2005, increasing from $6,760,000 to $7,250,000.

The main reasons for the increase in other operating expenses in the three-month period ended September 30, 2006 were due to increases in the following: salaries and benefits; occupancy and equipment expense; data processing; stationery and supplies; and other miscellaneous operating expenses; which was partially offset by a decrease in advertising costs. The increase in salaries and benefits was due to increases in the following: merit salaries; profit sharing expenses; deferred compensation interest expense; group insurance; welfare and recreation expense; stock compensation expense; and payroll taxes, which were partially offset by a decrease in provision for incentive compensation due to decreased profits; commissions paid; and worker’s compensation expense. The increase in occupancy and equipment expense was due to increased rent expense, depreciation expense, service contracts; utilities expense and maintenance expense. The increase in data processing costs was due to increased expenses associated with maintaining and monitoring the Company’s data communications network and internet banking system. The increase in stationery and supplies was due to an increase in supply usage. The decrease in advertising costs was due to the timing of expenses.

Total other operating expenses was up 8.8% for the nine-month period ended September 30, 2006 from the same period in 2005, increasing from $19,957,000 to $21,718,000.

The main reasons for the increase in other operating expenses in the nine-month period ended September 30, 2006 were due to increases in the following: salaries and benefits; occupancy and equipment expense; data processing; stationery and supplies; and advertising costs; which was partially offset by a decrease in other miscellaneous operating expenses. The increase in salaries and benefits was due to increases in the following: merit salaries; deferred compensation interest expense, provision for incentive compensation and profit sharing expenses due to increased profits; group insurance; welfare and recreation expense; stock compensation expense; and payroll taxes, which were partially offset by a decrease in commissions paid and worker’s compensation expense. The increase in occupancy and equipment expense was due to increased rent expense, depreciation expense, service contracts, utilities expense, equipment rental, maintenance expense, property taxes and hazard and liability insurance expense. The increase in data processing costs was due to increased expenses associated with maintaining and monitoring the Company’s data communications network and internet banking system. The increase in stationery and supplies was due to an increase in supply usage. The increase in advertising costs was due to increased costs associated with new deposit products compared to the same period in 2005.

The following table sets forth other miscellaneous operating expenses by category for the three-month and nine-month periods ended September 30, 2006 and 2005.

   
(in thousands)
       
Three months
ended
Three months
ended
Nine months
ended
Nine months
ended
     
September 30, 2006
September 30, 2005
September 30, 2006
September 30, 2005
                           
 
Other miscellaneous operating expenses
                       
 
(Recovery of) provision for unfunded lending commitments
 
$(61)
   
$—
   
$(61)
   
$81
 
 
Legal fees
 
71
   
30
   
214
   
118
 
 
Accounting and audit fees
 
113
   
102
   
364
   
428
 
 
Consulting fees
   
188
   
96
   
418
   
313
 
 
Postage expense
   
88
   
81
   
276
   
218
 
 
Telephone expense
   
56
   
50
   
156
   
159
 
 
Training expense
 
64
   
71
   
209
   
188
 
 
Loan origination expense
 
153
   
201
   
445
   
674
 
 
Computer software depreciation
 
60
   
58
   
189
   
179
 
 
Other miscellaneous expense
 
481
   
449
   
1,372
   
1,399
 
                 
 
   
 
 
                               
 
Total other miscellaneous operating expenses
 
$1,213
   
$1,138
   
$3,582
   
$3,757
 


 
 
24



Income Taxes

The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by nontaxable earnings primarily affect the Company’s provision for income taxes. In the nine months ended September 30, 2006, the Company’s provision for income taxes increased $477,000 from the same period last year, from $3,519,000 to $3,996,000. The Company’s effective tax rate for the nine months ended September 30, 2006 was 37.2%, compared to 35.4% for the same period in 2005.

In the three months ended September 30, 2006, the Company’s provision for income taxes decreased $224,000 from the same period last year, from $1,419,000 to $1,195,000. The Company’s effective tax rate for the three months ended September 30, 2006 was 36.9%, compared to 37.0% for the same period in 2005.

The provision for income taxes for all periods presented is primarily attributable to the respective level of earnings and the incidence of allowable deductions, in particular non-taxable municipal bond income tax credits generated from low-income housing investments, and for California franchise taxes, higher excludable interest income on loans within designated enterprise zones.

Off-Balance Sheet Commitments

The following table shows the distribution of the Company’s undisbursed loan commitments and standby letters of credit at the dates indicated.

   
(in thousands)
 
           
   
September 30, 2006
 
December 31, 2005
 
Undisbursed loan commitments
 
$
193,589
 
$
203,101
 
Standby letters of credit
   
13,050
   
14,077
 
   
$
206,639
 
$
217,178
 








 
 
25



Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and to maintain an adequate allowance for loan losses at all times.

It is generally the Company's policy to discontinue interest accruals once a loan is past due for a period of ninety days as to interest or principal payments. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected.

Non-accrual loans amounted to $2,798,000 at September 30, 2006 and were comprised of six commercial loans totaling $1,706,000, two agricultural loans totaling $624,000 and two real estate loans totaling $468,000. At December 31, 2005, non-accrual loans amounted to $2,073,000 and were comprised of one commercial loan totaling $289,000 and three agricultural loans totaling $1,784,000. At September 30, 2005, non-accrual loans amounted to $3,147,000 and were comprised of three commercial loans totaling $1,693,000, two agricultural loans totaling $1,411,000 and one installment loan totaling $43,000. The increase in non-accrual loans at September 30, 2006 from the balance at December 31, 2005 was due to the addition of five commercial loans, two real estate loans and one agricultural loan. The increase was partially offset by payoffs on two agricultural loans and payments on one commercial loan and one agricultural loan. The Company’s management believes that nearly $2,311,000 of the non-accrual loans at September 30, 2006 were adequately collateralized or guaranteed by a governmental entity, and the remaining $487,000 may have some potential loss which management believes is sufficiently covered by the Company’s existing loan loss allowance. See“Allowance for Loan Losses” below for additional information. No assurance can be given that the existing or any additional collateral will be sufficient to secure full recovery of the obligations owed under these loans.
 
The Company had no loans 90 days past due and still accruing at September 30, 2006. Such loans amounted to $69,000 and $178,000 at September 30, 2005 and December 31, 2005, respectively.
 
Other real estate owned is made up of property that the Company has acquired by deed in lieu of foreclosure or through normal foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair value of the property is determined prior to transferring the balance to other real estate owned. The balance transferred to OREO is the lesser of the estimated fair market value of the property, or the book value of the loan, less estimated cost to sell. A write-down may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan officer evaluations are then done periodically thereafter charging any additional write-downs to the appropriate expense account.
 
OREO properties amounted to $268,000 at December 31, 2005; this property was sold at a foreclosure sale during the first quarter of 2006. The Company had no OREO properties at September 30, 2006.

 
 
26



Allowance for Loan Losses

The Company’s Allowance for Loan Losses is maintained at a level believed by management to be adequate to provide for loan losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company makes credit reviews of the loan portfolio and considers current economic conditions, loan loss experience and other factors in determining the adequacy of the reserve balance. The allowance for loan losses is based on estimates and actual losses may vary from current estimates.

The following table summarizes the loan loss experience of the Company for the nine-month periods ended September 30, 2006 and 2005, and for the year ended December 31, 2005.

Analysis of the Allowance for Loan Losses
(in thousands)

   
Nine months ended
 
Year ended
 
   
September 30,
 
December 31,
 
   
2006
 
2005
 
2005
 
Balance at Beginning of Period
 
$
7,917
 
$
7,445
 
$
7,445
 
Provision for Loan Losses
   
585
   
   
600
 
Loans Charged-Off:
                   
   Commercial
   
(400
)
 
(91
)
 
(670
)
   Agriculture
   
   
   
 
   Real Estate Mortgage
   
   
   
 
   Real Estate Construction
   
   
   
 
   Installment Loans to Individuals
   
(317
)
 
(110
)
 
(185
)
                     
        Total Charged-Off
   
(717
)
 
(201
)
 
(855
)
Recoveries:
                   
   Commercial
   
480
   
   
64
 
   Agriculture
   
   
663
   
663
 
   Real Estate Mortgage
   
   
   
 
   Real Estate Construction
   
   
   
 
   Installment Loans to Individuals
   
135
   
41
   
 
                     
        Total Recoveries
   
615
   
704
   
727
 
Net (Charge-Offs) Recoveries 
   
(102
)
 
503
   
(128
)
Balance at End of Period
 
$
8,400
 
$
7,948
 
$
7,917
 
Ratio of Net (Charge-Offs)Recoveries 
                   
   To Average Loans Outstanding During the Period
   
(0.02
%)
 
0.11
%
 
(0.03
%)
Allowance for Loan Losses
                   
   To Total Loans at the end of the Period
   
1.70
%
 
1.75
%
 
1.71
%
   To Nonperforming Loans at the end of the Period
   
300.21
%
 
247.14
%
 
351.71
%

Non-performing loans totaled $2,798,000, $3,216,000 and $2,251,000 at September 30, 2006 and 2005 and December 31, 2005, respectively.


 
 
27



Deposits

Deposits are one of the Company’s primary sources of funds.  At September 30, 2006, the Company had the following deposit mix: 32.5% in savings and MMDA deposits, 19.5% in time deposits, 17.7% in interest-bearing transaction deposits and 30.3% in non-interest-bearing transaction deposits.  Non-interest-bearing transaction deposits enhance the Company’s net interest income by lowering its costs of funds.

The Company obtains deposits primarily from the communities it serves.  No material portion of its deposits has been obtained from or is dependent on any one person or industry.  The Company accepts deposits in excess of $100,000 from customers.  These deposits are priced to remain competitive. 

Maturities of time certificates of deposits of $100,000 or more outstanding at September 30, 2006 and December 31, 2005 are summarized as follows:
   
(in thousands)
 
           
   
September 30, 2006
 
December 31, 2005
 
Three months or less
 
$
21,613
 
$
30,401
 
Over three to twelve months
   
37,315
   
31,129
 
Over twelve months
   
5,681
   
3,456
 
   
$
64,609
 
$
65,986
 

Liquidity and Capital Resources

In order to adequately serve our market area, the Company must maintain adequate liquidity and adequate capital. Liquidity is measured by various ratios, with the most common being the ratio of net loans to deposits (including loans held for sale). This ratio was 84.9% on September 30, 2006. In addition, on September 30, 2006, the Company had the following short-term investments: $39,495,000 in Federal funds sold; $13,779,000 in securities due within one year; and $29,835,000 in securities due in one to five years.

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks totaling $25,700,000. Additionally, the Company has a line of credit with the Federal Home Loan Bank, the current borrowing capacity of which is $92,205,000.

The Company’s primary source of liquidity are dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions.

As of September 30, 2006, the Bank’s capital ratios exceeded applicable regulatory requirements. The following tables present the capital ratios for the Bank, compared to the standards for well-capitalized depository institutions, as of September 30, 2006.

   
(in thousands, except percentage amounts)
 
               
   
Actual
 
Well Capitalized Ratio Requirement
 
Minimum
 
   
Capital
 
Ratio
     
Capital
 
Leverage
 
$60,076
 
9.14%
 
5.0%
 
4.0%
 
Tier 1 Risk-Based
 
$
60,076
   
10.72
%
 
6.0
%
 
4.0
%
Total Risk-Based
 
$
66,749
   
11.91
%
 
10.0
%
 
8.0
%

Return on Equity and Assets

   
Nine months ended
September 30,
2006
 
Nine months ended
September 30,
2005
 
Year ended
December 31,
2005
 
Annualized return on average assets
   
1.36
%
 
1.35
%
 
1.35
%
Annualized return on beginning core equity*
   
15.86
%
 
16.85
%
 
17.06
%
 
                     
* Core equity does not include any gains or losses on available for sale securities and other intangible
    assets
 
.
Core equity consisted of $60,712,000, $54,788,000 and $56,683,000 at September 30, 2006, September 30, 2005 and December 31, 2005, respectively.
   

 
 
28



Recent Accounting Pronouncements

In February 2006, the FASB issued FASB Staff Position (“FSP”) No. FAS 123R-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement Upon the Occurrence of a Contingent Event,” which amended the guidance in SFAS No. 123R. This staff position requires that an award of options or similar instruments that otherwise meets the criteria for equity classification, but contains a cash settlement feature that can require the entity to settle the award in cash only upon the occurrence of a contingent event that is outside the employee’s control, should be classified as a liability only when the event’s occurrence is probable. If the occurrence of the contingent event is not probable, equity classification is required. This staff position is effective upon initial adoption of SFAS No. 123R, which the Company adopted as of January 1, 2006. The Company has determined that adoption of FSP No. FAS 123R-4 does not have a material impact on its financial condition, results of operations or cash flows.

Pending Adoption of New Accounting Standards in November 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1"), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosure about unrealized losses that have not been recognized as other-than-temporary impairments. FSP115-1 is effective for reporting periods beginning after December 15, 2005. The Company does not believe the adoption of FSP 115-1 on February 1, 2006 will have a material impact on our financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends the guidance in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with SFAS No. 133. SFAS No. 155 allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings. SFAS No. 155 will be effective for the Company for financial instruments acquired, issued or subject to a re-measurement event in the fiscal year beginning January 1, 2007. The Company does not expect the adoption of SFAS No. 155 to have a material impact on its financial condition, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which amends the guidance in SFAS No. 140. SFAS No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a servicing contract in certain situations. Such servicing assets or servicing liabilities are required to be measured initially at fair value, if practicable. SFAS No. 156 also allows an entity to measure its servicing assets and servicing liabilities subsequently using either the amortization method, which existed under SFAS No. 140, or the fair value measurement method. SFAS No. 156 will be effective for the Company in the fiscal year beginning January 1, 2007. The Company does not expect the adoption of SFAS No. 156 to have a material impact on its financial condition, results of operations or cash flows.

In July 2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109.” and FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48 establishes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial statements.  For tax positions that meet the "more-likely-than-not" threshold, an enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.  The Interpretation is effective January 1, 2007.  The cumulative effect of applying the provisions of the Interpretation would be recognized as an adjustment to the beginning balance of retained earnings. Management is currently evaluating the impact of this interpretation on the Company’s financial position and results of operations.


 
 
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ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2006, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

ITEM 4.  

CONTROLS AND PROCEDURES

Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2006. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

During the quarter ended September 30, 2006, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


 
 
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PART II - OTHER INFORMATION

ITEM 1A.  
 
RISK FACTORS

For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2005, which is incorporated by reference herein and the following information.

Changes in the premiums payable to the Federal Deposit Insurance Corporation will increase our costs and could adversely affect our business.

Deposits of First Northern Bank of Dixon are insured up to statutory limits by the Federal Deposit Insurance Corporation, or FDIC, and, accordingly, are subjected to deposit insurance assessments to maintain the Deposit Insurance Fund. In November 2006, the FDIC issued a final rule effective January 1, 2007 that creates a new assessment system designed to more closely tie what banks pay for deposit insurance to the risks they pose and adopts a new base schedule of rates that the FDIC Board can adjust up or down, depending on the revenue needs of the insurance fund. This new assessment system is expected to result in increased annual assessments on the deposits of First Northern Bank of Dixon. An FDIC credit for prior contributions is expected to offset a portion of the assessment for 2007 and may offset a portion of the assessment for 2008. Significant increases in the insurance assessments First Northern Bank of Dixon pays will increase our costs once the credit is exceeded.


ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases of Equity Securities

On April 20, 2006, the Board of Directors of the Company approved a new stock repurchase program effective April 30, 2006 to replace the Company’s previous stock purchase plan that expired on April 30, 2006. The new stock repurchase program, which will remain in effect until April 30, 2008, allows repurchases by the Company in an aggregate of up to 2 1/2% of the Company’s outstanding shares of common stock over each rolling twelve-month period. The Company repurchased 17,994 shares of the Company’s outstanding common stock during the third quarter ended September 30, 2006.

 
The Company made the following purchases of its common stock during the quarter ended September 30, 2006:
 

   
(a)
 
(b)
 
(c)
 
(d)
 
Period
 
Total number of shares
purchased
 
Average price
paid per share
 
Number of shares purchased as part of publicly announced
plans or programs
 
Maximum number of shares that may yet be purchased under the plans or programs
 
July 1 - July 31, 2006
   
10,221
 
$
26.54
   
10,221
   
162,752
 
August 1 - August 31, 2006
   
7,273
 
$
26.12
   
7,273
   
155,479
 
September 1 - September 30, 2006
   
500
 
$
25.25
   
500
   
154,979
 
Total
   
17,994
 
$
26.34
   
17,994
   
154,979
 


 
 
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ITEM 6.  

EXHIBITS

Exhibit
 
Number
Exhibits
   
31.1
 
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                             
                             


SIGNATURES


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


   
FIRST NORTHERN COMMUNITY BANCORP
     
 
Date: November 8, 2006
By: /s/ Louise A. Walker 
     
   
Louise A. Walker, Sr. Executive Vice President / Chief Financial Officer
   
(Principal Financial Officer and Duly Authorized Officer)


 
 
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