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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2006

ྑ

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

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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%

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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.

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

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)

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

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