**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


———————————


**FORM
      10-K**




**x** **** **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the Fiscal Year Ended December 31, 2006**


**OR**


**o** **** **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(** **d** **)
      OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the transition period from _________ to __________.**




**Commission
      File Number 000-30707**




**First
      Northern Community Bancorp**


(Exact
      name of Registrant as specified in its charter)





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





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





**707-678-3041**


(Registrant’s
      telephone number including area code)





Securities
                registered pursuant to Section 12(b) of the Act:
            NoneSecurities
                registered pursuant to Section 12(g) of the Act:
            Common
                Stock, no par value
              (Title
                of Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


**Yes** **o**  **No** **x**





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act.


**Yes** **o**  **No** **x**





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


**Yes** **x**  **No** **o**





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
      will not be contained, to the best of registrant’s knowledge, in definitive
      proxy or information statements incorporated by reference in Part III of
      this Form 10-K or any amendment to this Form 10-K. x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


**Large
                accelerated filer****o**
            **Accelerated
                filer****x**
            **Non-accelerated
                filer****o**





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


**Yes** **o**  **No** **x**





The
      aggregate market value of the Common Stock held by non-affiliates of the
      registrant on June 30, 2006 (based upon the last reported sales price of such
      stock on the OTC Bulletin Board on June 30, 2006) was $209,686,313.




The
      number of shares of Common Stock outstanding as of March 13, 2007 was 7,958,805.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Items
      10,
      11, 12 (as to security ownership of certain beneficial owners and management),
      13 and 14 of Part III incorporate by reference information from the
      registrant’s proxy statement to be filed with the Securities and Exchange
      Commission in connection with the solicitation of proxies for the registrant’s
      2007 Annual Meeting of Shareholders.













**TABLE
      OF CONTENTS**





**PART
                I**
            **Page**Item
                1. Business
            3Item
                1A. Risk Factors
            14Item
                1B. Unresolved Staff Comments
            19Item
                2. Properties
            19Item
                3. Legal Proceedings
            19Item
                4. Submission of Matters to a Vote of Security
                Holders
            19**PART
                II**Item
                5. Market for the Registrant's Common Equity and Related
                Stockholder Matters
            19Item
                6. Selected Financial Data
            21Item
                7. Management's Discussion and Analysis of Financial
                Condition and Results of Operation
            22Item
                7A. Quantitative and Qualitative Disclosures about Market
                Risk
            41Item
                8. Financial Statements and Supplementary
                Data
            43Item
                9. Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure
            79Item
                9A. Controls and Procedures
            79Item
                9B. Other Information
            80**PART
                III**Item
                10. Directors and Executive Officers of the Registrant
                and Corporate Governance
            80Item
                11. Executive Compensation
            80Item
                12. Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            81Item
                13. Certain Relationships and Related Transactions and
                Director Independence
            81Item
                14. Principal Accountant Fees and
                Services
            81**PART
                IV**Item
                15. Exhibits and Financial Statement
                Schedules
            82Signatures
            84


2
 *Table
            of Contents*
  *This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended, and Section
      21E of the Securities Exchange Act of 1934, as amended, which are subject to
      the
“safe harbor” created by those sections. Forward-looking statements include the
      information concerning possible or assumed future results of operations of
      the
      Company set forth under the heading “Management's Discussion and Analysis of
      Financial Condition and Results of Operations.” Forward-looking statements can
      be identified by the fact that they do no relate strictly to historical or
      current facts. Often they include words such as “expect,” “anticipate,”
“intend,” “plan,” “believe,” estimate,” “consider,” or words of similar meaning,
      or future or conditional verbs such as “will”, “would”, “should”, “could”,
“might”, or “may. These forward-looking statements involve certain risks and
      uncertainties that could cause actual results to differ materially from those
      in
      the forward-looking statements. Such risks and uncertainties include, but are
      not limited to, the risks discussed in Item 1A under the caption “Risk Factors”
and other risk factors discussed elsewhere in this Report. All of these
      forward-looking statements are based on assumptions about an uncertain future
      and are based on information available to us at the date of these statements.
      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.*








**PART
      I**





**ITEM
      1 - BUSINESS**




Unless
      otherwise indicated, all information herein has been adjusted to give effect
      to
      our two-for-one stock split in 2005 and stock dividends.





First
      Northern Bank of Dixon (“First Northern” or the “Bank”) was established in 1910
      under a California state charter as Northern Solano Bank, and opened for
      business on February 1st of that year. On January 2, 1912, the First National
      Bank of Dixon was established under a federal charter, and until 1955, the
      two
      entities operated side by side under the same roof and with the same management.
      In an effort to increase efficiency of operation, reduce operating expense,
      and
      improve lending capacity, the two banks were consolidated on April 8, 1955,
      with
      the First National Bank of Dixon as the surviving entity.





On
      January 1, 1980, the Bank’s federal charter was relinquished in favor of a
      California state charter, and the Bank’s name was changed to First Northern Bank
      of Dixon.





In
      April
      of 2000, the shareholders of First Northern approved a corporate reorganization,
      which provided for the creation of a bank holding company, First Northern
      Community Bancorp (the “Company”). The objective of this reorganization, which
      was effected May 19, 2000, was to enable the Bank to better compete and grow
      in
      its competitive and rapidly changing marketplace. As a result of the
      reorganization, the Bank is a wholly owned and principal operating subsidiary
      of
      the Company.





First
      Northern engages in the general commercial banking business in the Solano,
      Yolo,
      Placer and Sacramento Counties of California.





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





The
      Bank
      has eleven full service branches. Four are located in the Solano County cities
      of Dixon, Fairfield, and Vacaville (2). Four branches are located in the Yolo
      County cities of Winters, Davis, West Sacramento and Woodland. Two branches
      are
      located in Sacramento County, one in Downtown Sacramento and the other in the
      city of Folsom, and one branch is located in the city of Roseville in Placer
      County. The Bank also has two satellite-banking offices inside retirement
      communities in the city of Davis. In addition, the Bank has real estate loan
      offices in Davis, Woodland, Vacaville, Folsom and Roseville that originate
      residential mortgages and construction loans. The Bank also has a Small Business
      Administration (the “SBA”) Loan Department and an Asset Management & Trust
      Department in Downtown Sacramento that serve the Bank’s entire market
      area.





First

      Northern is in the commercial banking business, which includes accepting demand,
      interest bearing transaction, savings, and time deposits, and making commercial,
      consumer, and real estate related loans. It also offers installment note
      collection, issues cashier’s checks and money orders, sells travelers’ checks,
      rents safe deposit boxes, and provides other customary banking services. The
      Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and each
      depositor’s account is insured up to $100,000.





3
 *Table
            of Contents*





First
      Northern also offers a broad range of alternative investment products and
      services. The Bank offers these services through an arrangement with Raymond
      James Financial Services, Inc., an independent broker/dealer and a member of
      NASD and SIPC. All investments and/or financial services offered by
      representatives of Raymond James Financial Services, Inc. are not insured by
      the
      FDIC.





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





The
      operating policy of the Bank since its inception has emphasized serving the
      banking needs of individuals and small-to medium-sized businesses. In Dixon,
      this has included businesses involved in crop and livestock production.
      Historically, the economy of the Dixon area has been primarily dependent upon
      agricultural related sources of income and most employment opportunities have
      also been related to agriculture. Since 2000, Dixon has been growing and
      becoming more diverse with noticeable expansion in the areas of industrial,
      commercial, retail and residential housing projects.





Agriculture
      continued to be a significant factor in the Bank’s business after the opening of
      the first branch office in Winters in 1970. A significant step was taken in
      1976
      to reduce the Company’s dependence on agriculture with the opening of the Davis
      Branch.





The
      Davis
      economy is supported significantly by the University of California, Davis.
      In
      1981, a branch was opened in South Davis, and was consolidated into the main
      Davis Branch in 1986.





In
      1983,
      the West Sacramento Branch was opened. The West Sacramento economy is built
      primarily around transportation and distribution related business. This addition
      to the Bank’s market area further reduced the Company’s dependence on
      agriculture.





In
      order
      to accommodate the demand of the Bank’s customers for long-term residential real
      estate loans, a Real Estate Loan Office was opened in 1983. This office is
      centrally located in Davis, and has enabled the Bank to access the secondary
      real estate market.





The
      Vacaville Branch was opened in 1985. Vacaville is a rapidly growing community
      with a diverse economic base including a California state prison, food
      processing, distribution, shopping centers (Factory Outlet Stores), medical,
      biotech and other varied industries.





In
      1994,
      the Fairfield Branch was opened. Fairfield has also been a rapidly growing
      community bounded by Vacaville on the east. Its diverse economic base includes
      military (Travis AFB), food processing (an Anheuser-Busch plant), retail (Solano
      Mall), manufacturing, medical, agriculture, and other varied industries.
      Fairfield is the county seat of Solano County.





A
      real
      estate loan production office was opened in El Dorado Hills, in April 1996,
      to
      serve the growing mortgage loan demand in the foothills area east of Sacramento.
      This office was moved to Folsom in 2006, a more central location for serving
      Folsom, Rancho Cordova, and the eastern slope of El Dorado County.





The
      SBA
      Loan Department was opened in April 1997 in Sacramento to serve the small
      business and industrial loan demand throughout the Bank’s entire market
      area.





In
      June
      of 1997, the Bank’s seventh branch was opened in Woodland, the county seat of
      Yolo County. Woodland is an expanding and diversified city with an economy
      dominated by agribusiness, retail services, and a healthy industrial
      sector.





The
      Bank’s eighth branch, the Downtown Financial Center, opened in July of 2000 in
      Vacaville to serve the business and individual financial needs on the west
      side
      of Interstate-80. Also in July of 2000, in an adjacent office, the Bank opened
      its third real estate loan production office.





Two
      satellite banking offices of the Bank’s Davis Branch were opened in 2001 in the
      Davis senior living communities of Covell Gardens and the University Retirement
      Community.





In
      December of 2001, Roseville became the site of the Bank’s fourth real estate
      loan production office. This office serves the residential mortgage loan needs
      throughout Placer County.





4
 *Table
            of Contents*





In
      March
      of 2002 the Bank opened its ninth branch in a new class-A commercial building
      located on the harbor in Suisun City. Suisun’s Downtown waterfront area is part
      of an ongoing community revitalization project put into place with the goal
      of
      attracting new small businesses and merchants. After five years in operation
      and
      slower than anticipated city growth, the Bank decided to close its Suisun City
      Branch and serve the Branch’s customers out of its Fairfield Branch. The
      Fairfield Branch is undergoing an expansion and remodel to accommodate the
      additional customers.





In
      October of 2002, the Bank opened its tenth branch on a prominent corner in
      Downtown Sacramento to serve Sacramento Metro’s business center and its
      employees. The Bank’s Asset Management & Trust Department, located on the
      mezzanine of the Downtown Sacramento Branch, was opened in 2002 to serve the
      trust and fiduciary needs of the Bank’s entire market area. Fiduciary services
      are offered to individuals, businesses, governments and charitable organizations
      in the Solano, Yolo, Sacramento, Placer and El Dorado County
      regions.





In
      August
      of 2003, a fifth full service real estate loan production office was opened
      in
      Woodland. This loan office is located within the same commercial office complex
      as the Bank’s Woodland Branch. The Bank’s history of servicing the Woodland
      community, coupled with the continued growth of the Woodland housing market,
      prompted this decision to expand the Bank’s real estate loan services for the
      community.





The
      Bank
      expanded its presence in Placer County in January 2005 by opening a full service
      branch on a prominent corner in the rapidly growing business district of
      Roseville.





In
      the
      fourth quarter of 2006, the Bank opened its Folsom Financial Center which houses
      a full service branch, a real estate loan production office, and an investment
      & brokerage services office. Folsom is one of the fastest growing cities in
      Sacramento County and its central proximity to Rancho Cordova and El Dorado
      Hills makes it ideal for building market share in the eastern part of the
      County.





Through
      this period of change and diversification, the Bank’s strategic focus, which
      emphasizes serving the banking needs of individuals and small to medium-sized
      businesses, has not changed. The Bank takes real estate, crop proceeds,
      securities, savings and time deposits, automobiles, and equipment as collateral
      for loans.





Most
      of
      the Bank’s deposits are attracted from the market of northern and central Solano
      County and southern and central Yolo County. The Company believes that the
      Bank’s deposit base does not involve any undue concentration levels from one or
      a few major depositors.





As
      of
      December 31, 2006, the Company and the Bank employed 242 full-time equivalent
      staff. The Company and the Bank consider their relationship with their employees
      to be good and have not experienced any interruptions of operations due to
      labor
      disagreements.





First
      Northern has historically experienced seasonal swings in both deposit and loan
      volumes due primarily to general economic factors and specific economic factors
      affecting our customers. Deposits have typically hit lows in February or March
      and have peaked in November or December. Loans typically peak in the late spring
      and hit lows in the fall as crops are harvested and sold. Since the real estate
      and agricultural economies generally follow the same seasonal cycle, they
      experience the same deposit and loan fluctuations.





**Available
      Information**





The
      Company’s internet address is www.thatsmybank.com ,
      and the
      Company makes available free of charge on this website its Annual Reports on
      Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
      amendments to those reports, as soon as reasonably practicable after the Company
      electronically files such material with, or furnishes it to, the SEC. These
      filings are also accessible on the SEC's website at www.sec.gov .
      The
      information found on the Company’s website shall not be deemed incorporated by
      reference by any general statement incorporating by reference this report into
      any filing under the Securities Act of 1933 or under the Securities Exchange
      Act
      of 1934, except to the extent the Company specifically incorporates the
      information found on the Company’s website by reference, and shall not otherwise
      be deemed filed under such Acts.





5
 *Table
            of Contents*





**The
      Effect of Government Policy on Banking**





The
      earnings and growth of the Bank are affected not only by local market area
      factors and general economic conditions, but also by government monetary and
      fiscal policies. For example, the Board of Governors of the Federal Reserve
      System (the “FRB”) influences the supply of money through its open market
      operations in U.S. Government securities, adjustments to the discount rates
      applicable to borrowings by depository institutions and others and establishment
      of reserve requirements against both members and non-members financial
      institutions’ deposits. Such actions significantly affect the overall growth and
      distribution of loans, investments and deposits and also affect interest rates
      charged on loans and paid on deposits. The nature and impact of future changes
      in such policies on the business and earnings of the Company cannot be
      predicted. Additionally, state and federal tax policies can impact banking
      organizations.





As
      a
      consequence of the extensive regulation of commercial banking activities in
      the
      United States, the business of the Company is particularly susceptible to being
      affected by the enactment of federal and state legislation which may have the
      effect of increasing or decreasing the cost of doing business, modifying
      permissible activities or enhancing the competitive position of other financial
      institutions. Any change in applicable laws or regulations may have a material
      adverse effect on the business and prospects of the Company.





**Regulation
      and Supervision of Bank Holding Companies**





The
      Company is a bank holding company subject to the Bank Holding Company Act of
      1956, as amended (the “BHCA”). The Company reports to, registers with, and may
      be examined by, the FRB. The FRB also has the authority to examine the Company’s
      subsidiaries. The costs of any examination by the FRB are payable by the
      Company.





The
      Company is a bank holding company within the meaning of Section 3700 of the
      California Financial Code. As such, the Company and the Bank are subject to
      examination by, and may be required to file reports with, the California
      Commissioner of Financial Institutions (the “Commissioner”).





The
      FRB
      has significant supervisory and regulatory authority over the Company and its
      affiliates. The FRB requires the Company to maintain certain levels of capital. *See* “Capital
      Standards” below for more information. The FRB also has the authority to take
      enforcement action against any bank holding company that commits any unsafe
      or
      unsound practice, or violates certain laws, regulations or conditions imposed
      in
      writing by the FRB. *See* “Prompt
      Corrective Action and Other Enforcement Mechanisms” below for more information.
      According to FRB policy, bank holding companies are expected to act as a source
      of financial strength to subsidiary banks, and to commit resources to support
      subsidiary banks. This support may be required at times when a bank holding
      company may not be able to provide such support.





Under
      the
      BHCA, a company generally must obtain the prior approval of the FRB before
      it
      exercises a controlling influence over a bank, or acquires directly or
      indirectly, more than 5% of the voting shares or substantially all of the assets
      of any bank or bank holding company. Thus, the Company is required to obtain
      the
      prior approval of the FRB before it acquires, merges or consolidates with any
      bank or bank holding company. Any company seeking to acquire, merge or
      consolidate with the Company also would be required to obtain the prior approval
      of the FRB.





The
      Company is generally prohibited under the BHCA from acquiring ownership or
      control of more than 5% of the voting shares of any company that is not a bank
      or bank holding company and from engaging directly or indirectly in activities
      other than banking, managing banks, or providing services to affiliates of
      the
      holding company. However, a bank holding company, with the approval of the
      FRB,
      may engage, or acquire the voting shares of companies engaged, in activities
      that the FRB has determined to be so closely related to banking or managing
      or
      controlling banks as to be a proper incident thereto. A bank holding company
      must demonstrate that the benefits to the public of the proposed activity will
      outweigh the possible adverse effects associated with such
      activity.





6
 *Table
            of Contents*





The
      Gramm-Leach-Bliley Act of 1999 (“GLBA”) eliminated many of the restrictions
      placed on the activities of bank holding companies that become financial holding
      companies. Among other things, GLBA repealed certain Glass-Steagall Act
      restrictions on affiliations between banks and securities firms, and amended
      the
      BHCA to permit bank holding companies that are financial holding companies
      to
      engage in activities, and acquire companies engaged in activities, that are:
      financial in nature (including insurance underwriting, insurance company
      portfolio investment, financial advisor, securities underwriting, dealing and
      market-making, and merchant banking activities); incidental to financial
      activities; or complementary to financial activities if the FRB determines
      that
      they pose no substantial risk to the safety or soundness of depository
      institutions or the financial system in general. The Company has not become
      a
      financial holding company. GLBA also permits national banks to engage in
      activities considered financial in nature through a financial subsidiary,
      subject to certain conditions and limitations and with the approval of the
      Comptroller of the Currency.





A
      bank
      holding company may acquire banks in states other than its home state without
      regard to the permissibility of such acquisitions under state law, but subject
      to any state requirement that the bank has been organized and operating for
      a
      minimum period of time, not to exceed five years, and the requirement that
      the
      bank holding company, prior to or following the proposed acquisition, controls
      no more than 10% of the total amount of deposits of insured depository
      institutions in the United States and no more than 30% of such deposits in
      that
      state (or such lesser or greater amount set by state law). Banks may also merge
      across state lines, thereby creating interstate branches. Furthermore, a bank
      is
      able to open new branches in a state in which it does not already have banking
      operations, if the laws of such state permit such de novo
      branching.





Under
      California law, (a) out-of-state banks that wish to establish a California
      branch office to conduct core banking business must first acquire an existing
      California bank or industrial bank, which has existed for at least five years,
      by merger or purchase, (b) California state-chartered banks are empowered to
      conduct various authorized branch-like activities on an agency basis through
      affiliated and unaffiliated insured depository institutions in California and
      other states, and (c) the Commissioner of Financial Institutions is authorized
      to approve an interstate acquisition or merger which would result in a deposit
      concentration in California exceeding 30% if the Commissioner finds that the
      transaction is consistent with public convenience and advantage. However, a
      state bank chartered in a state other than California may not enter California
      by purchasing a California branch office of a California bank or industrial
      bank
      without purchasing the entire entity or by establishing a de novo California
      bank.





The
      FRB
      generally prohibits a bank holding company from declaring or paying a cash
      dividend which would impose undue pressure on the capital of subsidiary banks
      or
      would be funded only through borrowing or other arrangements that might
      adversely affect a bank holding company's financial position. The FRB's policy
      is that a bank holding company should not continue its existing rate of cash
      dividends on its common stock unless its net income is sufficient to fully
      fund
      each dividend and its prospective rate of earnings retention appears consistent
      with its capital needs, asset quality and overall financial condition. The
      Company is also subject to restrictions relating to the payment of dividends
      under California corporate law. See “Restrictions on Dividends and Other
      Distributions” below for additional restrictions on the ability of the Company
      and the Bank to pay dividends.





Transactions
      between the Company and the Bank are subject to a number of other restrictions.
      FRB policies forbid the payment by bank subsidiaries of management fees, which
      are unreasonable in amount or exceed the fair market value of the services
      rendered (or, if no market exists, actual costs plus a reasonable profit).
      Subject to certain limitations, depository institution subsidiaries of bank
      holding companies may extend credit to, invest in the securities of, purchase
      assets from, or issue a guarantee, acceptance, or letter of credit on behalf
      of,
      an affiliate, provided that the aggregate of such transactions with affiliates
      may not exceed 10% of the capital stock and surplus of the institution, and
      the
      aggregate of such transactions with all affiliates may not exceed 20% of the
      capital stock and surplus of such institution. The Company may only borrow
      from
      depository institution subsidiaries of the Company if the loan is secured by
      marketable obligations with a value of a designated amount in excess of the
      loan. Further, the Company may not sell a low-quality asset to the
      Bank.





7
 *Table
            of Contents*





**Bank
      Regulation and Supervision**





The
      Bank
      is subject to regulation, supervision and regular examination by the California
      Department of Financial Institutions (“DFI”) and the FDIC and the Company by the
      FRB. The regulations of these agencies affect most aspects of the Company’s
      business and prescribe permissible types of loans and investments, the amount
      of
      required reserves, requirements for branch offices, the permissible scope of
      the
      Company’s activities and various other requirements. While the Bank is not a
      member of the FRB, it is also directly subject to certain regulations of the
      FRB
      dealing primarily with check clearing activities, establishment of banking
      reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD),
      and
      Equal Credit Opportunity (Regulation B). In addition, the banking industry
      is
      subject to significantly increased regulatory scrutiny and enforcement regarding
      Bank Secrecy Act and anti-money laundering matters. In recent years, a number
      of
      banks and bank holding companies announced the imposition of regulatory
      sanctions, including regulatory agreements and cease and desist orders and,
      in
      some cases, fines and penalties by the bank regulators due to failures to comply
      with the Bank Secrecy Act and other anti-money laundering legislation. In a
      number of these cases, the fines and penalties have been
      significant.





Under
      California law, the Bank is subject to various restrictions on, and requirements
      regarding, its operations and administration including the maintenance of branch
      offices and automated teller machines, capital and reserve requirements,
      deposits and borrowings, stockholder rights and duties, and investment and
      lending activities.





California
      law permits a state chartered bank to invest in the stock and securities of
      other corporations, subject to a state chartered bank receiving either general
      authorization or, depending on the amount of the proposed investment, specific
      authorization from the Commissioner. Federal banking laws, however, impose
      limitations on the activities and equity investments of state chartered,
      federally insured banks. The FDIC rules on investments prohibit a state bank
      from acquiring an equity investment of a type, or in an amount, not permissible
      for a national bank. Non-permissible investments must have been divested by
      state banks no later than December 19, 1996. FDIC rules also prohibit a state
      bank from engaging as a principal in any activity that is not permissible for
      a
      national bank, unless the bank is adequately capitalized and the FDIC approves
      the activity after determining that such activity does not pose a significant
      risk to the deposit insurance fund. The FDIC rules on activities generally
      permit subsidiaries of banks, without prior specific FDIC authorization, to
      engage in those activities that have been approved by the FRB for bank holding
      companies because such activities are so closely related to banking to be a
      proper incident thereto. Other activities generally require specific FDIC prior
      approval and the FDIC may impose additional restrictions on such activities
      on a
      case-by-case basis in approving applications to engage in otherwise
      impermissible activities.





**The
      USA Patriot Act**





Title
      III
      of the United and Strengthening America by Providing Appropriate Tools Required
      to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) includes
      numerous provisions for fighting international money laundering and blocking
      terrorism access to the U.S. financial system. The USA Patriot Act requires
      certain additional due diligence and record keeping practices, including, but
      not limited to, new customers, correspondent and private banking accounts. In
      March
      2006, President Bush signed into law a renewal of the USA Patriot
      Act.





Part
      of
      the USA Patriot Act is the International Money Laundering Abatement and
      Financial Anti-Terrorism Act of 2001 (“IMLAFATA”). Among its provisions,
      IMLAFATA requires each financial institution to: (i) establish an anti-money
      laundering program; (ii) establish appropriate anti-money laundering policies,
      procedures and controls; (iii) appoint a Bank Secrecy Act officer responsible
      for day-to-day compliance; and (iv) conduct independent audits. In addition,
      IMLAFATA contains a provision encouraging cooperation among financial
      institutions, regulatory authorities and law enforcement authorities with
      respect to individuals, entities and organizations engaged in, or reasonably
      suspected of engaging in, terrorist acts or money laundering activities.
      IMLAFATA expands the circumstances under which funds in a bank account may
      be
      forfeited and requires covered financial institutions to respond under certain
      circumstances to requests for information from federal banking agencies within
      120 hours. IMLAFATA also amends the BHCA and the Bank Merger Act to require
      the
      federal banking agencies to consider the effectiveness of a financial
      institution's anti-money laundering activities when reviewing an application
      under these Acts.





Pursuant
      to IMLAFATA, the Secretary of the Treasury, in consultation with the heads
      of
      other government agencies, has adopted and proposed special measures applicable
      to banks, bank holding companies, and/or other financial institutions. These
      measures include enhanced record keeping and reporting requirements for certain
      financial transactions that are of primary money laundering concern, due
      diligence requirements concerning the beneficial ownership of certain types
      of
      accounts, and restrictions or prohibitions on certain types of accounts with
      foreign financial institutions.





8
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**Privacy
      Restrictions**





GLBA,
      in
      addition to the previous described changes in permissible non-banking activities
      permitted to banks, bank holding companies and financial holding companies,
      also
      requires financial institutions in the U.S. to provide certain privacy
      disclosures to customers and consumers, to comply with certain restrictions
      on
      the sharing and usage of personally identifiable information, and to implement
      and maintain commercially reasonable customer information safeguarding
      standards.





The
      Company believes that it complies with all provisions of GLBA and all
      implementing regulations, and the Bank has developed appropriate policies and
      procedures to meet its responsibilities in connection with the privacy
      provisions of GLBA.





California
      and other state legislatures have adopted privacy laws, including laws
      prohibiting sharing of customer information without the customer’s prior
      permission. These laws may make it more difficult for the Company to share
      information with its marketing partners, reduce the effectiveness of marketing
      programs, and increase the cost of marketing programs.





**Capital
      Standards**





The
      federal banking agencies have risk-based capital adequacy guidelines intended
      to
      provide a measure of capital adequacy that reflects the degree of risk
      associated with a banking organization's operations for both transactions
      reported on the balance sheet as assets and transactions, such as letters of
      credit and recourse arrangements, which are recorded as off-balance-sheet items.
      Under these guidelines, nominal dollar amounts of assets and credit equivalent
      amounts of off-balance-sheet items are multiplied by one of several risk
      adjustment percentages, which range from 0% for assets with low credit risk,
      such as certain U.S. government securities, to 100% for assets with relatively
      higher credit risk, such as certain loans.





In
      determining the capital level the Bank is required to maintain, the federal
      banking agencies do not, in all respects, follow generally accepted accounting
      principles (“GAAP”) and have special rules which have the effect of reducing the
      amount of capital that will be recognized for purposes of determining the
      capital adequacy of the Bank.





A
      banking
      organization's risk-based capital ratios are obtained by dividing its qualifying
      capital by its total risk-adjusted assets and off-balance-sheet items. The
      regulators measure risk-adjusted assets and off balance sheet items against
      both
      total qualifying capital (the sum of Tier 1 capital and limited amounts of
      Tier
      2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained
      earnings, non-cumulative perpetual preferred stock, trust preferred securities
      (for up to 25% of total tier 1 capital), other types of qualifying preferred
      stock and minority interests in certain subsidiaries, less most other intangible
      assets and other adjustments. Net unrealized losses on available-for-sale equity
      securities with readily determinable fair value must be deducted in determining
      Tier 1 capital. For Tier 1 capital purposes, deferred tax assets that can only
      be realized if an institution earns sufficient taxable income in the future
      are
      limited to the amount that the institution is expected to realize within one
      year, or 10% of Tier 1 capital, whichever is less. Tier 2 capital may consist
      of
      a limited amount of the allowance for possible loan and lease losses, term
      preferred stock and other types of preferred stock and trust preferred
      securities not qualifying as Tier 1 capital, term subordinated debt and certain
      other instruments with some characteristics of equity. The inclusion of elements
      of Tier 2 capital are subject to certain other requirements and limitations
      of
      the federal banking agencies. The federal banking agencies require a minimum
      ratio of qualifying total capital to risk-adjusted assets and off-balance-sheet
      items of 8%, and a minimum ratio of Tier 1 capital to adjusted average
      risk-adjusted assets and off-balance-sheet items of 4%.





Under
      FDIC regulations, there are also two rules governing minimum capital levels
      that
      FDIC-supervised banks must maintain against the risks to which they are exposed.
      The first rule makes risk-based capital standards consistent for two types
      of
      credit enhancements (i.e., recourse arrangements and direct credit substitutes)
      and requires different amounts of capital for different risk positions in asset
      securitization transactions. The second rule permits limited amounts of
      unrealized gains on debt and equity securities to be recognized for risk-based
      capital purposes as of September 1, 1998. The FDIC rules also provide that
      a
      qualifying institution that sells small business loans and leases with recourse
      must hold capital only against the amount of recourse retained. In general,
      a
      qualifying institution is one that is well capitalized under the FDIC's prompt
      corrective action rules. The amount of recourse that can receive the
      preferential capital treatment cannot exceed 15% of the institution's total
      risk-based capital.





9
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Effective
      January 1, 2002, the federal banking agencies, including the FDIC, adopted
      new
      regulations to change their regulatory capital standards to address the
      treatment of recourse obligations, residual interests and direct credit
      substitutes in asset securitizations that expose banks primarily to credit
      risk.
      Capital requirements for positions in securitization transactions are varied
      according to their relative risk exposures, while limited use is permitted
      of
      credit ratings from rating agencies, a banking organization’s qualifying
      internal risk rating system or qualifying software. The regulation requires
      a
      bank to deduct from Tier 1 capital, and from assets, all credit-enhancing
      interest only-strips, whether retained or purchased that exceed 25% of Tier
      1
      capital. Additionally, a bank must maintain dollar-for-dollar risk-based capital
      for any remaining credit-enhancing interest-only strips and any residual
      interests that do not qualify for a ratings-based approach. The regulation
      specifically reserves the right to modify any risk-weight, credit conversion
      factor or credit equivalent amount, on a case-by-case basis, to take into
      account any novel transactions that do not fit well into the currently defined
      categories.





In
      addition to the risk-based guidelines, federal banking regulators require
      banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
      average total assets, referred to as the leverage capital ratio. For a banking
      organization rated in the highest of the five categories used by regulators
      to
      rate banking organizations, the minimum lever-age ratio of Tier 1 capital to
      total assets must be 3%. It is improbable; however, that an institution with
      a
      3% leverage ratio would receive the highest rating by the regulators since
      a
      strong capital position is a significant part of the regulators' rating. For
      all
      banking organizations not rated in the highest category, the minimum leverage
      ratio must be at least 100 to 200 basis points above the 3% minimum. Thus,
      the
      effective minimum leverage ratio, for all practical purposes, must be at least
      4% or 5%. In addition to these uniform risk-based capital guidelines and
      leverage ratios that apply across the industry, the regulators have the
      discretion to set individual minimum capital requirements for specific
      institutions at rates significantly above the minimum guidelines and
      ratios.





As
      of
      December 31, 2006, the Company’s and the Bank’s capital ratios exceeded
      applicable regulatory requirements.





The
      following tables present the capital ratios for the Company and the Bank,
      compared to the standards for well-capitalized bank holding companies and
      depository institutions, as of December 31, 2006 (amounts in thousands
      except percentage amounts).





The
                CompanyWell
            
            MinimumActual
            
            Capitalized
            
            CapitalCapital
            
            Ratio
            
            Ratio
            
            RequirementLeverage
            
            $
            62,400
            
            
            9.1
            %
            
            5.0
            %
            
            4.0
            %Tier 1
                Risk-Based
            
            
            62,400
            
            
            11.1
            %
            
            6.0
            %
            
            4.0
            %Total
                Risk-Based
            
            
            69,078
            
            
            12.3
            %
            
            10.0
            %
            
            8.0
            %





The
                BankWell
            
            MinimumActual
            
            Capitalized
            
            CapitalCapital
            
            Ratio
            
            Ratio
            
            RequirementLeverage
            
            $
            61,719
            
            
            9.0
            %
            
            5.0
            %
            
            4.0
            %Tier 1
                Risk-Based
            
            
            61,719
            
            
            11.0
            %
            
            6.0
            %
            
            4.0
            %Total
                Risk-Based
            
            
            68,397
            
            
            12.2
            %
            
            10.0
            %
            
            8.0
            %





The
      federal banking agencies must take into consideration concentrations of credit
      risk and risks from non-traditional activities, as well as an institution's
      ability to manage those risks, when determining the adequacy of an institution's
      capital. This evaluation will be made as a part of the institution's regular
      safety and soundness examination. The federal banking agencies must also
      consider interest rate risk (when the interest rate sensitivity of an
      institution's assets does not match the sensitivity of its liabilities or its
      off-balance-sheet position) in evaluating a Bank’s capital
      adequacy.





10
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            of Contents*





**Prompt
      Corrective Action and Other Enforcement Mechanisms**





The
      Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
      requires each federal banking agency to take prompt corrective action to resolve
      the problems of insured depository institutions, including but not limited
      to
      those that fall below one or more prescribed minimum capital ratios. The law
      required each federal banking agency to promulgate regulations defining the
      following five categories in which an insured depository institution will be
      placed, based on the level of its capital ratios: well capitalized, adequately
      capitalized, under-capitalized, significantly undercapitalized and critically
      undercapitalized.





Under
      the
      prompt corrective action provisions of FDICIA, an insured depository institution
      generally will be classified in the following categories based on the capital
      measures indicated below:





“Well
                capitalized”
              Total
                risk-based capital of 10%;
              Tier 1
                risk-based capital of 6%; and
              Leverage
                ratio of 5%.
            “Adequately
                capitalized”
              Total
                risk-based capital of 8%;
              Tier 1
                risk-based capital of 4%; and
              Leverage
                ratio of 4%.





“Undercapitalized”
              Total
                risk-based capital less than 8%;
              Tier 1
                risk-based capital less than 4%; or
              Leverage
                ratio less than 4%.
            “Significantly
                undercapitalized”
              Total
                risk-based capital less than 6%;
              Tier 1
                risk-based capital less than 3%; or
              Leverage
                ratio less than 3%.





“Critically
                undercapitalized”
              Tangible
                equity to total assets less than 2%.





An
      institution that, based upon its capital levels, is classified as “well
      capitalized,” “adequately capitalized” or “under-capitalized” may be treated as
      though it were in the next lower capital category if the appropriate federal
      banking agency, after notice and opportunity for hearing, determines that
      an unsafe or unsound condition or an unsafe or unsound practice warrants such
      treatment. At each successive lower capital category, an insured depository
      institution is subject to more restrictions. Management believes that at
      December 31, 2006, the Company and the Bank met the requirements for “well
      capitalized institutions.”





In
      addition to measures taken under the prompt corrective action provisions,
      commercial banking organizations may be subject to potential enforcement actions
      by the federal regulators for unsafe or unsound practices in conducting their
      businesses or for violations of any law, rule, regulation or any condition
      imposed in writing by the agency or any written agreement with the agency.
      Enforcement actions may include the imposition of a conservator or receiver,
      the
      issuance of a cease-and-desist order that can be judicially enforced, the
      termination of insurance of deposits (in the case of a depository institution),
      the imposition of civil money penalties, the issuance of directives to increase
      capital, the issuance of formal and informal agreements, the issuance of removal
      and prohibition orders against institution-affiliated parties and the
      enforcement of such actions through injunctions or restraining orders based
      upon
      a judicial determination that the agency would be harmed if such equitable
      relief was not granted. Additionally, a holding company’s inability to serve as
      a source of strength to its subsidiary banking organizations could serve as
      an
      additional basis for a regulatory action against the holding
      company.





**Safety
      and Soundness Standards**





FDICIA
      also implemented certain specific restrictions on transactions and required
      federal banking regulators to adopt overall safety and soundness standards
      for
      depository institutions related to internal control, loan underwriting and
      documentation and asset growth. Among other things, FDICIA limits the interest
      rates paid on deposits by undercapitalized institutions, restricts the use
      of
      brokered deposits, limits the aggregate extensions of credit by a depository
      institution to an executive officer, director, principal shareholder or related
      interest, and reduces deposit insurance coverage for deposits offered by
      undercapitalized institutions for deposits by certain employee benefits
      accounts.





The
      federal banking agencies may require an institution to submit to an acceptable
      compliance plan as well as have the flexibility to pursue other more appropriate
      or effective courses of action given the specific circumstances and severity
      of
      an institution's non-compliance with one or more standards.





11
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            of Contents*





**Restrictions
      on Dividends and Other Distributions**





The
      power
      of the board of directors of an insured depository institution to declare a
      cash
      dividend or other distribution with respect to capital is subject to statutory
      and regulatory restrictions which limit the amount available for such
      distribution depending upon the earnings, financial condition and cash needs
      of
      the institution, as well as general business conditions. FDICIA prohibits
      insured depository institutions from paying management fees to any controlling
      persons or, with certain limited exceptions, making capital distributions,
      including dividends, if, after such transaction, the institution would be
      undercapitalized.





The
      federal banking agencies also have authority to prohibit a depository
      institution from engaging in business practices, which are considered to be
      unsafe or unsound, possibly including payment of dividends or other payments
      under certain circumstances even if such payments are not expressly prohibited
      by statute.





In
      addition to the restrictions imposed under federal law, banks chartered under
      California law generally may only pay cash dividends to the extent such payments
      do not exceed the lesser of retained earnings of the Bank’s net income for its
      last three fiscal years (less any distributions to shareholders during such
      period). In the event a bank desires to pay cash dividends in excess of such
      amount, the bank may pay a cash dividend with the prior approval of the
      Commissioner in an amount not exceeding the greatest of the Bank’s retained
      earnings, the Bank’s net income for its last fiscal year, or the Bank’s net
      income for its current fiscal year.





**Premiums
      for Deposit Insurance**





The
      Bank
      is a member of the Deposit Insurance Fund (DIF) maintained by the FDIC. Through
      the DIF, the FDIC insures the deposits of the Bank up to prescribed limits
      for
      each depositor. The DIF was formed March 31, 2006, upon the merger of the Bank
      Insurance Fund and the Savings Insurance Fund in accordance with the Federal
      Deposit Insurance Reform Act of 2005. To maintain the DIF, member institutions
      are assessed an insurance premium based on their deposits and their
      institutional risk category. The FDIC determines an institution’s risk category
      by combining its supervisory ratings with its financial ratios and other risk
      measures.




To
      offset
      assessments, a member institution may apply certain one time credits, based
      on
      the institution’s (or its successor’s) assessment base as of the end of 1996. An
      institution may apply available credits up to 100% of assessments in 2007,
      and
      up to 90% of assessments in each of 2008, 2009 and 2010. Based on available
      credits, we expect the increase in total deposit insurance expense in 2007
      under
      the new assessment schedule to be fully offset.




The
      FDIC
      may terminate a depository institution’s deposit insurance upon a finding that
      the institution’s financial condition is unsafe or unsound or that the
      institution has engaged in unsafe or unsound practices or has violated any
      applicable rule, regulation, order or condition enacted or imposed by the
      institution’s regulatory agency. The termination of deposit insurance for the
      Bank would have a material adverse effect on our business and
      prospects.




The
      Deposit Insurance Funds Act of 1996 (the “Deposit Funds Act”) separated the
      Financing Corporation (“FICO”) assessment to service the interest on FICO bond
      obligations from the BIF and Savings Association Insurance Fund (“SAIF”)
      assessments. The FICO annual assessment on individual depository institutions
      is
      in addition to the amount, if any, paid for deposit insurance according to
      the
      FDIC’s risk-based assessment rate schedules. FICO assessment rates may be
      adjusted quarterly by the FDIC. The current FICO assessment rate is 1.32 cents
      per $100 of deposits. In addition, the FDIC has authority to impose special
      assessments from time to time, subject to certain limitations specified in
      the
      Deposit Funds Act.





**Community
      Reinvestment Act and Fair Lending**





The
      Bank
      is subject to certain fair lending requirements and reporting obligations
      involving home mortgage lending operations and Community Reinvestment Act
      (“CRA”) activities. The CRA generally requires the federal banking agencies to
      evaluate the record of a financial institution in meeting the credit needs
      of
      the bank’s local communities, including low and moderate-income neighborhoods.
      In addition to substantive penalties and corrective measures that may be
      required for a violation of certain fair lending laws, the federal banking
      agencies may take compliance with such laws and CRA into account when regulating
      and supervising other activities, particularly applications involving business
      expansion.





12
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            of Contents*





**Sarbanes
      - Oxley Act**





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





·
            the
                creation of a five-member oversight board that sets standards for
                accountants and has investigative and disciplinary
                powers;


·
            the
                prohibition of accounting firms from providing various types of consulting
                services to public clients and requires accounting firms to rotate
                partners among public client assignments every five
                years;


·
            increased
                penalties for financial crimes;


·
            expanded
                disclosure of corporate operations and internal controls and certification
                of financial statements;


·
            enhanced
                controls on, and reporting of, insider trading;
                and


·
            prohibition
                on lending to officers and directors of public companies, although
                the
                Bank may continue to make these loans within the constraints of existing
                banking regulations.





Among
      other provisions, Section 302(a) of the Sarbanes-Oxley Act requires that our
      Chief Executive Officer and Chief Financial Officer certify that our quarterly
      and annual reports do not contain any untrue statement or omission of a material
      fact. Specific requirements of the certifications include having these officers
      confirm that they are responsible for establishing, maintaining and regularly
      evaluating the effectiveness of our disclosure controls and procedures; they
      have made certain disclosures to our auditors and Audit Committee about our
      internal controls; and they have included information in our quarterly and
      annual reports about their evaluation and whether there have been significant
      changes in our internal controls or in other factors that could significantly
      affect internal controls subsequent to their evaluation.





In
      addition, Section 404 of the Sarbanes-Oxley Act and the SEC’s rules and
      regulations thereunder require our management to evaluate, with the
      participation of our principal executive and principal financial officers,
      the
      effectiveness, as of the end of each fiscal year, of our internal control over
      financial reporting. Our management must then provide a report of management
      on
      our internal control over financial reporting that contains, among other things,
      a statement of their responsibility for establishing and maintaining adequate
      internal control over financial reporting, and a statement identifying the
      framework they used to evaluate the effectiveness of our internal control over
      financial reporting.





**Pending
      Legislation and Regulations**





Proposals
      to change the laws and regulations governing the banking and financial services
      industry are frequently introduced in Congress, in the state legislatures and
      before the various bank regulatory agencies. The likelihood and timing of any
      such changes and the impact such changes might have on the Company cannot be
      determined at this time.





**Competition**





In
      the
      past, an independent bank’s principal competitors for deposits and loans have
      been other banks (particularly major banks), savings and loan associations
      and
      credit unions. For agricultural loans, the Bank also competes with constituent
      entities with the Federal Farm Credit System. To a lesser extent, competition
      was also provided by thrift and loans, mortgage brokerage companies and
      insurance companies. Other institutions, such as brokerage houses, mutual fund
      companies, credit card companies, and even retail establishments have offered
      new investment vehicles, which also compete with banks for deposit business.
      The
      direction of federal legislation in recent years seems to favor competition
      among different types of financial institutions and to foster new entrants
      into
      the financial services market.





13
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            of Contents*





The
      enactment of GLBA is the latest evidence of this trend, and it is anticipated
      that this trend will continue as financial services institutions combine to
      take
      advantage of the elimination of the barriers against such affiliations. The
      enactment of the federal Interstate Banking and Branching Act in 1994 and the
      California Interstate Banking and Branching Act of 1995 have increased
      competition within California. Recent legislation has also made it easier for
      out-of-state credit unions to conduct business in California and allows
      industrial banks to offer consumers more lending products. Moreover, regulatory
      reform, as well as other changes in federal and California law will also affect
      competition. The availability of banking services over the Internet or
“e-banking” has continued to expand. While the impact of these changes, and of
      other proposed changes, cannot be predicted with certainty, it is clear that
      the
      business of banking in California will remain highly competitive.





In
      order
      to compete with major financial institutions and other competitors in its
      primary service areas, the Bank relies upon the experience of its executive
      and
      senior officers in serving business clients, and upon its specialized services,
      local promotional activities and the personal contacts made by its officers,
      directors and employees.





For
      customers whose loan demand exceeds the Bank’s legal lending limit, the Bank may
      arrange for such loans on a participation basis with correspondent banks. The
      seasonal swings discussed earlier have, in the past, had some impact on the
      Bank’s liquidity. The management of investment maturities, sale of loan
      participations, federal fund borrowings, qualification for funds under the
      Federal Reserve Bank’s seasonal credit program, and the ability to sell
      mortgages in the secondary market has allowed the Bank to satisfactorily manage
      its liquidity.





**ITEM
      1A - RISK FACTORS**





In
      addition to factors mentioned elsewhere in this Report, the factors contained
      below, among others, could cause our financial condition and results of
      operations to be materially and adversely affected. If this were to happen,
      the
      value of our common stock could decline, perhaps significantly, and you could
      lose all or part of your investment.





**The
      Bank is Subject to Lending Risks of Loss and Repayment Associated with
      Commercial Banking Activities**





The
      Bank’s business strategy is to focus on commercial business loans (which
      includes agricultural loans), construction loans and commercial and multi-family
      real estate loans. The principal factors affecting the Bank’s risk of loss in
      connection with commercial business loans include the borrower's ability to
      manage its business affairs and cash flows, general economic conditions and,
      with respect to agricultural loans, weather and climate conditions. Loans
      secured by commercial real estate are generally larger and involve a greater
      degree of credit and transaction risk than residential mortgage (one to four
      family) loans. Because payments on loans secured by commercial and multi-family
      real estate properties are often dependent on successful operation or management
      of the underlying properties, repayment of such loans may be dependent on
      factors other than the prevailing conditions in the real estate market or the
      economy. Real estate construction financing is generally considered to involve
      a
      higher degree of credit risk than long-term financing on improved,
      owner-occupied real estate. Risk of loss on a construction loan is dependent
      largely upon the accuracy of the initial estimate of the property's value at
      completion of construction or development compared to the estimated cost
      (including interest) of construction. If the estimate of value proves to be
      inaccurate, the Bank may be confronted with a project which, when completed,
      has
      a value which is insufficient to assure full repayment of the construction
      loan.





Although
      the Bank manages lending risks through its underwriting and credit
      administration policies, no assurance can be given that such risks will not
      materialize, in which event, the Company’s financial condition, results of
      operations, cash flows and business prospects could be materially adversely
      affected.





**The
      Bank’s Dependence on Real Estate Lending Increases Our Risk of
      Losses**





At
      December 31, 2006, approximately 70% of the Bank’s loans (excluding loans
      held-for-sale) were secured by real estate. The value of the Bank’s real estate
      collateral has been, and could in the future continue to be, adversely affected
      by any economic recession and any resulting adverse impact on the real estate
      market in Northern California such as that experienced during the early 1990’s. *See* “Adverse
      California Economic Conditions Could Adversely Affect the Bank’s Business”
below.





14
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            of Contents*





The
      Bank’s primary lending focus has historically been commercial (including
      agricultural), construction and real estate mortgage. At December 31, 2006,
      real
      estate mortgage (excluding loans held-for-sale) and construction loans comprised
      approximately 48% and 22%, respectively, of the total loans in the Bank’s
      portfolio. At December 31, 2006, all of the Bank’s real estate mortgage and
      construction loans and approximately 49% of its commercial loans were secured
      fully or in part by deeds of trust on underlying real estate. The Company’s
      dependence on real estate increases the risk of loss in both the Bank’s loan
      portfolio and its holdings of other real estate owned if economic conditions
      in
      Northern California deteriorate in the future. Deterioration of the real estate
      market in Northern California would have a material adverse effect on the
      Company’s business, financial condition and results of operations. *See* “Adverse
      California Economic Conditions Could Adversely Affect the Bank’s Business”
below.





**Adverse
      California Economic Conditions Could Adversely Affect the Bank’s
      Business**





The
      Bank’s operations and a substantial majority of the Bank’s assets and deposits
      are generated and concentrated primarily in Northern California, particularly
      the counties of Placer, Sacramento, Solano and Yolo, and are likely to remain
      so
      for the foreseeable future. At December 31, 2006, approximately 70% of the
      Bank’s loan portfolio (excluding loans held-for-sale) consisted of real
      estate-related loans, all of which were secured by collateral located in
      Northern California. As a result, poor economic conditions in Northern
      California may cause the Bank to incur losses associated with high default
      rates
      and decreased collateral values in its loan portfolio. In the early 1990’s, the
      California economy experienced an economic recession that resulted in increases
      in the level of delinquencies and losses for many of the state’s financial
      institutions. Economic conditions in California are subject to various
      uncertainties at this time, including the softening in the California real
      estate market and housing industry. California’s state government has undergone
      serious fiscal and budget difficulties in the recent past. If economic
      conditions in California decline or if California were to experience another
      recession, it is expected that the Bank’s level of problem assets would increase
      accordingly. California real estate is also subject to certain natural
      disasters, such as earthquakes, floods and mudslides, which are typically not
      covered by the standard hazard insurance policies maintained by borrowers.
      Uninsured disasters may make it difficult or impossible for borrowers to repay
      loans made by the Bank. The occurrence of natural disasters in California could
      have a material adverse effect on the Company’s financial condition, results of
      operations, cash flows and business prospects.





**The
      Bank is Subject to Interest Rate Risk**





The
      income of the Bank depends to a great extent on “interest rate differentials”
and the resulting net interest margins (i.e., the difference between the
      interest rates earned on the Bank’s interest-earning assets such as loans and
      investment securities, and the interest rates paid on the Bank’s
      interest-bearing liabilities such as deposits and borrowings). These rates
      are
      highly sensitive to many factors, which are beyond the Bank’s control,
      including, but not limited to, general economic conditions and the policies
      of
      various governmental and regulatory agencies, in particular, the FRB. The Bank
      is generally adversely affected by declining interest rates. Changes in the
      relationship between short-term and long-term market interest rates or between
      different interest rate indices, can also impact our interest rate differential,
      possibly resulting in a decrease in our interest income relative to interest
      expense. In addition, changes in monetary policy, including changes in interest
      rates, influence the origination of loans, the purchase of investments and
      the
      generation of deposits and affect the rates received on loans and investment
      securities and paid on deposits, which could have a material adverse effect
      on
      the Company’s business, financial condition and results of operations. See
“Quantitative and Qualitative Disclosures About Market Risk” below.




**Potential
      Volatility of Deposits May Increase Our Cost of Funds**





At
      December 31, 2006, 11% of the dollar value of the Company’s total deposits was
      represented by time certificates of deposit in excess of $100,000. These
      deposits are considered volatile and could be subject to withdrawal. Withdrawal
      of a material amount of such deposits would adversely impact the Company’s
      liquidity, profitability, business prospects, results of operations and cash
      flows.





**Our
      Ability to Pay Dividends is Subject to Legal Restrictions**





As
      a bank
      holding company, our cash flow typically comes from dividends of the Bank.
      Various statutory and regulatory provisions restrict the amount of dividends
      the
      Bank can pay. The ability of the Company to pay cash dividends in the future
      also depends on the Company’s profitability, growth and capital needs. In
      addition, California law restricts the ability of the Company to pay dividends.
      No assurance can be given that the Company will pay any dividends in the future
      or, if paid, such dividends will not be discontinued. *See* “Business
      - Restrictions on Dividends and Other Distributions” above.





15
 *Table
            of Contents*





**Competition
      Adversely Affects our Profitability**





In
      California generally, and in the Bank’s primary market area specifically, major
      banks dominate the commercial banking industry. By virtue of their larger
      capital bases, such institutions have substantially greater lending limits
      than
      those of the Bank. In obtaining deposits and making loans, the Bank competes
      with these larger commercial banks and other financial institutions, such as
      savings and loan associations, credit unions and member institutions of the
      Farm
      Credit System, which offer many services that traditionally were offered only
      by
      banks. Using the financial holding company structure, insurance companies and
      securities firms may compete more directly with banks and bank holding
      companies. In addition, the Bank competes with other institutions such as mutual
      fund companies, brokerage firms, and even retail stores seeking to penetrate
      the
      financial services market. Also, technology and other changes increasingly
      allow
      parties to complete financial transactions electronically, and in many cases,
      without banks. For example, consumers can pay bills and transfer funds over
      the
      internet and by telephone without banks. Non-bank financial service providers
      may have lower overhead costs and are subject to fewer regulatory constraints.
      If consumers do not use banks to complete their financial transactions, we
      could
      potentially lose fee income, deposits and income generated from those deposits.
      During periods of declining interest rates, competitors with lower costs of
      capital may solicit the Bank’s customers to refinance their loans. Furthermore,
      during periods of economic slowdown or recession, the Bank’s borrowers may face
      financial difficulties and be more receptive to offers from the Bank’s
      competitors to refinance their loans. No assurance can be given that the Bank
      will be able to compete with these lenders. See “Business - Competition”
above.





**Government
      Regulation and Legislation**





The
      Company and the Bank are subject to extensive state and federal regulation,
      supervision and legislation, which govern almost all aspects of the operations
      of the Company and the Bank. The business of the Bank is particularly
      susceptible to being affected by the enactment of federal and state legislation,
      which may have the effect of increasing the cost of doing business, modifying
      permissible activities or enhancing the competitive position of other financial
      institutions. Such laws are subject to change from time to time and are
      primarily intended for the protection of consumers, depositors and the deposit
      insurance funds and not for the protection of shareholders of the Company.
      The
      Company cannot predict what effect any presently contemplated or future changes
      in the laws or regulations or their interpretations would have on the business
      and prospects of the Company, but it could be material and adverse. *See* “Bank
      Regulation and Supervision” above.




**Our
      Controls and Procedures May Fail or be Circumvented**




The
      Company maintains controls and procedures to mitigate against risks such as
      processing system failures and errors, and customer or employee fraud, and
      maintains insurance coverage for certain of these risks. Any system of controls
      and procedures, however well designed and operated, is based in part on certain
      assumptions and can provide only reasonable, not absolute, assurances that
      the
      objectives of the system are met. Events could occur which are not prevented
      or
      detected by the Company’s internal controls or are not insured against or are in
      excess of the Company’s insurance limits. Any failure or circumvention of the
      Company’s controls and procedures or failure to comply with regulations related
      to controls and procedures could have a material adverse effect on the Company’s
      business, results of operations and financial condition.





**Recent
      Changes in Deposit Insurance Premiums Could Adversely Affect Our
      Business**




In
      2006,
      the FDIC created a new assessment system designed to more closely tie what
      banks
      pay for deposit insurance to the risks they pose and adopted a new base schedule
      of rates that the FDIC 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 deposits of the Bank. Although an FDIC credit
      for prior contributions is expected to fully offset the assessment for 2007,
      increases in the insurance assessments will increase our costs once the credit
      is exceeded.




16
 *Table
            of Contents*





**Negative
      Public Opinion could Damage Our Reputation and Adversely Affect Our
      Earnings**





Reputational
      risk, or the risk to our earnings and capital from negative public opinion,
      is
      inherent in our business. Negative public opinion can result from the actual
      or
      perceived manner in which we conduct our business activities, management of
      actual or potential conflicts of interest and ethical issues and our protection
      of confidential client information. Negative public opinion can adversely affect
      our ability to keep and attract customers and can expose us to litigation and
      regulatory action. We take steps to minimize reputation risk in the way we
      conduct our business activities and deal with our clients and
      communities.





**Reliance
      on Key Employees and Others**





The
      Company’s future success depends to a significant extent on the efforts and
      abilities of its executive officers. The loss of the services of certain of
      these individuals, or the failure of the Company to attract and retain other
      qualified personnel, could have a material adverse effect on the Company’s
      business, financial condition and results of operations.





**War
      on Terrorism; Foreign Hostilities**





Acts
      or
      threats of terrorism and actions taken by the U.S. or other governments as
      a
      result of such acts or threats and other international hostilities may result
      in
      a downturn in U.S. economic conditions and could adversely affect business
      and
      economic conditions in the U.S. generally and in our principal markets. The
      war
      in Iraq has also generated various political and economic uncertainties
      affecting the global and U.S. economies.





**Critical
      Accounting Policies**





The
      Company’s financial statements are presented in accordance with accounting
      principles generally accepted in the United States of America (“US GAAP”). The
      financial information contained within our financial statements is, to a
      significant extent, financial information that is based on approximate measures
      of the financial effects of transactions and events that have already occurred.
      A variety of factors could affect the ultimate value that is obtained either
      when earning income, recognizing an expense, recovering an asset or relieving
      a
      liability. Along with other factors, we use historical loss factors to determine
      the inherent loss that may be present in our loan portfolio. Actual losses
      could
      differ significantly from the historical loss factors that we use. Other
      estimates that we use are fair value of our securities and expected useful
      lives
      of our depreciable assets. We have not entered into derivative contracts for
      our
      customers or for ourselves, which relate to interest rate, credit, equity,
      commodity, energy, or weather-related indices. US GAAP itself may change from
      one previously acceptable method to another method. Although the economics
      of
      our transactions would be the same, the timing of events that would impact
      our
      transactions could change. Accounting standards and interpretations currently
      affecting the Company and its subsidiaries may change at any time, and the
      Company’s financial condition and results of operations may be adversely
      affected.





**Adequacy
      of Allowance for Loan and Other Real Estate Losses**





The
      Bank’s allowance for estimated losses on loans was approximately $8.4 million,
      or 1.73% of total loans at December 31, 2006 compared to $7.9 million or 1.70%
      of total loans at December 31, 2005 and 243% of total non-performing loans
      at
      December 31, 2006 compared to 352% at December 31, 2005. Material future
      additions to the allowance for estimated losses on loans may be necessary if
      material adverse changes in economic conditions occur and the performance of
      the
      Bank’s loan portfolio deteriorates. In addition an allowance for losses on other
      real estate owned may also be required in order to reflect changes in the
      markets for real estate in which the Bank’s other real estate owned is located
      and other factors which may result in adjustments which are necessary to ensure
      that the Bank’s foreclosed assets are carried at the lower of cost or fair
      value, less estimated costs to dispose of the properties. Moreover, the FDIC
      and
      the DFI, as an integral part of their examination process, periodically review
      the Bank’s allowance for estimated losses on loans and the carrying value of its
      assets. Increases in the provisions for estimated losses on loans and foreclosed
      assets would adversely affect the Bank’s financial condition and results of
      operations. *See* “Management's
      Discussion and Analysis of Financial Condition and Results of Operations -
      Summary of Loan Loss Experience” below.





17
 *Table
            of Contents*





**Shares
      Eligible for Future Sale**





As
      of
      December 31, 2006, the Company had 7,980,952 shares of Common Stock outstanding,
      all of which are eligible for sale in the public market without restriction.
      Future sales of substantial amounts of the Company’s Common Stock, or the
      perception that such sales could occur, could have a material adverse effect
      on
      the market price of the Common Stock. In addition, options to acquire up to
      6%
      of the unissued authorized shares of Common Stock at exercise prices ranging
      from $4.27 to $27.75 have been issued to directors and employees of the Company,
      over the past seven (7) years, under the Company’s 2000 Stock Option Plan and
      Outside Directors 2000 Non-statutory Stock Option Plan, and options to acquire
      up to an additional 10% of the unissued authorized shares of Common Stock are
      reserved for issuance under such plans. No prediction can be made as to the
      effect, if any, that future sales of shares, or the availability of shares
      for
      future sale, will have on the market price of the Company’s Common Stock. *See* “Market
      for the Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities” below.





**Limited
      Public Market; Volatility in Stock Price**





The
      Company’s common stock is not listed on any exchange, nor is it included on
      NASDAQ. However, trades may be reported on the OTC Bulletin Board under the
      symbol “FNRN”. The Company is aware that Howe Barnes Hoefer & Arnett, Stone
& Youngberg, Wedbush Morgan Securities and Monroe Securities, Inc., all
      currently make a market in the Company’s common stock. Management is aware that
      there are also private transactions in the Company’s common stock. However, the
      limited trading market for the Company’s common stock may make it difficult for
      shareholders to dispose of their shares. Also, the price of the Company’s common
      stock may be affected by general market price movements as well as developments
      specifically related to the financial services sector, including interest rate
      movements, quarterly variations, or changes in financial estimates by securities
      analysts and a significant reduction in the price of the stock of another
      participant in the financial services industry, as well as the level of
      repurchases of Company stock by the Company pursuant to its stock repurchase
      program.





**Technology
      and Computer Systems**





Advances
      and changes in technology can significantly impact the business and operations
      of the Company. The Company faces many challenges including the increased demand
      for providing computer access to Company accounts and the systems to perform
      banking transactions electronically. The Company’s merchant processing services
      require the use of advanced computer hardware and software technology and
      rapidly changing customer and regulatory requirements. The Company’s ability to
      compete depends on its ability to continue to adapt its technology on a timely
      and cost-effective basis to meet these requirements. In addition, the Company’s
      business and operations are susceptible to negative impacts from computer system
      failures, communication and energy disruption and unethical individuals with
      the
      technological ability to cause disruptions or failures of the Company’s data
      processing systems.





**Environmental
      Risks**





The
      Company, in its ordinary course of business, acquires real property securing
      loans that are in default, and there is a risk that hazardous substances or
      waste, contaminants or pollutants could exist on such properties. The Company
      may be required to remove or remediate such substances from the affected
      properties at its expense, and the cost of such removal or remediation may
      substantially exceed the value of the affected properties or the loans secured
      by such properties. Furthermore, the Company may not have adequate remedies
      against the prior owners or other responsible parties to recover its costs.
      Finally, the Company may find it difficult or impossible to sell the affected
      properties either prior to or following any such removal. In addition, the
      Company may be considered liable for environmental liabilities in connection
      with its borrowers' properties, if, among other things, it participates in
      the
      management of its borrowers' operations. The occurrence of such an event could
      have a material adverse effect on the Company’s business, financial condition,
      results of operations and cash flows.





**Dilution**





As
      of
      December 31, 2006, the Company had outstanding options to purchase an aggregate
      of 517,953 shares of Common Stock at exercise prices ranging from $4.27 to
      $27.75 per share, or a weighted average exercise price per share of $10.94.
      To
      the extent such options are exercised, shareholders of the Company will
      experience dilution. *See* “Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities” below.





18
 *Table
            of Contents*





**ITEM
      1B - UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2 - PROPERTIES**





The
      Company and the Bank are engaged in the banking business through 19 offices
      in
      five counties in Northern California including six offices in Solano County,
      eight in Yolo County, three in Sacramento County and two in Placer County.
      In
      addition, the Company owns two vacant lots, one in northern Solano County and
      the other in eastern Sacramento County for possible future bank sites. The
      Company and the Bank believe all of their offices are constructed and equipped
      to meet prescribed security requirements.





The
      Bank
      owns three branch office locations and two administrative facilities and leases
      13 facilities. Most of the leases contain multiple renewal options and
      provisions for rental increases, principally for changes in the cost of living
      index, property taxes and maintenance.





**ITEM
      3 - LEGAL PROCEEDINGS**





Neither
      the Company nor the Bank is a party to any material pending legal proceeding,
      nor is any of their property the subject of any material pending legal
      proceeding, except ordinary routine litigation arising in the ordinary course
      of
      the Bank's business and incidental to its business, none of which is expected
      to
      have a material adverse impact upon the Company's or the Bank's business,
      financial position or results of operations.





**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





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








**PART
      II**





**ITEM
      5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**





The
      Company’s common stock is not listed on any exchange, nor is it included on
      NASDAQ. However, trades may be reported on the OTC Bulletin Board under the
      symbol “FNRN”. The Company is aware that Howe Barnes Hoefer & Arnett, Stone
& Youngberg, Wedbush Morgan Securities and Monroe Securities, Inc., all
      currently make a market in the Company’s common stock. Management is aware that
      there are also private transactions in the Company’s common stock and the data
      set forth below may not reflect all such transactions.





The
      following table summarizes the range of reported high and low bid quotations
      of
      the Company’s Common Stock for each quarter during the last two fiscal years and
      is based on information provided by Stone & Youngberg. The quotations
      reflect the price that would be received by the seller without retail mark-up,
      mark-down or commissions and may not have represented actual
      transactions:





QUARTER/YEAR
            
            HIGH*
            
            LOW*4th
                Quarter 2006
            
            $25.53
            
            $21.463rd
                Quarter 2006
            
            $25.46
            
            $23.582nd
                Quarter 2006
            
            $27.36
            
            $24.621st
                Quarter 2006
            
            $27.12
            
            $22.474th
                Quarter 2005
            
            $22.34
            
            $20.473rd
                Quarter 2005
            
            $22.25
            
            $20.252nd
                Quarter 2005
            
            $23.04
            
            $14.241st
                Quarter 2005
            
            $14.68
            
            $11.75





*
            Price
                adjusted for dividends and splits.





19
 *Table
            of Contents*





As
      of
      December 31, 2006, there were approximately 1,148 holders of record of the
      Company’s common stock, no par value, which is the only class of equity
      securities authorized or issued.





In
      the
      last two fiscal years the Company has declared the following stock
      dividends:





Shareholder
              Record
                Date
            
            Dividend
              Percentage
            
            Date
              PayableFebruary
                28, 2007
            
            6%
            
            March
                30, 2007February
                28, 2006
            
            6%
            
            March
                31, 2006February
                28, 2005
            
            6%
            
            March
                31, 2005





In
      addition to the above, on April 21, 2005, the Board of Directors of the Company
      declared a two-for-one stock split. The stock split doubled the outstanding
      common stock recorded on the books of the Company as of the record date, May
      10,
      2005.





The
      Company does not expect to pay a cash dividend in the foreseeable
      future.





**Purchases
      of Equity Securities by the Issuer or Affiliated
      Purchasers**





On
      April
      20, 2006, the Company approved a 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
      2.5%
      of the Company’s outstanding shares of common stock over each rolling
      twelve-month period. The Company repurchased 30,078 shares of the Company’s
      outstanding common stock during the fourth quarter of 2006. The following table
      details stock repurchase activity during this period:




(a)
              (b)
              (c)
              (d)Period
              Total
                  number of shares purchased
              Average
                  price paid per share
              Total
                  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
                  programsOctober
                  1 - October 31, 2006
              16,599
              $25.24
              16,599
              138,380November
                  1 - November 30, 2006
              11,360
              $24.86
              11,360
              127,020December
                  1 - December 31, 2006
              2,119
              $23.16
              2,119
              124,901Total
              30,078
              $24.95
              30,078
              124,901


20
 *Table
            of Contents*
  **ITEM
      6 - SELECTED FINANCIAL DATA**





The
      selected consolidated financial data below have been derived from the Company’s
      audited consolidated financial statements. The selected consolidated financial
      data set forth below as of December 31, 2003, and 2002 have been derived from
      the Company’s historical financial statements not included in this Report. The
      financial information for 2006, 2005 and 2004 should be read in conjunction
      with
“Management's Discussion and Analysis of Financial Condition and Results of
      Operations,” which is in Part II (Item 7) of this Report and with the Company’s
      audited consolidated financial statements and the notes thereto, which are
      included in Part II (Item 8) of this Report.





**Consolidated
      Financial Data as of and for the years ended December
      31,**


(in
      thousands, except share and per share amounts)





2006
            
            2005
            
            2004
            
            2003
            
            2002Interest
                Income and Loan Fees
            
            $
            48,070
            
            $
            40,902
            
            $
            31,619
            
            $
            30,326
            
            $
            28,941Interest
                Expense
            
            
            (9,426
            )
            
            (5,729
            )
            
            (3,426
            )
            
            (3,109
            )
            
            (4,237
            )Net
                Interest Income
            
            
            38,644
            
            
            35,173
            
            
            28,193
            
            
            27,217
            
            
            24,704Provision
                for Loan Losses
            
            
            (735
            )
            
            (600
            )
            
            (207
            )
            
            (2,153
            )
            
            (676
            )Net
                Interest Income after Provision for Loan Losses
            
            
            37,909
            
            
            34,573
            
            
            27,986
            
            
            25,064
            
            
            24,028Other
                Operating Income
            
            
            5,289
            
            
            5,720
            
            
            5,214
            
            
            7,160
            
            
            4,972Other
                Operating Expense
            
            
            (29,219
            )
            
            (26,813
            )
            
            (22,943
            )
            
            (22,868
            )
            
            (20,411
            )Income
                before Taxes
            
            
            13,979
            
            
            13,480
            
            
            10,257
            
            
            9,356
            
            
            8,589Provision
                for Taxes
            
            
            (5,169
            )
            
            (4,792
            )
            
            (3,550
            )
            
            (3,245
            )
            
            (2,871
            )Net
                Income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707
            
            $
            6,111
            
            $
            5,718Basic
                Income Per Share
            
            $
            1.04
            
            $
            1.02
            
            $
            .78
            
            $
            .71
            
            $
            .65Diluted
                Income Per Share
            
            $
            0.99
            
            $
            0.98
            
            $
            .76
            
            $
            .69
            
            $
            .64Total
                Assets
            
            $
            685,225
            
            $
            660,647
            
            $
            629,503
            
            $
            559,441
            
            $
            495,876Total
                Investments
            
            $
            76,273
            
            $
            48,788
            
            $
            55,154
            
            $
            50,235
            
            $
            69,958Total
                Loans, including loans held-for-sale, net
            
            $
            480,009
            
            $
            460,501
            
            $
            433,421
            
            $
            380,491
            
            $
            356,018Total
                Deposits
            
            $
            603,682
            
            $
            581,781
            
            $
            557,186
            
            $
            498,849
            
            $
            442,241Total
                Equity
            
            $
            61,990
            
            $
            56,802
            
            $
            51,901
            
            $
            46,972
            
            $
            43,442Weighted
                Average Shares of Common Stock outstanding used for Basic Income
                Per Share
                Computation1
            
            
            8,468,643
            
            
            8,531,880
            
            
            8,585,409
            
            
            8,608,209
            
            
            8,749,315Weighted
                Average Shares of Common Stock outstanding used for Diluted Income
                Per
                Share Computation1
            
            
            8,882,925
            
            
            8,881,596
            
            
            8,809,916
            
            
            8,799,158
            
            
            8,999,552Return
                on Average Total Assets
            
            
            1.32
            %
            
            1.35
            %
            
            1.14
            %
            
            1.18
            %
            
            1.25
            %Net
                Income/Average Equity
            
            
            14.90
            %
            
            16.17
            %
            
            13.73
            %
            
            13.56
            %
            
            13.71
            %Net
                Income/Average Deposits
            
            
            1.49
            %
            
            1.52
            %
            
            1.28
            %
            
            1.32
            %
            
            1.40
            %Average
                Loans/Average Deposits
            
            
            81.20
            %
            
            79.44
            %
            
            75.81
            %
            
            79.25
            %
            
            73.99
            %Average
                Equity to Average Total Assets
            
            
            8.87
            %
            
            8.37
            %
            
            8.32
            %
            
            8.69
            %
            
            9.11
            %





1. All
      years
      have been restated to give retroactive effect for stock dividends issued and
      stock splits.





21
 *Table
            of Contents*





**ITEM
      7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATION**





*This
      report includes forward-looking statements, which include forecasts of our
      financial results and condition, expectations for our operations and business,
      and our assumptions for those forecasts and expectations. Do not rely unduly
      on
      forward-looking statements. Actual results might differ significantly from
      our
      forecasts and expectations. Please refer to Part I, Item 1A “Risk Factors” for a
      discussion of some factors that may cause results to differ.*





**Introduction**





This
      overview of Management’s Discussion and Analysis highlights selected information
      in this annual report and may not contain all of the information that is
      important to you. For a more complete understanding of trends, events,
      commitments, uncertainties, liquidity, capital resources and critical accounting
      estimates, you should carefully read this entire annual report.





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





The
      Company experienced strong earnings performance in 2006 due to a combination
      of
      (1) growth in earning assets, (2) improvement in the mix of earning assets
      as
      reflected by an increase in loans as a percentage of average earning assets,
      and
      (3) the increase in low cost deposits which helped to support the increase
      in
      loans. Financial highlights for 2006 include:





·
            Net
                income for 2006 totaled $8.8 million, a 1.2% increase compared to
                $8.7
                million for 2005. Net income per common share for 2006 of $1.04 increased
                2.0% compared to $1.02 for 2005, and net income per common share
                on a
                fully diluted basis was $0.99 for 2006, an increase of 1.0% compared
                to
                $0.98 for 2005.





·
            Loans
                (including loans held-for-sale) increased to $480.0 million at
                December 31, 2006, a 4.2% increase from $460.5 million at
                December 31, 2005. Commercial loans totaled $97.3 million at
                December 31, 2006, up 11.7% from $87.1 million a year earlier;
                agriculture loans were $38.6 million, up 17.7% from $32.8 million
                at
                December 31, 2005; real estate construction loans were $106.8 million,
                up
                3.3% from $103.4 million at December 31, 2005; and real estate
                mortgage loans were $232.0 million, down 0.4% from $233.0 million
                a year
                earlier.





·
            Average
                deposits grew to $589.8 million during 2006, a $20.0 million or 3.5%
                increase from 2005.





·
            The
                Company reported average total assets of $666.4 million at
                December 31, 2006, up 3.7% from $642.5 million a year
                earlier.





·
            The
                provision for loan losses in 2006 totaled $735,000, an increase of
                22.5%
                from $600,000 in 2005. Net charge-offs were $291,000 in 2006 compared
                to
                $128,000 in net charge-offs in 2005. The increase in the provision
                for
                loan losses and increase in net charge-offs can be primarily attributed
                to
                increased loan volume combined with charge-offs.





·
            Net
                interest income totaled $38.6 million for 2006, an increase of 9.7%
                from
                $35.2 million in 2005, primarily due to strong loan volumes and increased
                rates.





·
            Other
                operating income totaled $5.3 million for the year ended December 31,
                2006, a decrease of 7.0% from $5.7 million for the year ended
                December 31, 2005. The decrease was due primarily to decreases in
                gains on sales of loans and gains on other real estate
                owned.





·
            Other
                operating expenses totaled $29.2 million for 2006, up 9.0% from $26.8
                million in 2005. Contributing to the increase were increased salaries
                and
                employee benefits, increased rents and other expenses associated
                with
                opening new branches and offices, and advertising
                expenses.








22
 *Table
            of Contents*





In
      2007,
      the Company intends to continue its long-term strategy of maintaining deposit
      growth to fund growth in loans and other earning assets and intends to identify
      opportunities for growing other operating income in areas such as Asset
      Management and Trust and Investment and Brokerage Services, and deposit fee
      income while remaining conscious of the need to maintain appropriate expense
      levels. We expect gradual growth in commercial and real estate loan volumes
      and
      deposit growth, assuming that inflation remains in check throughout the year.
      If
      the current flat or inverted interest rate environment continues, the Company’s
      net interest income and net interest margin may decrease due to an increase
      in
      the cost of deposits, unless accompanied by a disproportionate increase in
      loan
      volume.





**Critical
      Accounting Policies and Estimates**





The
      Company’s discussion and analysis of its financial condition and results of
      operations are based upon the Company’s consolidated financial statements, which
      have been prepared in accordance with accounting principles generally accepted
      in the United States. The preparation of these financial statements requires
      the
      Company to make estimates and judgments that affect the reported amounts of
      assets, liabilities, income and expenses, and related disclosure of contingent
      assets and liabilities. On an on-going basis, the Company evaluates its
      estimates, including those related to the allowance for loan losses, other
      real
      estate owned, investments and income taxes. The Company bases its estimates
      on
      historical experience and on various other assumptions that are believed to
      be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions.





The
      Company’s most significant estimates are approved by its senior management team.
      At the end of each financial reporting period, a review of these estimates
      is
      presented to the Company’s Board of Directors.





The
      Company believes the following critical accounting policy affects its more
      significant judgments and estimates used in the preparation of its consolidated
      financial statements. The Company believes the allowance for loan losses
      accounting policy is critical because the loan portfolio represents the largest
      asset type on the consolidated balance sheet. The Company maintains an allowance
      for loan losses resulting from the inability of borrowers to make required
      loan
      payments. Loan losses are charged off against the allowance, while recoveries
      of
      amounts previously charged off are credited to the allowance. A provision for
      loan losses is charged to operations based on the Company’s periodic evaluation
      of the factors mentioned below, as well as other pertinent factors. The
      allowance for loan losses consists of an allocated component and an unallocated
      component. The components of the allowance for loan losses represent an
      estimation done pursuant to either Statement of Financial Accounting Standards
      No. (“SFAS”) 5, Accounting for Contingencies, or SFAS 114, Accounting by
      Creditors for Impairment of a Loan. The allocated component of the allowance
      for
      loan losses reflects expected losses resulting from analyses developed through
      specific credit allocations for individual loans and historical loss experience
      for each loan category. The specific credit allocations are based on regular
      analyses of all loans where the internal credit rating is at or below a
      predetermined classification. These analyses involve a high degree of judgment
      in estimating the amount of loss associated with specific loans, including
      estimating the amount and timing of future cash flows and collateral values.
      The
      historical loan loss element is determined using analysis that examines loss
      experience.





The
      allocated component of the allowance for loan losses also includes consideration
      of concentrations and changes in portfolio mix and volume. The unallocated
      portion of the allowance reflects the Company’s estimate of probable inherent
      but undetected losses within the portfolio due to uncertainties in economic
      conditions, delays in obtaining information, including unfavorable information
      about a borrower’s financial condition, the difficulty in identifying triggering
      events that correlate perfectly to subsequent loss rates, and risk factors
      that
      have not yet manifested themselves in loss allocation factors. Uncertainty
      surrounding the strength and timing of economic cycles also affects estimates
      of
      loss. There are many factors affecting the allowance for loan losses; some
      are
      quantitative while others require qualitative judgment. Although the Company
      believes its process for determining the allowance adequately considers all
      of
      the potential factors that could potentially result in credit losses, the
      process includes subjective elements and may be susceptible to significant
      change. To the extent actual outcomes differ from Company estimates, additional
      provision for credit losses could be required that could adversely affect
      earnings or financial position in future periods.





23
 *Table
            of Contents*





**Prospective
      Accounting Pronouncements**





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 will 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 will 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 was
      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.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      and
      expands disclosures about fair value measurements. SFAS No. 157 establishes
      a
      fair value hierarchy about the assumptions used to measure fair value and
      clarifies assumptions about risk and the effect of a restriction on the sale
      or
      use of an asset. The standard is effective for fiscal years beginning after
      November 15, 2007. The Company has not completed its evaluation of the impact
      of
      the adoption of this standard.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” Under this standard, the Company
      may elect to report financial instruments and certain other items at fair value
      on a contract-by-contract basis with changes in value reported in earnings.
      This
      election is irrevocable. SFAS No. 159 provides an opportunity to mitigate
      volatility in reported earnings that is caused by measuring hedged assets and
      liabilities that were previously required to use a different accounting method
      than the related hedging contracts when the complex provisions of SFAS No.
      133
      hedge accounting are not met.




SFAS
      No.
      159 is effective for years beginning after November 15, 2007. Early adoption
      within 120 days of the beginning of the Company’s 2007 fiscal year is
      permissible, provided the Company has not yet issued interim financial
      statements for 2007 and has adopted SFAS No. 157. The Company has not completed
      its evaluation of the impact of the adoption of this standard.




In
      September 2006, the Emerging Issues Task Force issued EITF 06-4, “Accounting for
      Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements.” This consensus concludes that for a
      split-dollar life insurance arrangement within the scope of this Issue, an
      employer should recognize a liability for future benefits in accordance with
      FASB Statement No. 106 (if, in substance, a postretirement benefit plan exits)
      or APB Opinion No. 12 (if the arrangement is, in substance, an individual
      deferred compensation contract) based on the substantive agreement with the
      employee. The consensus is effective for fiscal years beginning after December
      15, 2007. The Company has not completed its evaluation of the impact of the
      adoption of this standard.





24
 *Table
            of Contents*





In
      September 2006, The Emerging Issues Task Force issued EITF 06-5, “Accounting for
      Purchases of Life Insurance- Determining the Amount That Could Be Realized
      in
      Accordance with FASB
      Technical Bulletin No. 85-4 .”
This
      consensus concludes that a policyholder should consider any additional amounts
      included in the contractual terms of the insurance policy other than the cash
      surrender value in determining the amount that could be realized under the
      insurance contract. A consensus also was reached that a policyholder should
      determine the amount that could be realized under the life insurance contract
      assuming the surrender of an individual-life by individual-life policy (or
      certificate by certificate in a group policy). The consensuses are effective
      for
      fiscal years beginning after December 15, 2006. The Company has not completed
      its evaluation of the impact of the adoption of this standard.




**STATISTICAL
      INFORMATION AND DISCUSSION**





The
      following statistical information and discussion should be read in conjunction
      with the Selected Financial Data included in Part II (Item 6) and the audited
      consolidated financial statements and accompanying notes included in Part II
      (Item 8) of this Annual Report on Form 10-K.





The
      following tables present information regarding the consolidated average assets,
      liabilities and stockholders’ equity, the amounts of interest income from
      average earning assets and the resulting yields, and the amount of interest
      expense paid on interest-bearing liabilities. Average loan balances include
      non-performing loans. Interest income includes proceeds from loans on
      non-accrual status only to the extent cash payments have been received and
      applied as interest income. Tax-exempt income is not shown on a tax equivalent
      basis.





**Distribution
      of Assets, Liabilities and Stockholders' Equity;**


**Interest
      Rates and Interest Differential**





2006
            
            2005
            
            2004Average
              Balance
            
            Percent
            
            Average
              Balance
            
            Percent
            
            Average
              Balance
            
            PercentASSETSCash
                and Due From Banks
            
            $
            29,934
            
            
            4.49
            %
            $
            31,287
            
            
            4.87
            %
            $
            37,542
            
            
            6.40
            %Investment
                Securities:U.S.
                Government Securities
            
            
            31,968
            
            
            4.80
            %
            
            20,279
            
            
            3.16
            %
            
            15,745
            
            
            2.68
            %Obligations
                of States & PoliticalSubdivisions
            
            
            23,688
            
            
            3.56
            %
            
            27,045
            
            
            4.21
            %
            
            32,899
            
            
            5.60
            %Other
                Securities
            
            
            11,201
            
            
            1.68
            %
            
            3,065
            
            
            0.48
            %
            
            3,277
            
            
            0.56
            %Federal
                Funds Sold
            
            
            61,904
            
            
            9.29
            %
            
            81,948
            
            
            12.75
            %
            
            77,169
            
            
            13.15
            %Loans1
            
            
            478,908
            
            
            71.87
            %
            
            452,646
            
            
            70.45
            %
            
            395,883
            
            
            67.43
            %Other
                Assets
            
            
            28,750
            
            
            4.31
            %
            
            26,211
            
            
            4.08
            %
            
            24,551
            
            
            4.18
            %Total
                Assets
            
            $
            666,353
            
            
            100.00
            %
            $
            642,481
            
            
            100.00
            %
            $
            587,066
            
            
            100.00
            %LIABILITIES
                & STOCKHOLDERS' EQUITYDeposits:Demand
            
            $
            187,766
            
            
            28.18
            %
            $
            184,171
            
            
            28.67
            %
            $
            158,676
            
            
            27.03
            %Interest-Bearing
                Transaction Deposits
            
            
            95,180
            
            
            14.28
            %
            
            73,990
            
            
            11.52
            %
            
            63,619
            
            
            10.84
            %Savings
                & MMDAs
            
            
            190,036
            
            
            28.52
            %
            
            190,562
            
            
            29.65
            %
            
            174,539
            
            
            29.73
            %Time
                Certificates
            
            
            116,787
            
            
            17.53
            %
            
            121,067
            
            
            18.84
            %
            
            125,366
            
            
            21.35
            %Borrowed
                Funds
            
            
            11,350
            
            
            1.70
            %
            
            14,320
            
            
            2.23
            %
            
            13,681
            
            
            2.33
            %Other
                Liabilities
            
            
            6,113
            
            
            0.92
            %
            
            4,627
            
            
            0.72
            %
            
            2,332
            
            
            0.40
            %Stockholders'
                Equity
            
            
            59,121
            
            
            8.87
            %
            
            53,744
            
            
            8.37
            %
            
            48,853
            
            
            8.32
            %Total
                Liabilities & Stockholders’ Equity
            
            $
            666,353
            
            
            100.00
            %
            $
            642,481
            
            
            100.00
            %
            $
            587,066
            
            
            100.00
            %





1.
            Average
                Balances for Loans include non-accrual loans and are net of the allowance
                for loan losses.


25
 *Table
            of Contents*




**Net
      Interest Earnings**


**Average
      Balances, Yields and Rates**


(Dollars
      in thousands)





2006
            
            2005
            
            2004Assets
            
            Average
              Balance
            
            Interest
              Income/
              Expense
            
            Yields
              Earned/
              Rates
              Paid
            
            Average
              Balance
            
            Interest
              Income/
              Expense
            
            Yields
              Earned/
              Rates
              Paid
            
            Average
              Balance
            
            Interest
              Income/
              Expense
            
            Yields
              Earned/
              Rates
              PaidSecurities:U.S.
                Government
            
            $
            31,968
            
            $
            1,299
            
            
            4.06
            %
            $
            20,279
            
            $
            767
            
            
            3.78
            %
            $
            15,745
            
            $
            747
            
            
            4.74
            %Obligations
                of States And Political Subdivisions1
            
            
            23,688
            
            
            1,311
            
            
            5.53
            %
            
            27,045
            
            
            1,577
            
            
            5.83
            %
            
            32,899
            
            
            1,892
            
            
            5.75
            %Other
                Securities
            
            
            11,201
            
            
            580
            
            
            5.18
            %
            
            3,065
            
            
            133
            
            
            4.34
            %
            
            3,277
            
            
            135
            
            
            4.12
            %Total
                Investment Securities
            
            
            66,857
            
            
            3,190
            
            
            4.77
            %
            
            50,389
            
            
            2,477
            
            
            4.92
            %
            
            51,921
            
            
            2,774
            
            
            5.34
            %Federal
                Funds Sold
            
            
            61,904
            
            
            2,986
            
            
            4.82
            %
            
            81,948
            
            
            2,587
            
            
            3.16
            %
            
            77,169
            
            
            972
            
            
            1.26
            %Loans2
            
            
            478,908
            
            
            39,082
            
            
            8.16
            %
            
            452,646
            
            
            32,808
            
            
            7.25
            %
            
            395,883
            
            
            25,331
            
            
            6.40
            %Loan
                Fees
            
            
            —
            
            
            2,812
            
            
            0.59
            %
            
            —
            
            
            3,030
            
            
            0.67
            %
            
            —
            
            
            2,542
            
            
            0.64
            %Total
                Loans, Including Loan Fees
            
            
            478,908
            
            
            41,894
            
            
            8.75
            %
            
            452,646
            
            
            35,838
            
            
            7.92
            %
            
            395,883
            
            
            27,873
            
            
            7.04
            %Total
                Earning Assets
            
            
            607,669
            
            $
            48,070
            
            
            7.91
            %
            
            584,983
            
            $
            40,902
            
            
            6.99
            %
            
            524,973
            
            $
            31,619
            
            
            6.02
            %Cash
                and Due from Banks
            
            
            29,934
            
            
            
            
            
            
            
            
            31,287
            
            
            
            
            
            
            
            
            37,542Premises
                and Equipment
            
            
            8,188
            
            
            
            
            
            
            
            
            7,743
            
            
            
            
            
            
            
            
            7,531Interest
                Receivable and Other Assets
            
            
            20,562
            
            
            
            
            
            
            
            
            18,468
            
            
            
            
            
            
            
            
            17,020Total
                Assets
            
            $
            666,353
            
            
            
            
            
            
            
            $
            642,481
            
            
            
            
            
            
            
            $
            587,066





1.
            Interest
                income and yields on tax-exempt securities are not presented on a
                tax
                equivalent basis.





2.
            Average
                Balances for Loans include non-accrual loans and are net of the allowance
                for loan losses, but non-accrued interest thereon is
                excluded.





26
 *Table
            of Contents*




**Continuation
      of**


**Net
      Interest Earnings**


**Average
      Balances, Yields and Rates**


(Dollars
      in thousands)





2006
            
            2005
            
            2004Liabilities
                and Stockholders' Equity
            
            Average
              Balance
            
            Interest
              Income/
              Expense
            
            Yields
              Earned/
              Rates
              Paid
            
            Average
              Balance
            
            Interest
              Income/
              Expense
            
            Yields
              Earned/
              Rates
              Paid
            
            Average
              Balance
            
            Interest
              Income/
              Expense
            
            Yields
              Earned/
              Rates
              PaidInterest-Bearing
                Deposits:Interest-Bearing
                Transaction Deposits
            
            $
            95,180
            
            $
            1,568
            
            
            1.65
            %
            $
            73,990
            
            $
            512
            
            
            0.69
            %
            $
            63,619
            
            $
            89
            
            
            0.14
            %Savings
                & MMDAs
            
            
            190,036
            
            
            3,813
            
            
            2.01
            %
            
            190,562
            
            
            2,279
            
            
            1.20
            %
            
            174,539
            
            
            893
            
            
            0.51
            %Time
                Certificates
            
            
            116,787
            
            
            3,682
            
            
            3.15
            %
            
            121,067
            
            
            2,443
            
            
            2.02
            %
            
            125,366
            
            
            2,003
            
            
            1.60
            %Total
                Interest-Bearing Deposits
            
            
            402,003
            
            
            9,063
            
            
            2.25
            %
            
            385,619
            
            
            5,234
            
            
            1.36
            %
            
            363,524
            
            
            2,985
            
            
            0.82
            %Borrowed
                Funds
            
            
            11,350
            
            
            363
            
            
            3.20
            %
            
            14,320
            
            
            495
            
            
            3.46
            %
            
            13,681
            
            
            441
            
            
            3.22
            %Total
                Interest-Bearing Deposits and Funds
            
            
            413,353
            
            
            9,426
            
            
            2.28
            %
            
            399,939
            
            
            5,729
            
            
            1.43
            %
            
            377,205
            
            
            3,426
            
            
            0.91
            %Demand
                Deposits
            
            
            187,766
            
            
            —
            
            
            —
            
            
            184,171
            
            
            —
            
            
            —
            
            
            158,676
            
            
            —
            
            
            —Total
                Deposits and Borrowed Funds
            
            
            601,119
            
            $
            9,426
            
            
            1.57
            %
            
            584,110
            
            $
            5,729
            
            
            0.98
            %
            
            535,881
            
            $
            3,426
            
            
            0.64
            %Accrued
                Interest and Other Liabilities
            
            
            6,113
            
            
            
            
            
            
            
            
            4,627
            
            
            
            
            
            
            
            
            2,332Stockholders'
                Equity
            
            
            59,121
            
            
            
            
            
            
            
            
            53,744
            
            
            
            
            
            
            
            
            48,853Total
                Liabilities and Stockholders' Equity
            
            $
            666,353
            
            
            
            
            
            
            
            $
            642,481
            
            
            
            
            
            
            
            $
            587,066Net
                Interest Income and Net Interest Margin1
            
            
            
            
            $
            38,644
            
            
            6.36
            %
            
            
            
            $
            35,173
            
            
            6.01
            %
            
            
            
            $
            28,193
            
            
            5.37
            %Net
                Interest Spread2
            
            
            
            
            
            
            
            
            5.63
            %
            
            
            
            
            
            
            
            5.56
            %
            
            
            
            
            
            
            
            5.11
            %





1.
            Net
                interest margin is computed by dividing net interest income by total
                average interest-earning assets.





2.
            Net
                interest spread represents the average yield earned on interest-earning
                assets less the average rate paid on interest-bearing
                liabilities.





27
 *Table
            of Contents*





**Analysis
      of Changes**


**in
      Interest Income and Interest Expense**


(Dollars
      in thousands)





Following
      is an analysis of changes in interest income and expense (dollars in thousands)
      for 2006 over 2005 and 2005 over 2004. Changes not solely due to interest rate
      or volume have been allocated proportionately to interest rate and
      volume.





2006
                Over 2005
            
            2005
                Over 2004Volume
            
            Interest
              Rate
            
            Change
            
            Volume
            
            Interest
              Rate
            
            ChangeIncrease
                (Decrease) in Interest Income:Loans
                & Banker’s Acceptance
            
            $
            1,983
            
            $
            4,291
            
            $
            6,274
            
            $
            3,882
            
            $
            3,595
            
            $
            7,477Investment
                Securities
            
            
            787
            
            
            (74
            )
            
            713
            
            
            (81
            )
            
            (216
            )
            
            (297
            )Federal
                Funds Sold
            
            
            (347
            )
            
            746
            
            
            399
            
            
            63
            
            
            1,552
            
            
            1,615Loan
                Fees
            
            
            (218
            )
            
            —
            
            
            (218
            )
            
            488
            
            
            —
            
            
            488$
            2,205
            
            $
            4,963
            
            $
            7,168
            
            $
            4,352
            
            $
            4,931
            
            $
            9,283Increase
                (Decrease) in Interest Expense:Deposits:Interest-Bearing
                Transaction Deposits
            
            $
            180
            
            $
            876
            
            $
            1,056
            
            $
            17
            
            $
            406
            
            $
            423Savings
                & MMDAs
            
            
            (6
            )
            
            1,540
            
            
            1,534
            
            
            88
            
            
            1,298
            
            
            1,386Time
                Certificates
            
            
            (83
            )
            
            1,322
            
            
            1,239
            
            
            (66
            )
            
            506
            
            
            440Borrowed
                Funds
            
            
            (97
            )
            
            (35
            )
            
            (132
            )
            
            21
            
            
            33
            
            
            54$
            (6
            )
            $
            3,703
            
            $
            3,697
            
            $
            60
            
            $
            2,243
            
            $
            2,303Increase
                (Decrease) in Net Interest Income
            
            $
            2,211
            
            $
            1,260
            
            $
            3,471
            
            $
            4,292
            
            $
            2,688
            
            $
            6,980


28
 *Table
            of Contents*




**INVESTMENT
      PORTFOLIO**





**Composition
      of Investment Securities**





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





2006
            
            2005
            
            2004Investment
                securities available for sale:U.S.
                Treasury Securities
            
            $
            253
            
            $
            250
            
            $
            256Securities
                of U.S. Government Agencies and Corporations
            
            
            31,703
            
            
            21,556
            
            
            21,063Obligations
                of State & Political Subdivisions
            
            
            30,193
            
            
            23,047
            
            
            30,747Mortgage
                Backed Securities
            
            
            12,031
            
            
            1,803
            
            
            1,260Other
                Securities
            
            
            2,093
            
            
            2,132
            
            
            1,828Total
                Investments
            
            $
            76,273
            
            $
            48,788
            
            $
            55,154





**Maturities
      of Investment Securities**





The
      following table is a summary of the relative maturities (d ollars
      in
      thousands) and
      yields of the Company’s investment securities as of December 31, 2006. The
      yields on tax-exempt securities are shown on a tax equivalent
      basis.




**Period
      to Maturity**





Within
                One Year
            
            After
                One But
              Within
                Five Years
            
            After
                Five But
              Within
                Ten YearsSecurity
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            YieldU.S.
                Treasury Securities
            
            $
            —
            
            
            —
            
            $
            253
            
            
            5.00
            %
            $
            —
            
            
            —Securities
                of U.S. Government Agencies and Corporations
            
            
            6.907
            
            
            3.16
            %
            
            20,708
            
            
            4.38
            %
            
            4,088
            
            
            5.26
            %Obligations
                of State & Political Subdivisions
            
            
            5,356
            
            
            7.12
            %
            
            8,534
            
            
            7.37
            %
            
            5,712
            
            
            6.72
            %Mortgage
                Backed Securities
            
            
            35
            
            
            7.10
            %
            
            11,996
            
            
            5.14
            %
            
            —
            
            
            —TOTAL
            
            $
            12,298
            
            
            4.90
            %
            $
            41,491
            
            
            5.22
            %
            $
            9,800
            
            
            6.11
            %




After
                Ten Years
            
            Other
            
            TotalSecurity
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            YieldU.S.
                Treasury Securities
            
            $
            —
            
            
            —
            
            $
            —
            
            
            —
            
            $
            253
            
            
            5.00
            %Securities
                of U.S. Government Agencies and Corporations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            31,703
            
            
            4.23
            %Obligations
                of State & Political Subdivisions
            
            
            10,591
            
            
            6.27
            %
            
            —
            
            
            —
            
            
            30,193
            
            
            6.82
            %Mortgage
                Backed Securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            12,031
            
            
            5.15
            %Other
                Securities
            
            
            —
            
            
            —
            
            
            2,093
            
            
            5.13
            %
            
            2,093
            
            
            5.13
            %TOTAL
            
            $
            10,591
            
            
            6.27
            %
            $
            2,093
            
            
            5.13
            %
            $
            76,273
            
            
            5.43
            %


29
 *Table
            of Contents*




**LOAN
      PORTFOLIO**





**Composition
      of Loans**





The
      mix
      of loans, net of deferred origination fees and allowance for loan losses and
      excluding loans held-for-sale, at December 31, for the previous five fiscal
      years is as follows (d ollars
      in
      thousands ):





December
                31,2006
            
            2005
            
            2004Balance
            
            Percent
            
            Balance
            
            Percent
            
            Balance
            
            PercentCommercial
            
            $
            97,268
            
            
            20.5
            %
            
            87,091
            
            
            19.1
            %
            $
            89,721
            
            
            20.9
            %Agriculture
            
            
            38,607
            
            
            8.1
            %
            
            32,808
            
            
            7.2
            %
            
            32,910
            
            
            7.7
            %Real
                Estate Mortgage
            
            
            227,552
            
            
            47.9
            %
            
            228,524
            
            
            50.1
            %
            
            216,846
            
            
            50.4
            %Real
                Estate Construction
            
            
            106,752
            
            
            22.4
            %
            
            103,422
            
            
            22.7
            %
            
            85,584
            
            
            19.9
            %Installment
            
            
            5,370
            
            
            1.1
            %
            
            4,216
            
            
            0.9
            %
            
            4,641
            
            
            1.1
            %TOTAL
            
            $
            475,549
            
            
            100.0
            %
            $
            456,061
            
            
            100.0
            %
            $
            429,702
            
            
            100.0
            %





2003
            
            2002Balance
            
            Percent
            
            Balance
            
            PercentCommercial
            
            $
            88,949
            
            
            24.1
            %
            $
            76,887
            
            
            24.6
            %Agriculture
            
            
            32,766
            
            
            8.9
            %
            
            31,926
            
            
            10.2
            %Real
                Estate Mortgage
            
            
            174,867
            
            
            47.2
            %
            
            144,171
            
            
            46.0
            %Real
                Estate Construction
            
            
            68,370
            
            
            18.5
            %
            
            54,094
            
            
            17.3
            %Installment
            
            
            4,867
            
            
            1.3
            %
            
            5,967
            
            
            1.9
            %TOTAL
            
            $
            369,819
            
            
            100.0
            %
            $
            313,045
            
            
            100.0
            %





Commercial
      loans are primarily for financing the needs of a diverse group of businesses
      located in the Bank’s market area. The Bank also makes loans to individuals for
      investment purposes. Most of these loans are relatively short-term (an overall
      average life of approximately two years) and secured by various types of
      collateral. Real estate construction loans are generally for financing the
      construction of single-family residential homes for well-qualified individuals
      and builders. These loans are secured by real estate and have short
      maturities.





As
      shown
      in the comparative figures for loan mix during 2006 and 2005, total loans
      increased as a result of increases in commercial loans, agriculture loans,
      real
      estate construction loans and installment loans which were partially offset
      by a
      decrease in real estate mortgage loans.





30
 *Table
            of Contents*




**Maturities
      and Sensitivities of Loans to Changes in Interest
      Rates**





Loan
      maturities of the loan portfolio at December 31, 2006 are as follows (dollars in thousands) (exclude s
      loans
      held-for-sale):





Maturing
            
            Fixed
                Rate
            
            Variable
                Rate
            
            TotalWithin
                one year
            
            $
            52,221
            
            $
            174,338
            
            $
            226,559After
                one year through five years
            
            
            44,208
            
            
            110,925
            
            
            155,133After
                five years
            
            
            18,169
            
            
            75,688
            
            
            93,857Total
            
            $
            114,598
            
            $
            360,951
            
            $
            475,549





**Non-accrual,
      Past Due and Restructured Loans**





It
      is the
      Bank’s policy to recognize interest income on an accrual basis. Accrual of
      interest is suspended when a loan has been in default as to principal or
      interest for 90 days, unless well secured by collateral believed by management
      to have a fair market value that at least equals the book value of the loan
      plus
      accrued interest receivable and in the process of collection. Real estate
      acquired through foreclosure is written down to its estimated fair market value
      at the time of acquisition and is carried as a non-earning asset until sold.
      Any
      write-down at the time of acquisition is charged against the allowance for
      loan
      losses; subsequent write-downs or gains or losses upon disposition are credited
      or charged to non-interest income/expense. The Bank has made no foreign
      loans.





The
      following table shows the aggregate amounts of assets (d ollars
      in
      thousands )
      in each
      category at December 31, for the years indicated:





2006
            
            2005
            
            2004
            
            2003
            
            2002Non-accrual
                Loans
            
            $
            3,399
            
            $
            2,073
            
            $
            4,907
            
            $
            3,877
            
            $
            55290
                Days Past Due But Still Accruing
            
            
            37
            
            
            178
            
            
            55
            
            
            4
            
            
            8Total
                Non-performing Loans
            
            
            3,436
            
            
            2,251
            
            
            4,962
            
            
            3,881
            
            
            560Other
                Real Estate Owned
            
            
            375
            
            
            268
            
            
            —
            
            
            —
            
            
            —Total
                Non-performing Assets
            
            $
            3,811
            
            $
            2,519
            
            $
            4,962
            
            $
            3,881
            
            $
            560





If
      interest on non-accrual loans had been accrued, such interest income would
      have
      approximated $280,000, $101,000, and $280,000 during the years ended December
      31, 2006, 2005 and 2004, respectively. Income actually recognized for these
      loans approximated $113,000, $100,000 and $64,000 for the years ended December
      31, 2006, 2005 and 2004, respectively.





There
      was
      a $1,292,000 increase in non-performing assets for 2006 over 2005. At December
      31, 2006, non-performing assets included five non-accrual commercial loans
      totaling $1,469,000, two non-accrual agricultural loans totaling $620,000,
      one
      non-accrual commercial real estate loan totaling $90,000 and one non-accrual
      residential mortgage loan totaling $1,220,000. Additional non-performing assets
      included two loans past due more than 90 days totaling $37,000. Other Real
      Estate Owned (“OREO”) properties totaled $375,000 at December 31, 2006. The
      Bank’s management believes that nearly $3,277,000 of the $3,399,000 in
      non-accrual loans at December 31, 2006, are adequately collateralized or
      guaranteed by a governmental entity, and the remaining $122,000 may have some
      potential loss which management believes is sufficiently covered by the Bank’s
      existing loan loss reserve (Allowance for Loan Losses).





31
 *Table
            of Contents*




**Potential
      Problem Loans**





In
      addition to the non-performing assets described above, the Bank's Branch
      Managers each month submit to the Loan Committee of the Board of Directors
      a
      report detailing the status of those loans that are past due over sixty days
      and
      each quarter a report detailing the status of those loans that are classified
      as
      such. Also included in the report are those loans that are not necessarily
      past
      due, but the branch manager is aware of problems with these loans which may
      result in a loss.





The
      monthly Allowance for Loan Loss Analysis Report is prepared based upon the
      Problem Loan Report, internal loan grading, regulatory classifications and
      loan
      review classification and is reviewed by the Management Loan Committee of the
      Bank. The Management Loan Committee reviewed the Allowance for Loan Loss
      Analysis Report, dated December 31, 2006, on January 9, 2007. This report
      included all non-performing loans reported in the table on the previous page
      and
      all other potential problem loans. Excluding the non-performing loans cited
      previously, loans totaling $10,744,000 were classified as potential problem
      loans. The Bank’s management believes that of these loans, loans totaling
      $10,434,000 are adequately collateralized or guaranteed, the remaining loans
      totaling $310,000 may have some loss potential which management believes is
      sufficiently covered by the Bank’s existing loan loss reserve (Allowance for
      Loan Losses). The ratio of the Allowance for Loan Losses to total loans at
      December 31, 2006 was 1.73%.





**SUMMARY
      OF LOAN LOSS EXPERIENCE**





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





**Analysis
      of the Allowance for Loan Losses**


(D ollars
      in
      thousands )





2006
            
            2005
            
            2004
            
            2003
            
            2002Balance
                at Beginning of Year
            
            $
            7,917
            
            $
            7,445
            
            $
            7,006
            
            $
            6,630
            
            $
            6,116Provision
                for (Recovery of) Loan Losses
            
            
            735
            
            
            600
            
            
            207
            
            
            2,153
            
            
            676Loans
                Charged-Off:Commercial
            
            
            (572
            )
            
            (670
            )
            
            (122
            )
            
            (143
            )
            
            (51
            )Agriculture
            
            
            (57
            )
            
            —
            
            
            (214
            )
            
            (1,662
            )
            
            (191
            )Installment
                Loans to Individuals
            
            
            (431
            )
            
            (185
            )
            
            (46
            )
            
            (104
            )
            
            (87
            )Total
                Charged-Off
            
            
            (1,060
            )
            
            (855
            )
            
            (382
            )
            
            (1,909
            )
            
            (329
            )Recoveries:Commercial
            
            
            561
            
            
            64
            
            
            199
            
            
            101
            
            
            92Agriculture
            
            
            —
            
            
            663
            
            
            399
            
            
            11
            
            
            33Real
                Estate Mortgage
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            35Installment
                Loans to Individuals
            
            
            208
            
            
            —
            
            
            16
            
            
            20
            
            
            7Total
                Recoveries
            
            
            769
            
            
            727
            
            
            614
            
            
            132
            
            
            167Net
                (Charge-Offs) Recoveries
            
            
            (291
            )
            
            (128
            )
            
            232
            
            
            (1,777
            )
            
            (162
            )Balance
                at End of Year
            
            $
            8,361
            
            $
            7,917
            
            $
            7,445
            
            $
            7,006
            
            $
            6,630Ratio
                of Net (Charge-Offs) Recoveries During the Year to Average Loans
                Outstanding During the Year
            
            
            (0.06
            %)
            
            (0.03
            %)
            
            0.06
            %
            
            (0.48
            %)
            
            (0.05
            %)





32
 *Table
            of Contents*




**Allocation
      of the Allowance for Loan Losses**





The
      Allowance for Loan Losses has been established as a general reserve available
      to
      absorb probable inherent losses throughout the Loan Portfolio. The following
      table is an allocation of the Allowance for Loan Losses balance on the dates
      indicated (d ollars
      in
      thousands ):





December
                31, 2006
            
            December
                31, 2005
            
            December
                31, 2004Allocation
                of
              Allowance
                for
              Loan
                Losses
              Balance
            
            Loans
                as a
              %
                of Total
              Loans
            
            Allocation
                of
              Allowance
                for
              Loan
                Losses
              Balance
            
            Loans
                as a
              %
                of Total
              Loans
            
            Allocation
                of
              Allowance
                for
              Loan
                Losses
              Balance
            
            Loans
                as a
              %
                of Total
              LoansLoan
                Type:Commercial
            
            $
            2,037
            
            
            20.5
            %
            $
            1,779
            
            
            19.1
            %
            $
            1,727
            
            
            20.9
            %Agriculture
            
            
            1,133
            
            
            8.1
            %
            
            1,518
            
            
            7.2
            %
            
            1,484
            
            
            7.7
            %Real
                Estate Mortgage
            
            
            3,016
            
            
            47.9
            %
            
            3,003
            
            
            50.1
            %
            
            2,767
            
            
            50.4
            %Real
                Estate Construction
            
            
            1,535
            
            
            22.4
            %
            
            1,001
            
            
            22.7
            %
            
            668
            
            
            19.9
            %Installment
            
            
            640
            
            
            1.1
            %
            
            616
            
            
            0.9
            %
            
            801
            
            
            1.1
            %Total
            
            $
            8,361
            
            
            100.0
            %
            $
            7,917
            
            
            100.0
            %
            $
            7,445
            
            
            100.0
            %






December
                31, 2003
            
            December
                31, 2002Allocation
                of
              Allowance
                for
              Loan
                Losses
              Balance
            
            Loans
                as a
              %
                of Total
              Loans
            
            Allocation
                of
              Allowance
                for
              Loan
                Losses
              Balance
            
            Loans
                as a
              %
                of Total
              LoansLoan
                Type:Commercial
            
            $
            1,881
            
            
            24.1
            %
            $
            2,377
            
            
            24.6
            %Agriculture
            
            
            1,746
            
            
            8.9
            %
            
            974
            
            
            10.2
            %Real
                Estate Mortgage
            
            
            2,181
            
            
            47.2
            %
            
            279
            
            
            46.0
            %Real
                Estate Construction
            
            
            621
            
            
            18.5
            %
            
            2,472
            
            
            17.3
            %Installment
            
            
            577
            
            
            1.3
            %
            
            528
            
            
            1.9
            %Total
            
            $
            7,006
            
            
            100.0
            %
            $
            6,630
            
            
            100.0
            %





The
      Bank
      believes that any breakdown or allocation of the Reserve into loan categories
      lends an appearance of exactness, which does not exist, because the Reserve
      is
      available for all loans. The Reserve breakdown shown above is computed taking
      actual experience into consideration but should not be interpreted as an
      indication of the specific amount and allocation of actual charge-offs that
      may
      ultimately occur.





33
 *Table
            of Contents*





**Deposits**





The
      following table sets forth the average amount and the average rate paid on
      each
      of the listed deposit categories (d ollars
      in
      thousands )
      during
      the periods specified:





2006
            
            2005
            
            2004Average
              Amount
            
            Average
              Rate
            
            Average
              Amount
            
            Average
              Rate
            
            Average
              Amount
            
            Average
              RateDeposit
                Type:Non-interest-Bearing
                Demand
            
            $
            187,766
            
            
            —
            
            $
            184,171
            
            
            —
            
            $
            158,676
            
            
            —Interest-Bearing
                Demand (NOW)
            
            $
            95,180
            
            
            1.65
            %
            $
            73,990
            
            
            0.69
            %
            $
            63,619
            
            
            0.14
            %Savings
                and MMDAs
            
            $
            190,036
            
            
            2.01
            %
            $
            190,562
            
            
            1.20
            %
            $
            174,539
            
            
            0.51
            %Time
            
            $
            116,787
            
            
            3.15
            %
            $
            121,067
            
            
            2.02
            %
            $
            125,366
            
            
            1.60
            %





The
      following table sets forth by time remaining to maturity the Bank’s time
      deposits in the amount of $100,000 or more (d ollars
      in
      thousands )
      as of
      December 31, 2006:





Three
                months or less
            
            $
            28,729Over
                three months through twelve months
            
            
            32,355Over
                twelve months
            
            
            5,215Total
            
            $
            66,299





**Short-Term
      Borrowings**





Short-term
      borrowings at December 31, 2006 and 2005 consisted of secured borrowings from
      the U.S. Treasury in the amounts of $858,000 and $1,476,000, respectively.
      The
      funds are placed at the discretion of the U.S. Treasury and are callable on
      demand by the U.S. Treasury.





Additional
      short-term borrowings available to the Company consist of a line of credit
      and
      advances from the Federal Home Loan Bank (“FHLB”) secured under terms of a
      blanket collateral agreement by a pledge of FHLB stock and certain other
      qualifying collateral such as commercial and mortgage loans. At December 31,
      2006, the Company had a current collateral borrowing capacity from the FHLB
      of
      $93,832,000. The Company also has unsecured formal lines of credit totaling
      $25,700,000 with correspondent banks and borrowing capacity of $2,000,000 with
      the Federal Reserve Bank (loans and discounts), which is fully collateralized,
      with a pledge of U.S. Agency Notes.





**Long-Term
      Borrowings**





Long-term
      borrowings consisted of Federal Home Loan Bank advances, totaling $10,124,000
      and $13,493,000, respectively, at December 31, 2006 and 2005. Such advances
      ranged in maturity from 1.4 years to 2.3 years at a weighted average interest
      rate of 2.91% at December 31, 2006. Maturity ranged from 0.3 years to 3.3 years
      at a weighted average interest rate of 3.48% at December 31, 2005. Average
      outstanding balances were $10,776,000 and $13,628,000, respectively, during
      2006
      and 2005. The weighted average interest rate paid was 3.15% in 2006 and 3.48%
      in
      2005.





34
 *Table
            of Contents*





**Results
      of Operations**





**Net
      Income**





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**





Net
      income for the year ended December 31, 2006, was $8,810,000, representing an
      increase of $122,000, or 1.4% over net income of $8,688,000 for the year ended
      December 31, 2005. The increase in net income is principally attributable to
      a
      $3,471,000 increase in net interest income, which was partially offset by a
      decrease of $431,000 in other operating income, a $1,539,000 increase in
      salaries and employee benefits, an increase of $135,000 in the provision for
      loan losses, a $437,000 increase in occupancy and equipment, an increase of
      $175,000 in data processing, a $158,000 increase in advertising, and a $377,000
      increase in the provision for income taxes.





**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**





Net
      income for the year ended December 31, 2005, was $8,688,000, representing an
      increase of $1,981,000, or 30% over net income of $6,707,000 for the year ended
      December 31, 2004. The increase in net income is principally attributable to
      a
      $6,980,000 increase in net interest income and an increase of $506,000 in other
      operating income, which was partially offset by a $2,371,000 increase in
      salaries and employee benefits, an increase of $393,000 in the provision for
      loan losses, a $194,000 increase in occupancy and equipment, a $320,000 increase
      in advertising, and a $1,242,000 increase in the provision for income
      taxes.





**Net
      Interest Income**





Net
      interest income is the excess of interest and fees earned on the Bank’s loans,
      investment securities, federal funds sold and banker's acceptances over the
      interest expense paid on deposits, mortgage notes and other borrowed funds.
      It
      is primarily affected by the yields on the Bank’s interest-earning assets and
      loan fees and interest-bearing liabilities outstanding during the period. The
      $3,471,000 increase in the Bank’s net interest income in 2006 from 2005 was due
      to the effects of a higher level of core deposits and strong commercial and
      real
      estate loan volumes, combined with higher funding costs. The $6,980,000 increase
      in 2005 from 2004 was due to the effects of a higher level of core deposits
      and
      strong commercial and real estate loan volumes, combined with higher funding
      costs. The “Analysis of Changes in Interest Income and Interest Expense” set
      forth on page 28 of this Annual Report on Form 10-K identifies the effects
      of
      interest rates and loan/deposit volume. Another factor that affected the net
      interest income was the average earning asset to average total asset ratio.
      This
      ratio was 91.2% in 2006, 91.1% in 2005 and 89.4% in 2004.





Interest
      income on loans (including loan fees) was $41,894,000 for 2006, representing
      an
      increase of $6,056,000, or 16.9% from $35,838,000 for 2005. This compared to
      an
      increase in 2005 of $7,965,000 or 28.58% greater than loan interest income
      earned in 2004. The increased interest income on loans in 2006 over 2005 was
      the
      result of a 5.8% increase in loan volume, combined with a 91 basis point
      increase in loan interest rates, which was partially offset by a decrease of
      approximately $218,000 in loan fees. Loan fee comparisons were impacted by
      a net
      decrease in deferred loan fees and costs of $355,000 in 2006, a net decrease
      of
      $373,000 in 2005, and a net increase of $326,000 in 2004.





Average
      outstanding federal funds sold fluctuated during this period, ranging from
      $61,904,000, in 2006 to $81,948,000 in 2005 and $77,169,000 in 2004. At December
      31, 2006 federal funds sold were $62,470,000. Federal funds are used primarily
      as a short-term investment to provide liquidity for funding of loan commitments
      or to accommodate seasonal deposit fluctuations. Federal funds sold yields
      were
      4.82%, 3.16% and 1.26% for 2006, 2005 and 2004, respectively.





The
      average total level of investment securities increased $16,468,000 in 2006
      to
      $66,857,000 from $50,389,000 in 2005 and decreased $1,532,000 in 2005 to
      $50,389,000 from $51,921,000 in 2004. The level of securities interest income
      attributable to investment securities increased to $3,190,000 in 2006 from
      $2,477,000 in 2005 and $2,774,000 in 2004, due to the effects of interest rates
      and volume. The Bank’s strategy for this period has emphasized the use of the
      investment portfolio to maintain the Bank’s increasing loan demand. The Bank
      continues to reinvest maturing securities to provide future liquidity while
      attempting to reinvest the cash flows in short duration securities that provide
      higher cash flow for reinvestment in a higher interest rate instrument.
      Investment securities yields were 4.77%, 4.92% and 5.34% for 2006, 2005 and
      2004, respectively.





35
 *Table
            of Contents*





Total
      interest expense increased to $9,426,000 in 2006 from $5,729,000 in 2005, and
      increased to $5,729,000 in 2005 from $3,426,000 in 2004, representing a 64.53%
      increase in 2006 over 2005 and a 67.22% increase in 2005 over 2004. The increase
      in total interest expense from 2006 to 2005 was due to increases in volume
      combined with increases in interest rates paid on deposits. The increase in
      total interest expense from 2005 to 2004 was due to increases in volume combined
      with increases in interest rates paid on deposits.





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





2006
            
            2005
            
            2004Average
              Balance
            
            Percent
            
            Average
              Balance
            
            Percent
            
            Average
              Balance
            
            PercentNon-interest-Bearing
                Demand
            
            $
            187,766
            
            
            31.9
            %
            $
            184,171
            
            
            32.3
            %
            $
            158,676
            
            
            30.4
            %Interest-Bearing
                Demand (NOW)
            
            
            95,180
            
            
            16.1
            %
            
            73,990
            
            
            13.0
            %
            
            63,619
            
            
            12.2
            %Savings
                and MMDAs
            
            
            190,036
            
            
            32.2
            %
            
            190,562
            
            
            33.4
            %
            
            174,539
            
            
            33.4
            %Time
            
            
            116,787
            
            
            19.8
            %
            
            121,067
            
            
            21.3
            %
            
            125,366
            
            
            24.0
            %Total
            
            $
            589,769
            
            
            100.0
            %
            $
            569,790
            
            
            100.0
            %
            $
            522,200
            
            
            100.0
            %









The
      three
      years ended December 31, 2006 have been characterized by fluctuating interest
      rates. Loan rates and deposit rates both increased in 2006, 2005 and 2004.
      The
      net spread between the rate for total earning assets and the rate for total
      deposits and borrowed funds increased 7 basis points in the period from 2006
      to
      2005 and increased 45 basis points in the period from 2005 to 2004.





The
      Bank’s net interest margin (net interest income divided by average earning
      assets) was 6.36% in 2006, 6.01% in 2005, and 5.37% in 2004. The net interest
      margin benefited in 2006 from rising interest rates combined with increased
      loan
      volume and was partially offset by higher cost of funds, the continued
      flattening of the yield curve, a slowdown in mortgage originations and
      maturities and calls of higher yielding securities. Going forward into the
      first
      half of 2007, it is Bank managements belief that net interest income and net
      interest margin will be flat because of anticipated stabilization of the Federal
      Funds Rate.





**Provision
      for Loan Losses**





The
      provision for loan losses is established by charges to earnings based on
      management's overall evaluation of the collectibility of the loan portfolio.
      Based on this evaluation, the provision for loan losses increased to $735,000
      in
      2006 from $600,000 in 2005, primarily as a result of loan growth and loan
      quality in the Bank’s loan portfolio. The amount of loans charged-off increased
      in 2006 to $1,060,000 from $855,000 in 2005, and recoveries increased to
      $769,000 in 2006 from $727,000 in 2005. The increase in charge-offs was due,
      for
      the most part, to an increase in charge-offs of installment loans to
      individuals. The ratio of the Allowance for Loan Losses to total loans at
      December 31, 2006 was 1.73% compared to 1.70% at December 31, 2005. The ratio
      of
      the Allowance for Loan Losses to total non-accrual loans and loans past due
      90
      days or more at December 31, 2006 was 243% compared to 352% at December 31,
      2005.





The
      provision for loan losses is established by charges to earnings based on
      management's overall evaluation of the collectibility of the loan portfolio.
      Based on this evaluation, the provision for loan losses increased to $600,000
      in
      2005 from $207,000 in 2004, primarily as a result of loan growth and loan
      quality in the Bank’s loan portfolio. The amount of loans charged-off increased
      in 2005 to $855,000 from $382,000 in 2004, and recoveries increased to $727,000
      in 2005 from $614,000 in 2004. The increase in charge-offs was due, for the
      most
      part, to a charge-off of an unsecured commercial loan. The ratio of the
      Allowance for Loan Losses to total loans at December 31, 2005 was 1.70% compared
      to 1.70% at December 31, 2004. The ratio of the Allowance for Loan Losses to
      total non-accrual loans and loans past due 90 days or more at December 31,
      2005
      was 352% compared to 150% at December 31, 2004.





36
 *Table
            of Contents*





**Other
      Operating Income and Expenses**





Other
      operating income consisted primarily of service charges on deposit accounts
      and
      other income, which was partially offset by a decrease in net realized gains
      on
      loans held for sale and a decrease in gains on other real estate owned. Service
      charges on deposit accounts increased $420,000 in 2006 over 2005 and $197,000
      in
      2005 over 2004. The increase in 2006 was due, for the most part, to increased
      service charges on regular and business checking accounts. Net realized gains
      on
      loans held-for-sale decreased $718,000 in 2006 over 2005 and increased $21,000
      in 2005 over 2004. The decrease in 2006 was due, for the most part, to a
      decrease in sold loans. Gains on other real estate owned decreased $317,000
      in
      2006 over 2005 and increased $291,000 in 2005 over 2004. The decrease in 2006
      was due to the sale of a previously foreclosed commercial property. Other income
      increased $199,000 in 2006 over 2005 and decreased $15,000 in 2005 over
      2004.





The
      Bank
      realized net gains of $-0- on sale of investment securities in 2006, $15,000
      in
      2005 and $3,000 in 2004.





Other
      operating expenses consisted primarily of salaries and employee benefits,
      occupancy and equipment expense, data processing, advertising, and other
      expenses. Other operating expenses increased to $29,219,000 in 2006 from
      $26,813,000 in 2005, and increased to $26,813,000 in 2005 from $22,943,000
      in
      2004, representing an increase of $2,406,000, or 9.0% in 2006 over 2005, and
      an
      increase of $3,870,000, or 16.9% in 2005 over 2004.





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





2006
                over 2005
            
            2005
                over 2004Amount
            
            Percent
            
            Amount
            
            PercentSalaries
                and Employee Benefits
            
            $
            1,539
            
            
            9.7
            %
            $
            2,371
            
            
            17.5
            %Occupancy
                and Equipment
            
            
            437
            
            
            13.5
            %
            
            194
            
            
            6.4
            %Data
                Processing
            
            
            175
            
            
            14.5
            %
            
            130
            
            
            12.0
            %Stationery
                and Supplies
            
            
            43
            
            
            8.9
            %
            
            (5
            )
            
            (1.0
            %)Advertising
            
            
            158
            
            
            21.5
            %
            
            320
            
            
            76.9
            %Directors
                Fees
            
            
            34
            
            
            26.6
            %
            
            1
            
            
            0.8
            %Other
                Expense
            
            
            20
            
            
            0.4
            %
            
            859
            
            
            20.2
            %Total
            
            $
            2,406
            
            
            9.0
            %
            $
            3,870
            
            
            16.9
            %





In
      2006,
      salaries and employee benefits increased $1,539,000 to $17,455,000 from
      $15,916,000 for 2005. This increase was due, for the most part, to an increase
      in regular salaries, incentive compensation, profit sharing payments and group
      insurance. Increases in occupancy and equipment were associated with increased
      rents and equipment associated with opening new branches and offices. Increases
      in the data processing area were attributed to continued emphasis on
      Internet-related products and security services and network improvements.
      Increases in stationary and supplies were attributed to an increase in the
      usage
      of office supplies. Increases in advertising were due to increased costs related
      to promoting new deposit products. Increases in director fees were due to
      increased fees.





In
      2005,
      salaries and employee benefits increased $2,371,000 to $15,916,000 from
      $13,545,000 for 2004. This increase was due, for the most part, to an increase
      in regular salaries, incentive compensation and profit sharing payments.
      Increases in occupancy and equipment were associated with increased rents and
      equipment associated with opening new branches and offices. Increases in the
      data processing area were attributed to continued emphasis on Internet-related
      products and security services and network improvements. Increases in
      advertising were due to increased costs related to promoting new deposit
      products. Other expenses increased, for the most part, due to increased
      accounting, audit and consulting fees associated with Sarbanes-Oxley Act
      compliance.





**Income
      Taxes**





The
      provision for income taxes is primarily affected by the tax rate, the level
      of
      earnings before taxes and the amount of lower taxes provided by non-taxable
      earnings. In 2006, taxes increased $377,000 to $5,169,000 from $4,792,000 for
      2005. In 2005, taxes increased $1,242,000 to $4,792,000 from $3,550,000 for
      2004. The Bank’s effective tax rate was 37%, 36%, and 35%, for the years ended
      December 31, 2006, 2005 and 2004, respectively. Non-taxable municipal bond
      income was $636,000, $562,000, and $610,000 for the years ended December 31,
      2006, 2005, and 2004, respectively.





37
 *Table
            of Contents*





**Liquidity,
      Contractual Obligations, Commitments, Off-Balance Sheet Arrangements and Capital
      Resources**





Liquidity
      is defined as the ability to generate cash at a reasonable cost to fulfill
      lending commitments and support asset growth, while satisfying the withdrawal
      demands of customers and any borrowing requirements. The Bank’s principal
      sources of liquidity are core deposits and loan and investment payments and
      prepayments. Providing a secondary source of liquidity is the available-for-sale
      investment portfolio. As a final source of liquidity, the Bank can exercise
      existing credit arrangements.





The
      Company’s primary source of liquidity on a stand-alone basis is dividends from
      the Bank. As discussed in Part I (Item 1) of this Annual Report on Form 10-K,
      dividends from the Bank are subject to regulatory restrictions.





As
      discussed in Part I (Item 1) of this Annual Report on Form 10-K, the Bank
      experiences seasonal swings in deposits, which impact liquidity. Management
      has
      adjusted to these seasonal swings by scheduling investment maturities and
      developing seasonal credit arrangements with the Federal Reserve Bank and
      Federal Funds lines of credit with correspondent banks. In addition, the ability
      of the Bank’s real estate department to originate and sell loans into the
      secondary market has provided another tool for the management of liquidity. As
      of
      December 31, 2006, the Company has not created any special purpose entities
      to
      securitize assets or to obtain off-balance sheet funding.





The
      liquidity position of the Bank is managed daily, thus enabling the Bank to
      adapt
      its position according to market fluctuations. Liquidity is measured by various
      ratios, the most common of which is the ratio of net loans (including loans
      held-for-sale) to deposits. This ratio was 79.6% on December 31, 2006, 79.2%
      on
      December 31, 2005, and 77.8% on December 31, 2004. At December 31, 2006 and
      2005, the Bank’s ratio of core deposits to total assets was 78.5% and 78.1%,
      respectively. Core deposits are important in maintaining a strong liquidity
      position as they represent a stable and relatively low cost source of funds.
      The
      Bank’s liquidity position increased slightly in 2006; management believes that
      it remains adequate. This is best illustrated by the change in the Bank’s net
      non-core and net short-term non-core funding dependence ratio, which explain
      the
      degree of reliance on non-core liabilities to fund long-term assets. At December
      31, 2006, the Bank’s net core funding dependence ratio, the difference between
      non-core funds, time deposits $100,000 or more and brokered time deposits under
      $100,000, and short-term investments to long-term assets, was 0.53%, compared
      to
      -3.54% in 2005. The Bank’s net short-term non-core funding dependence ratio,
      non-core funds maturing within one year, including borrowed funds, less
      short-term investments to long-term assets equaled -2.29% at the end of 2006,
      compared to -6.32% at year-end 2005. These ratios indicated at December 31,
      2006, the Bank had minimal reliance on non-core deposits and borrowings to
      fund
      the Bank’s long-term assets, namely loans and investments. The Bank believes
      that by maintaining adequate volumes of short-term investments and implementing
      competitive pricing strategies on deposits, it can ensure adequate liquidity
      to
      support future growth. The Bank also believes that its liquidity position
      remains strong to meet both present and future financial obligations and
      commitments, events or uncertainties that have resulted or are reasonably likely
      to result in material changes with respect to the Bank’s liquidity.





The
      Company has various financial obligations, including contractual obligations
      and
      commitments that may require future cash payments. The following table presents,
      as of December 31, 2006, the Company’s significant fixed and determinable
      contractual obligations to third parties by payment date:





**Payments
                due by period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More**
              **than
                5**
              **years**Deposits
                without a stated maturity (a)
            
            $
            490,246
            
            
            490,246
            
            
            —
            
            
            —
            
            
            —Certificates
                of Deposit (a)
            
            
            113,436
            
            
            104,675
            
            
            5,534
            
            
            3,227
            
            
            —Short-Term
                Borrowings (a)
            
            
            858
            
            
            858
            
            
            —
            
            
            —
            
            
            —Long-Term
                Borrowings (b)
            
            
            10,654
            
            
            511
            
            
            10,143
            
            
            —
            
            
            —Operating
                Leases
            
            
            6,545
            
            
            1,212
            
            
            2,333
            
            
            1,265
            
            
            1,735Purchase
                Obligations
            
            
            1,454
            
            
            1,454
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            623,193
            
            
            598,956
            
            
            18,010
            
            
            4,492
            
            
            1,735





(a)
            Excludes
                interest


(b)
            Includes
                interest on fixed rate obligations.





38
 *Table
            of Contents*





The
      Company’s operating lease obligations represent short-term and long-term lease
      and rental payments for facilities, certain software and data processing and
      other equipment. Purchase obligations represent obligations under agreements
      to
      purchase goods or services that are enforceable and legally binding on the
      Company and that specify all significant terms, including: fixed or minimum
      quantities to be purchased; fixed, minimum or variable price provisions; and
      the
      approximate timing of the transaction. The purchase obligation amounts presented
      above primarily relate to certain contractual payments for services provided
      for
      information technology, capital expenditures, and the outsourcing of certain
      operational activities.





The
      Company’s long-term borrowing consists of FHLB fixed-rate obligations. FHLB
      advances are collateralized by qualifying residential real estate loans.




The
      Company’s borrowed funds consist of secured borrowings from the U.S. Treasury.
      These borrowings are collateralized by qualifying securities. The funds are
      placed at the discretion of the U.S. Treasury and are callable on demand by
      the
      U.S. Treasury.





The
      following table details the amounts and expected maturities of commitments
      as of
      December 31, 2006:





**Maturities
                by period****Commitments**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than**
              **5
                years**Commitments
                to extend creditCommercial
            
            $
            67,969
            
            
            62,181
            
            
            2,719
            
            
            1,784
            
            
            1,285Agriculture
            
            
            25,496
            
            
            23,076
            
            
            19
            
            
            2,401
            
            
            —Real
                Estate Mortgage
            
            
            58,220
            
            
            3,983
            
            
            5,608
            
            
            24,018
            
            
            24,611Real
                Estate Construction
            
            
            43,644
            
            
            33,454
            
            
            7,956
            
            
            —
            
            
            2,234Installment
            
            
            2,871
            
            
            1,503
            
            
            1,338
            
            
            30
            
            
            —Standby
                Letters of Credit
            
            
            12,222
            
            
            12,220
            
            
            2
            
            
            —
            
            
            —Total
            
            $
            210,422
            
            
            136,417
            
            
            17,642
            
            
            28,233
            
            
            28,130





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since many of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements.





The
      Company is a party to financial instruments with off-balance sheet risk in
      the
      normal course of business to meet the financing needs of its customers. These
      financial instruments include commitments to extend credit in the form of loans
      or through standby letters of credit. These instruments involve, to varying
      degrees, elements of credit and interest rate risk in excess of the amounts
      recognized in the balance sheet. The contract amounts of those instruments
      reflect the extent of involvement the Company has in particular classes of
      financial instruments. These loans have been sold to third parties without
      recourse, subject to customary default, representations and warranties, recourse
      for breaches of the terms of the sales contracts and payment default
      recourse.




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




2006
            
            2005Undisbursed
                loan commitments
            
            $
            198,200
            
            $
            203,101Standby
                letters of credit
            
            
            12,222
            
            
            14,077Commitments
                to sell loans
            
            
            700
            
            
            —$
            211,122
            
            $
            217,178


39
 *Table
            of Contents*
  The
      Bank
      expects its liquidity position to remain strong in 2007 as the Bank expects
      to
      continue to grow into existing and new markets. The stock market has rebounded
      this past year and, while the Bank did not experience a significant outflow
      of
      deposits, the potential of additional outflows still exists as the stock market
      continues to improve. Regardless of the outcome, the Bank believes that it
      has
      the means to provide adequate liquidity for funding normal operations in 2007.





The
      Bank
      believes a strong capital position is essential to the Bank’s continued growth
      and profitability. A solid capital base provides depositors and shareholders
      with a margin of safety, while allowing the Bank to take advantage of profitable
      opportunities, support future growth and provide protection against any
      unforeseen losses.





At
      December 31, 2006, stockholders’ equity totaled $62.0 million, an increase of
      $5.2 million from $56.8 million at December 31, 2005. An important source of
      capital is earnings retention. Net income of $8.8 million in 2006, offset by
      stock repurchases of $4.2 million, was the primary factor contributing to the
      increase. Also affecting capital in 2006 was paid in capital in the amount
      of
      $0.5 million resulting from a tax benefit on stock options exercised and a
      decrease in other comprehensive income of $0.6 million, consisting of unrealized
      losses on investment securities available-for-sale and directors’ and employees’
retirement plan equity adjustment. The Bank’s Tier 1 Leverage Capital ratio at
      year-end 2006 was 9.0% and 8.3% for 2005.




On
      April
      24, 2006, the Company approved a stock repurchase program effective April 30,
      2006 to replace the Company’s previous stock purchase plan that expired on April
      30, 2006. The stock repurchase program, which will remain in effect until April
      30, 2008, allows repurchases by the Company in an aggregate of up to 2.5% of
      the
      Company’s outstanding shares of common stock over each rolling twelve-month
      period. The Company’s previous stock purchase plan had allowed repurchases by
      the Company in an aggregate of up to 3% of the Company’s outstanding shares of
      common stock over each rolling twelve-month period. During 2006, the Bank paid
      $2.5 million in dividends to the Company to fund the repurchase of 155,678
      shares of the Company’s outstanding common stock. During 2005, the Bank paid
      $3.5 million in dividends to the Company to fund the repurchase of 174,979
      shares of the Company’s outstanding common stock. The
      purpose of the stock repurchase program is to give management the ability to
      more effectively manage capital and create liquidity for shareholders who want
      to sell their stock. Management believes that the stock repurchase program
      has
      been a prudent use of excess capital.





The
      capital of the Bank historically has been maintained at a level that is in
      excess of regulatory guidelines. The policy of annual stock dividends has,
      over
      time, allowed the Bank to match capital and asset growth through retained
      earnings and a managed program of geographic growth.





40
 *Table
            of Contents*





**ITEM
      7A** - **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Market
      risk is the risk to a bank’s financial position resulting from adverse changes
      in market rates or prices, such as interest rates, foreign exchange rates or
      equity prices. The Bank has no exposure to foreign currency exchange risk or
      any
      specific exposure to commodity price risk. The Bank’s major area of market risk
      exposure is interest rate risk (“IRR”). The Bank’s exposure to IRR can be
      explained as the potential for change in the Bank’s reported earnings and/or the
      market value of its net worth. Variations in interest rates affect earnings
      by
      changing net interest income and the level of other interest-sensitive income
      and operating expenses. Interest rate changes also affect the underlying
      economic value of the Bank’s assets, liabilities and off-balance sheet items.
      These changes arise because the present value of future cash flows, and often
      the cash flows themselves, changes with the interest rates. The effects of
      the
      changes in these present values reflect the change in the Bank’s underlying
      economic value and provide a basis for the expected change in future earnings
      related to the interest rate. IRR is inherent in the role of banks as financial
      intermediaries; however, a bank with a high IRR level may experience lower
      earnings, impaired liquidity and capital positions, and most likely, a greater
      risk of insolvency. Therefore, banks must carefully evaluate IRR to promote
      safety and soundness in their activities.





The
      responsibility for the Bank’s market risk sensitivity management has been
      delegated to the Asset/Liability Committee (“ALCO”). Specifically, ALCO utilizes
      computerized modeling techniques to monitor and attempt to control the influence
      that market changes have on rate sensitive assets and rate sensitive
      liabilities.





Market
      risk continues to be a major focal point of regulatory emphasis. In accordance
      with regulation, each bank is required to develop an IRR management program
      depending on its structure, including certain fundamental components, which
      are
      mandatory to ensure IRR management. These elements include appropriate board
      and
      management oversight, as well a comprehensive risk management process that
      effectively identifies, measures, monitors and controls risk. Should a bank
      have
      material weaknesses in its risk management process or high exposure relative
      to
      its capital, the bank regulatory agencies will take action to remedy these
      shortcomings. Moreover, the level of a bank’s IRR exposure and the quality of
      its risk management process is a determining factor when evaluating a bank’s
      capital adequacy.





41
 *Table
            of Contents*





The
      Bank
      utilizes the tabular presentation alternative in complying with quantitative
      and
      qualitative disclosure rules.





The
      following tables summarize the expected maturity, principal repricing, principal
      repayment and fair value of the financial instruments that are sensitive to
      changes in interest rates.





**Interest
      Rate Sensitivity Analysis at December 31, 2006**





**Expected
                Maturity/Repricing/Principal Payment****In
                Thousands**
            
            **Within
                1**
              **Year**
            
            **1
                Year to**
              **3
                Years**
            
            **3
                Years to**
              **5
                Years**
            
            **After
                5**
              **Years**
            
            **Total**
              **Balance**
            
            **Fair**
              **Value****Interest-Sensitive
                Assets:**Federal
                funds sold
            
            $
            62,470
            
            
            —
            
            
            —
            
            
            —
            
            
            62,470
            
            
            62,470Average
                interest rate
            
            
            5.31
            %
            
            —
            
            
            —
            
            
            —
            
            
            5.31
            %
            
            —Fixed
                rate investments
            
            $
            12,298
            
            
            27,799
            
            
            13,692
            
            
            22,484
            
            
            76,273
            
            
            76,273Average
                interest rate
            
            
            4.90
            %
            
            5.22
            %
            
            5.22
            %
            
            6.09
            %
            
            5.43
            %
            
            —Fixed
                rate loans(1)
            
            $
            52,221
            
            
            23,571
            
            
            20,637
            
            
            18,169
            
            
            114,598
            
            
            114,665Average
                interest rate
            
            
            6.87
            %
            
            7.30
            %
            
            7.72
            %
            
            6.88
            %
            
            7.11
            %
            
            —Variable
                rate loans(1)
            
            $
            174,338
            
            
            63,695
            
            
            47,230
            
            
            75,688
            
            
            360,951
            
            
            361,283Average
                interest rate
            
            
            8.97
            %
            
            8.16
            %
            
            8.13
            %
            
            7.56
            %
            
            8.42
            %
            
            —Loans
                held-for-sale
            
            $
            4,460
            
            
            —
            
            
            —
            
            
            —
            
            
            4,460
            
            
            4,460Average
                interest rate
            
            
            6.35
            %
            
            —
            
            
            —
            
            
            —
            
            
            6.35
            %
            
            —**Interest-Sensitive
                Liabilities:**NOW
                account deposits(2)
            
            $
            30,453
            
            
            9,992
            
            
            6,929
            
            
            70,246
            
            
            117,620
            
            
            96,703Average
                interest rate
            
            
            1.10
            %
            
            1.10
            %
            
            1.10
            %
            
            1.10
            %
            
            1.10
            %
            
            —Money
                market deposits(2)
            
            $
            37,513
            
            
            6,431
            
            
            5,359
            
            
            57,875
            
            
            107,178
            
            
            90,573Average
                interest rate
            
            
            1.25
            %
            
            1.25
            %
            
            1.25
            %
            
            1.25
            %
            
            1.25
            %
            
            —Savings
                deposits(2)
            
            $
            23,783
            
            
            8,834
            
            
            6,795
            
            
            28,538
            
            
            67,950
            
            
            59,681Average
                interest rate
            
            
            1.65
            %
            
            1.65
            %
            
            1.65
            %
            
            1.65
            %
            
            1.65
            %
            
            —Certificates
                of deposit
            
            $
            104,673
            
            
            5,535
            
            
            3,228
            
            
            —
            
            
            113,436
            
            
            113,563Average
                interest rate
            
            
            3.60
            %
            
            3.65
            %
            
            4.25
            %
            
            —
            
            
            3.62
            %
            
            —Borrowed
                funds(3)
            
            $
            858
            
            
            10,123
            
            
            —
            
            
            —
            
            
            10,981
            
            
            10,528Average
                interest rate
            
            
            5.38
            %
            
            2.91
            %
            
            —
            
            
            —
            
            
            3.11
            %
            
            —**Interest-Sensitive
                Off-Balance Sheet Items:**Commitments
                to lend
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            198,200
            
            
            1,487Standby
                letters of credit
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            12,222
            
            
            122





(1)
            Based
                upon contractual maturity dates and interest rate
                repricing.


(2)
            NOW,
                money market and savings deposits do not carry contractual maturity
                dates.
                The actual maturities of NOW, money market and savings deposits could
                vary
                substantially if future withdrawals differ from the Company’s historical
                experience.


(3)
            Excludes
                interest on fixed rate obligations.





At
      December 31, 2006, federal funds sold of $62.5 million with a yield of 5.31%
      and
      investments of $12.3 million with a weighted-average, tax equivalent yield
      of
      4.90% were scheduled to mature within one year. In addition, net loans
      (including loans held-for-sale) of $231.0 million with a weighted-average yield
      of 8.45% were scheduled to mature or reprice within the same time-frame.
      Overall, interest-earning assets scheduled to mature within one year totaled
      $305.8 million with a weighted-average, tax-equivalent yield of 7.78%. With
      respect to interest-bearing liabilities, based on historical withdrawal
      patterns, NOW accounts, money market and savings deposits of $91.7 million
      with
      a weighted-average cost of 1.30% were scheduled to mature within one year.
      Certificates of deposit totaling $104.7 million with a weighted-average cost
      of
      3.60% were scheduled to mature in the same time-frame. In addition, borrowed
      funds totaling $0.9 million with a weighted-average cost of 5.38% were scheduled
      to mature within one year. Total interest-bearing liabilities scheduled to
      mature within one year equaled $197.3 million with a weighted-average cost
      of
      2.54%.





42
 *Table
            of Contents*





Historical
      withdrawal patterns with respect to interest-bearing and non-interest-bearing
      transaction accounts are not necessarily indicative of future performance as
      the
      volume of cash flows may increase or decrease. Loan information is presented
      based on payment due dates and repricing dates, which may differ materially
      from
      actual results due to prepayments.





The
      Bank
      seeks to control IRR by matching assets and liabilities. One tool used to ensure
      market rate return is variable rate loans. Loans totaling $231.0 million or
      48.1% of the total loan portfolio at December 31, 2006 (including loans
      held-for-sale) are subject to repricing within one year. Loan maturities in
      the
      after five year category decreased to $93.9 million at December 31, 2006 from
      $129.6 million at December 31, 2005.





The
      Bank
      is required by FASB 115 to mark to market the Available-for-Sale investments
      at
      the end of each quarter. Mark to market adjustments resulted in a reduction
      of
      $112,000 in other comprehensive income as reflected in the December 31, 2006
      consolidated balance sheet. Mark to market adjustments during the year ended
      December 31, 2005 resulted in a reduction of $914,000 in other comprehensive
      income. These adjustments were the result of fluctuating interest
      rates.





**ITEM
      8 - FINANCIAL STATEMENTS AND** **SUPPLEMENTARY** **DATA**





In
      response to this Item, the information set forth on pages 47 through 84 in
      this
      Annual Report is incorporated herein by reference.





**Financial
      Statements Filed:**





Management’s
                Report
            Page
                44Reports
                of Independent Registered Public Accounting Firms
            Page
                45Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            Page
                47Consolidated
                Statements of Operations for Years ended December 31, 2006, 2005,
                and
                2004
            Page
                48Consolidated
                Statements of Stockholders' Equity and Comprehensive Income for Years
                ended December 31, 2006, 2005, and 2004
            Page
                49Consolidated
                Statements of Cash Flows for Years ended December 31, 2006, 2005,
                and
                2004
            Page
                50Notes
                to Consolidated Financial Statements
            Page
                51


43
 *Table
            of Contents*




**Management’s
      Report**




**FIRST
                NORTHERN COMMUNITY BANCORP AND SUBSIDIARY**
              **MANAGEMENT’S
                REPORT ON INTERNAL CONTROL OVER FINANCIAL
                REPORTING**





Management
      of First Northern Community Bancorp and subsidiary (the "Company") is
      responsible for establishing and maintaining effective internal control over
      financial reporting. Internal control over financial reporting is a process
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with accounting principles generally accepted in the United States
      of
      America.





Under
      the
      supervision and with the participation of management, including the principal
      executive officer and principal financial officer, the Company conducted an
      evaluation of the effectiveness of internal control over financial reporting
      based on the framework in Internal Control - Integrated Framework issued by
      the
      Committee of Sponsoring Organizations of the Treadway Commission. Based on
      this
      evaluation under the framework in Internal Control - Integrated Framework,
      management of the Company has concluded the Company maintained effective
      internal control over financial reporting, as such term is defined in Securities
      Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2006.





Internal
      control over financial reporting cannot provide absolute assurance of achieving
      financial reporting objectives because of its inherent limitations. Internal
      control over financial reporting is a process that involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Internal control over financial reporting can also be
      circumvented by collusion or improper management override. Because of such
      limitations, there is a risk that material misstatements may not be prevented
      or
      detected on a timely basis by internal control over financial reporting.
      However, these inherent limitations are known features of the financial
      reporting process. Therefore, it is possible to design into the process
      safeguards to reduce, though not eliminate, this risk.





Management
      is also responsible for the preparation and fair presentation of the
      consolidated financial statements and other financial information contained
      in
      this report. The accompanying consolidated financial statements were prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America and include, as necessary, best estimates and judgments by management.
      MOSS ADAMS LLP, an independent registered public accounting firm, has audited
      the Company’s consolidated financial statements as of and for the year ended
      December 31, 2006, and the Company’s assertion as to the effectiveness of
      internal control over financial reporting as of December 31, 2006, as stated
      in
      their reports, which are included herein.








/s/
                Owen J. OnsumOwen
                J. OnsumPresident/Chief
                Executive Officer/Director(Principal
                Executive Officer)/s/
                Louise A. WalkerLouise
                A. WalkerSenior
                Executive Vice President/Chief Financial Officer(Principal
                Financial Officer)





March
      15,
      2007





44
 *Table
            of Contents*





**Report
      of Independent Registered Public Accounting Firm**





To
      The
      Board of Directors and Stockholders


First
      Northern Community Bancorp:





We
      have
      audited the accompanying consolidated balance sheet of First Northern Community
      Bancorp and subsidiary (the Company) as of December 31, 2006 and the related
      consolidated statements of operations, stockholders’ equity and comprehensive
      income and cash flows for the year ended December 31, 2006. We have also audited
      management’s assessment, included in the accompanying Management Report on
      Internal Control over Financial Reporting, that the Company maintained effective
      internal control over financial reporting as of December 31, 2006, based on
      criteria established in Internal Control - Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
      Company’s management is responsible for these financial statements, maintaining
      effective internal control over financial reporting, and for its assessment
      of
      the effectiveness of internal control over financial reporting. Our
      responsibility is to express an opinion on these financial statements, an
      opinion on management’s assessment, and an opinion on the effectiveness of the
      Company’s internal control over financial reporting based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. An audit of internal control over financial
      reporting includes obtaining an understanding of internal control over financial
      reporting, evaluating management’s assessment, testing and evaluating the design
      and operating effectiveness of internal control, and performing such other
      procedures as we considered necessary in the circumstances. We believe that
      our
      audits provide a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of assets of the company; (2) provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made in accordance with authorizations of management and directors of
      the
      company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use or disposition of the company’s
      assets that could have a material effect on the financial
      statements.





Because
      of the inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of the
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with policies or procedures may deteriorate.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of First Northern
      Community Bancorp and subsidiary as of December 31, 2006 and the consolidated
      results of their operations and cash flows for the year ended December 31,
      2006
      in conformity with accounting principles generally accepted in the United States
      of America. Also, in our opinion management’s assessment that First Northern
      Community Bancorp and subsidiary maintained effective internal control over
      financial reporting as of December 31, 2006, is fairly stated, in all material
      respects, based on criteria established in Internal Control - Integrated
      Framework issued by the COSO. Furthermore, in our opinion, First Northern
      Community Bancorp and subsidiary maintained, in all material respects, effective
      internal control over financial reporting as of December 31, 2006, based on
      criteria established in Internal Control - Integrated Framework issued by the
      COSO.





As
      discussed in notes 1 and 12 to the consolidated financial statements, effective
      January 1, 2006, the Company changed its method of accounting for share-based
      payment arrangements to conform to Statement of Financial Accounting Standard
      No. 123(R), “Share-Based Payment”.




/s/ **MOSS
      ADAMS LLP**





Stockton, California


March 15,
      2007





45
 *Table
            of Contents*





**Report
      of Independent Registered Public Accounting Firm**







The
      Board
      of Directors and Stockholders


First
      Northern Community Bancorp:








We
      have
      audited the accompanying consolidated balance sheet of First Northern Community
      Bancorp and subsidiary as of December 31, 2005, and the related
      consolidated statments of operations, stockholders’ equity and comprehensive
      income, and cash flows for each of the years in the two-year period ended
      December 31, 2005. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of First Northern Community
      Bancorp and subsidiary as of December 31, 2005, and the results of their
      operations and their cash flows for each of the years in the two-year period
      ended December 31, 2005, in conformity with U.S. generally accepted accounting
      principles.







/s/ **KPMG
      LLP**





Sacramento, California


March 15,
      2007





46
 *Table
            of Contents*




**FIRST
      NORTHERN COMMUNITY BANCORP**


**AND
      SUBSIDIARY**


Consolidated
      Balance Sheets


December
      31, 2006 and 2005


(in
      thousands, except share amounts)





**2006**
            
            **2005****Assets**Cash
                and due from banks
            
            $
            35,531
            
            $
            35,507Federal
                funds sold
            
            
            62,470
            
            
            87,185Investment
                securities - available-for-sale (includes securities pledged to creditors
                with the right to sell or repledge of $3,935 and $3,963, respectively)
            
            
            76,273
            
            
            48,788Loans,
                net
            
            
            475,549
            
            
            456,061Loans
                held-for-sale
            
            
            4,460
            
            
            4,440Premises
                and equipment, net
            
            
            8,060
            
            
            8,311Other
                real estate owned
            
            
            375
            
            
            268Other
                assets
            
            
            22,507
            
            
            20,087Total
                assets
            
            $
            685,225
            
            $
            660,647**Liabilities
                and Stockholders' Equity**Deposits:Demand
            
            $
            197,498
            
            $
            192,436Interest-bearing
                transaction deposits
            
            
            117,620
            
            
            85,560Savings
                and MMDAs
            
            
            175,128
            
            
            185,878Time,
                under $100,000
            
            
            47,137
            
            
            51,921Time,
                $100,000 and over
            
            
            66,299
            
            
            65,986Total
                Deposits
            
            
            603,682
            
            
            581,781FHLB
                advances and other borrowings
            
            
            10,981
            
            
            14,969Accrued
                interest payable and other liabilities
            
            
            8,572
            
            
            7,095Total
                Liabilities
            
            
            623,235
            
            
            603,845Stockholders'
                Equity:Common
                stock, no par value; 16,000,000 shares authorized; 7,980,952 and
                7,558,759
                shares issued and outstanding in 2006 and 2005,
                respectively;
            
            
            45,726
            
            
            36,100Additional
                paid-in capital
            
            
            977
            
            
            977Retained
                earnings
            
            
            15,792
            
            
            19,606Accumulated
                other comprehensive (loss) income, net
            
            
            (505
            )
            
            119Total
                stockholders’ equity
            
            
            61,990
            
            
            56,802Commitments
                and contingenciesTotal
                liabilities and stockholders’ equity
            
            $
            685,225
            
            $
            660,647





See
      accompanying notes to consolidated financial statements.





47
 *Table
            of Contents*




**FIRST
      NORTHERN COMMUNITY BANCORP**


**AND
      SUBSIDIARY**


Consolidated
      Statements of Operations


Years
      Ended December 31, 2006, 2005 and 2004


(in
      thousands, except share amounts)





**2006**
            
            **2005**
            
            **2004**Interest
                income:Interest
                and fees on loans
            
            $
            41,894
            
            $
            35,838
            
            $
            27,873Federal
                funds sold
            
            
            2,986
            
            
            2,587
            
            
            972Investment
                securities:Taxable
            
            
            2,554
            
            
            1,915
            
            
            2,164Non-taxable
            
            
            636
            
            
            562
            
            
            610Total
                interest income
            
            
            48,070
            
            
            40,902
            
            
            31,619Interest
                expense:Time
                deposits $100,000 and over
            
            
            2,315
            
            
            1,452
            
            
            1,122Other
                deposits
            
            
            6,748
            
            
            3,782
            
            
            1,863Other
                borrowings
            
            
            363
            
            
            495
            
            
            441Total
                interest expense
            
            
            9,426
            
            
            5,729
            
            
            3,426Net
                interest income
            
            
            38,644
            
            
            35,173
            
            
            28,193Provision
                for loan losses
            
            
            735
            
            
            600
            
            
            207Net
                interest income after provision for loan losses
            
            
            37,909
            
            
            34,573
            
            
            27,986Other
                operating income:Service
                charges on deposit accounts
            
            
            2,820
            
            
            2,400
            
            
            2,203Net
                realized gains on available-for-sale securities
            
            
            —
            
            
            15
            
            
            3Net
                realized gains on loans held-for-sale
            
            
            45
            
            
            763
            
            
            742Net
                realized gains on other real estate owned
            
            
            6
            
            
            323
            
            
            32Other
                income
            
            
            2,418
            
            
            2,219
            
            
            2,234Total
                other operating income
            
            
            5,289
            
            
            5,720
            
            
            5,214Other
                operating expenses:Salaries
                and employee benefits
            
            
            17,455
            
            
            15,916
            
            
            13,545Occupancy
                and equipment
            
            
            3,673
            
            
            3,236
            
            
            3,042Data
                processing
            
            
            1,384
            
            
            1,209
            
            
            1,079Stationery
                and supplies
            
            
            524
            
            
            481
            
            
            486Advertising
            
            
            894
            
            
            736
            
            
            416Directors
                fees
            
            
            162
            
            
            128
            
            
            127Other
            
            
            5,127
            
            
            5,107
            
            
            4,248Total
                other operating expenses
            
            
            29,219
            
            
            26,813
            
            
            22,943Income
                before income tax expense
            
            
            13,979
            
            
            13,480
            
            
            10,257Provision
                for income tax expense
            
            
            5,169
            
            
            4,792
            
            
            3,550Net
                income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707Basic
                income per share
            
            $
            1.04
            
            $
            1.02
            
            $
            0.78Diluted
                income per share
            
            $
            0.99
            
            $
            0.98
            
            $
            0.76





See
      accompanying notes to consolidated financial statements.





48
 *Table
            of Contents*





**FIRST
      NORTHERN COMMUNITY BANCORP**


**AND
      SUBSIDIARY**


Consolidated
      Statements of Stockholders' Equity and Comprehensive Income


Years
      Ended December 31, 2006, 2005 and 2004


(in
      thousands, except share amounts)





**Accumulated****Additional**
            
            
            
            **Other****Common
                Stock**
            
            **Comprehensive**
            
            **Paid-in**
            
            **Retained**
            
            **Comprehensive****Description**
            
            **Shares**
            
            **Amounts**
            
            **Income**
            
            **Capital**
            
            **Earnings**
            
            **Income**
            
            **Total**Balance
                at December 31, 2003
            
            
            6,834,514
            
            $
            28,193
            
            
            
            
            $
            977
            
            $
            15,933
            
            $
            1,869
            
            $
            46,972Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            $
            6,707
            
            
            
            
            $
            6,707
            
            
            
            
            $
            6,707Other
                comprehensive loss:Unrealized
                holding losses arising during the current period, net of tax effect
                of
                $513
            
            
            
            
            
            
            
            
            (770
            )Reclassification
                adjustment due to gains realized, net of tax effect of $1
            
            
            
            
            
            
            
            
            2Directors’
                and officers’ retirement plan equity adjustments
            
            
            
            
            
            
            
            
            (116
            )Total
                other comprehensive loss, net of tax effect of $512
            
            
            
            
            
            
            
            
            2(884
            )
            
            
            
            
            
            
            
            (884
            )
            
            (884
            )Comprehensive
                income
            
            
            
            
            
            
            
            $
            5,8236%
                stock dividend
            
            
            410,214
            
            
            5,537
            
            
            
            
            
            
            
            
            (5,537
            )
            
            
            
            
            —Cash
                in lieu of fractional shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12
            )
            
            
            
            
            (12
            )Stock-based
                compensation and related tax benefits
            
            
            
            
            
            360
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            360Common
                shares issued, including tax benefits
            
            
            80,668
            
            
            398
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            398Stock
                repurchase and retirement
            
            
            (123,062
            )
            
            (1,640
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,640
            )Balance
                at December 31, 2004
            
            
            7,202,334
            
            
            32,848
            
            
            
            
            
            977
            
            
            17,091
            
            
            985
            
            
            51,901Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            $
            8,688
            
            
            
            
            
            8,688
            
            
            
            
            
            8,688Other
                comprehensive loss:Unrealized
                holding losses arising during the current period, net of tax effect
                of
                $615
            
            
            
            
            
            
            
            
            (923
            )Reclassification
                adjustment due to gains realized, net of tax effect of $6
            
            
            
            
            
            
            
            
            9Directors’
                and officers’ retirement plan equity adjustments
            
            
            
            
            
            
            
            
            48Total
                other comprehensive loss, net of tax effect of $609
            
            
            
            
            
            
            
            
            (866
            )
            
            
            
            
            
            
            
            (866
            )
            
            (866
            )Comprehensive
                income
            
            
            
            
            
            
            
            $
            7,8226%
                stock dividend
            
            
            432,132
            
            
            6,158
            
            
            
            
            
            
            
            
            (6,158
            )
            
            
            
            
            —Cash
                in lieu of fractional shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15
            )
            
            
            
            
            (15
            )Stock-based
                compensation and related tax benefits
            
            
            
            
            
            554
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            554Common
                shares issued, including tax benefits
            
            
            99,262
            
            
            394
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            394Stock
                repurchase and retirement
            
            
            (174,969
            )
            
            (3,854
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,854
            )Balance
                at December 31, 2005
            
            
            7,558,759
            
            
            36,100
            
            
            
            
            
            977
            
            
            19,606
            
            
            119
            
            
            56,802Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            $
            8,810
            
            
            
            
            
            8,810
            
            
            
            
            
            8,810Other
                comprehensive loss:Unrealized
                holding losses arising during the current period, net of tax effect
                of
                $75
            
            
            
            
            
            
            
            
            (112
            )Reclassification
                adjustment due to gains realized, net of tax effect of
                $-0-
            
            
            
            
            
            
            
            
            —Directors’
                and officers’ retirement plan equity adjustments, net of tax effect of
                $341
            
            
            
            
            
            
            
            
            (512
            )Total
                other comprehensive loss, net of tax effect of $416
            
            
            
            
            
            
            
            
            (624
            )
            
            
            
            
            
            
            
            (624
            )
            
            (624
            )Comprehensive
                income
            
            
            
            
            
            
            
            $
            8,1866%
                stock dividend
            
            
            455,472
            
            
            12,525
            
            
            
            
            
            
            
            
            (12,525
            )
            
            
            
            
            —Cash
                in lieu of fractional shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15
            )
            
            
            
            
            (15
            )Accrued
                compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (84
            )
            
            
            
            
            (84
            )Stock-based
                compensation and related tax benefits
            
            
            
            
            
            817
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            817Common
                shares issued, including tax benefits
            
            
            122,399
            
            
            472
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            472Stock
                repurchase and retirement
            
            
            (155,678
            )
            
            (4,188
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,188
            )Balance
                at December 31, 2006
            
            
            7,980,952
            
            $
            45,726
            
            
            
            
            $
            977
            
            $
            15,792
            
            $
            (505
            )
            $
            61,990




See
      accompanying notes to consolidated financial statements.





49
 *Table
            of Contents*





**FIRST
      NORTHERN COMMUNITY BANCORP**


**AND
      SUBSIDIARY**


Consolidated
      Statements of Cash Flows


Years
      Ended December 31, 2006, 2005 and 2004


(in
      thousands, except share amounts)





**2006**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707Adjustments
                to reconcile net income to net cash provided byoperating activities:Provision
                for loan losses
            
            
            735
            
            
            600
            
            
            207Stock
                plan accruals
            
            
            395
            
            
            286
            
            
            204Tax
                benefit for stock options
            
            
            422
            
            
            268
            
            
            156Depreciation
                and amortization
            
            
            1,041
            
            
            1,016
            
            
            1,283Accretion
                and amortization, net
            
            
            (96
            )
            
            25
            
            
            60Net
                realized gains on available-for-sale securities
            
            
            —
            
            
            (15
            )
            
            (3
            )Net
                realized gains on loans held-for-sale
            
            
            (45
            )
            
            (763
            )
            
            (742
            )Gain
                on sale of OREO
            
            
            (6
            )
            
            (323
            )
            
            (32
            )Gain
                on sale of bank premises and equipment
            
            
            —
            
            
            (5
            )
            
            —Benefit
                from deferred income taxes
            
            
            (503
            )
            
            (666
            )
            
            (625
            )Proceeds
                from sales of loans held-for-sale
            
            
            38,386
            
            
            62,428
            
            
            58,387Originations
                of loans held-for-sale
            
            
            (38,361
            )
            
            (62,386
            )
            
            (56,694
            )(Decrease)
                increase in deferred loan origination fees and costs, net
            
            
            (355
            )
            
            (372
            )
            
            325(Increase)
                decrease in accrued interest receivable and other assets
            
            
            (2,016
            )
            
            (1,707
            )
            
            422Increase
                in accrued interest payable and other liabilities
            
            
            1,477
            
            
            2,135
            
            
            913Net
                cash provided by operating activities
            
            
            9,884
            
            
            9,209
            
            
            10,568Cash
                flows from investing activities:Proceeds
                from maturities of available-for-sale securities
            
            
            12,900
            
            
            10,755
            
            
            8,715Proceeds
                from sales of available-for-sale securities
            
            
            —
            
            
            405
            
            
            —Principal
                repayments on available-for-sale securities
            
            
            2,027
            
            
            655
            
            
            836Purchase
                of available-for-sale securities
            
            
            (42,503
            )
            
            (6,982
            )
            
            (15,807
            )Net
                increase in loans
            
            
            (19,975
            )
            
            (26,855
            )
            
            (54,464
            )Purchases
                of bank premises and equipment
            
            
            (790
            )
            
            (1,892
            )
            
            (745
            )Proceeds
                from bank premises and equipment
            
            
            —
            
            
            5
            
            
            —Proceeds
                from sale of other real estate owned
            
            
            6
            
            
            323
            
            
            32Net
                cash used in investing activities
            
            
            (48,335
            )
            
            (23,586
            )
            
            (61,433
            )Cash
                flows from financing activities:Net
                increase in deposits
            
            
            21,901
            
            
            24,595
            
            
            58,337Net
                (decrease) increase in FHLB advances and other borrowings
            
            
            (3,988
            )
            
            (487
            )
            
            5,883Cash
                dividends paid in lieu of fractional shares
            
            
            (15
            )
            
            (15
            )
            
            (12
            )Common
                stock issued
            
            
            472
            
            
            394
            
            
            398Tax
                benefit for stock options
            
            
            (422
            )
            
            (268
            )
            
            (156
            )Repurchase
                of common stock
            
            
            (4,188
            )
            
            (3,854
            )
            
            (1,640
            )Net
                cash provided by financing activities
            
            
            13,760
            
            
            20,365
            
            
            62,966Net
                change in cash and cash equivalents
            
            
            (24,691
            )
            
            5,988
            
            
            11,945Cash
                and cash equivalents at beginning of year
            
            
            122,692
            
            
            116,704
            
            
            104,759Cash
                and cash equivalents at end of year
            
            $
            98,001
            
            $
            122,692
            
            $
            116,704





See
      accompanying notes to consolidated financial statements.





50
 *Table
            of Contents*





**FIRST
      NORTHERN COMMUNITY BANCORP**


**AND
      SUBSIDIARY**


Notes
      to
      Consolidated Financial Statements


Years
      Ended December 31, 2006, 2005 and 2004


(in
      thousands, except share amounts)




**(1)**
            **Summary
                of Significant Accounting
                Policies**




First
      Northern Community Bancorp (the “Company”) is a bank holding company whose only
      subsidiary, First Northern Bank of Dixon (the “Bank”), a California state
      chartered bank, conducts general banking activities, including collecting
      deposits and originating loans, and serves Solano, Yolo, Sacramento, Placer
      and
      El Dorado Counties. All intercompany transactions between the Company and the
      Bank have been eliminated in consolidation.




The
      accounting and reporting policies of the Company conform with accounting
      principles generally accepted in the United States of America. In preparing
      the
      consolidated financial statements, management is required to make estimates
      and
      assumptions that affect the reported amounts of assets and liabilities as of
      the
      date of the balance sheet and revenues and expenses for the period. Actual
      results could differ from those estimates applied in the preparation of the
      accompanying consolidated financial statements. For the Bank the most
      significant accounting estimate is the allowance for loan losses. *See* footnote
      (1)(e). A summary of the significant accounting policies applied in the
      preparation of the accompanying consolidated financial statements
      follows.




***(a)***
            ***Cash
                Equivalents***




For
      purposes of the consolidated statements of cash flows, the Company considers
      due
      from banks, federal funds sold for one-day periods and short-term bankers
      acceptances to be cash equivalents.




***(b)***
            ***Investment
                Securities***




Investment
      securities consist of U.S. Treasury securities, U.S. Agency securities,
      obligations of states and political subdivisions, obligations of U.S.
      Corporations, mortgage backed securities and other securities. At the time
      of
      purchase of a security the Company designates the security as held-to-maturity
      or available-for-sale, based on its investment objectives, operational needs
      and
      intent to hold. The Company does not purchase securities with the intent to
      engage in trading activity.




Held-to-maturity
      securities are recorded at amortized cost, adjusted for amortization or
      accretion of premiums or discounts. Available-for-sale securities are recorded
      at fair value with unrealized holding gains and losses, net of the related
      tax
      effect, reported as a separate component of stockholders’ equity until
      realized.




A
      decline
      in the market value of any available-for-sale or held-to-maturity security
      below
      cost that is deemed other than temporary results in a charge to earnings and
      the
      corresponding establishment of a new cost basis for the security. Premiums
      and
      discounts are amortized or accreted over the life of the related
      held-to-maturity or available-for-sale security as an adjustment to yield using
      the effective interest method. Dividend and interest income are recognized
      when
      earned. Realized gains and losses for securities classified as
      available-for-sale and held-to-maturity are included in earnings and are derived
      using the specific identification method for determining the cost of securities
      sold.




Derivative
      instruments, including certain derivative instruments embedded in other
      contracts, (collectively referred to as derivatives) and hedging activities,
      are
      recognized as either assets or liabilities in the statement of financial
      position and measured at fair value. The Company did not hold any derivatives
      at
      December 31, 2006 and 2005.





51
 *Table
            of Contents*





***(c)***
            ***Loans***




Loans
      are
      reported at the principal amount outstanding, net of deferred loan fees and
      the
      allowance for loan losses. A loan is considered impaired when, based on current
      information and events; it is probable that the Company will be unable to
      collect all amounts due according to the contractual terms of the loan
      agreement, including scheduled interest payments. For a loan that has been
      restructured, the contractual terms of the loan agreement refer to the
      contractual terms specified by the original loan agreement, not the contractual
      terms specified by the restructuring agreement. An impaired loan is measured
      based upon the present value of future cash flows discounted at the loan’s
      effective rate, the loan’s observable market price, or the fair value of
      collateral if the loan is collateral dependent. Interest on impaired loans
      is
      recognized on a cash basis. If the measurement of the impaired loan is less
      than
      the recorded investment in the loan, an impairment is recognized by a charge
      to
      the allowance for loan losses.




Unearned
      discount on installment loans is recognized as income over the terms of the
      loans by the interest method. Interest on other loans is calculated by using
      the
      simple interest method on the daily balance of the principal amount
      outstanding.




Loan
      fees
      net of certain direct costs of origination, which represent an adjustment to
      interest yield are deferred and amortized over the contractual term of the
      loan
      using the interest method.




Loans
      on
      which the accrual of interest has been discontinued are designated as
      non-accrual loans. Accrual of interest on loans is discontinued either when
      reasonable doubt exists as to the full and timely collection of interest or
      principal or when a loan becomes contractually past due by ninety days or more
      with respect to interest or principal. When a loan is placed on non-accrual
      status, all interest previously accrued but not collected is reversed against
      current period interest income. Interest accruals are resumed on such loans
      only
      when they are brought fully current with respect to interest and principal
      and
      when, in the judgment of management, the loans are estimated to be fully
      collectible as to both principal and interest. Restructured loans are loans
      on
      which concessions in terms have been granted because of the borrowers’ financial
      difficulties. Interest is generally accrued on such loans in accordance with
      the
      new terms.




***(d)***
            ***Loans
                Held-for-Sale***




Loans
      originated and held-for-sale are carried at the lower of cost or estimated
      market value in the aggregate. Net unrealized losses are recognized through
      a
      valuation allowance by charges to income.




***(e)***
            ***Allowance
                for Loan Losses***




The
      allowance for loan losses is established through a provision charged to expense.
      Loans are charged off against the allowance for loan losses when management
      believes that the collectibility of the principal is unlikely. The allowance
      is
      an amount that management believes will be adequate to absorb losses inherent
      in
      existing loans and overdrafts on evaluations of collectibility and prior loss
      experience. The evaluations take into consideration such factors as changes
      in
      the nature and volume of the portfolio, overall portfolio quality, loan
      concentrations, specific problem loans, commitments, and current and anticipated
      economic conditions that may affect the borrowers’ ability to pay. While
      management uses these evaluations to recognize the provision for loan losses,
      future provisions may be necessary based on changes in the factors used in
      the
      evaluations.




Material
      estimates relating to the determination of the allowance for loan losses are
      particularly susceptible to significant change in the near term. Management
      believes that the allowance for loan losses is adequate. While management uses
      available information to recognize losses on loans, future additions to the
      allowance may be necessary based on changes in economic conditions. In addition,
      the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of its
      examination process, periodically reviews the Bank’s allowance for loan losses.
      The FDIC may require the Bank to recognize additions to the allowance based
      on
      their judgment about information available to them at the time of their
      examination.




52
 *Table
            of Contents*





**(f)**
            **Premises
                and Equipment**




Premises
      and equipment are stated at cost, less accumulated depreciation. Depreciation
      is
      computed substantially by the straight-line method over the estimated useful
      lives of the related assets. Leasehold improvements are depreciated over the
      estimated useful lives of the improvements or the terms of the related leases,
      whichever is shorter. The useful lives used in computing deprecation are as
      follows:




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





***(g)***
            ***Other
                Real Estate Owned***




Other
      real estate acquired by foreclosure, is carried at the lower of the recorded
      investment in the property or its fair value less estimated selling costs.
      Prior
      to foreclosure, the value of the underlying loan is written down to the fair
      value of the real estate to be acquired by a charge to the allowance for loan
      losses, if necessary. Fair value of other real estate owned is generally
      determined based on an appraisal of the property. Any subsequent operating
      expenses or income, reduction in estimated values and gains or losses on
      disposition of such properties are included in other operating
      expenses.




Revenue
      recognition on the disposition of real estate is dependent upon the transaction
      meeting certain criteria relating to the nature of the property sold and the
      terms of the sale. Under certain circumstances, revenue recognition may be
      deferred until these criteria are met.




***(h)***
            ***Impairment
                of Long-Lived Assets and Long-Lived Assets to Be Disposed
                Of***




Long-lived
      assets and certain identifiable intangibles are reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Recoverability of assets to be held and used is measured
      by a comparison of the carrying amount of an asset to future net cash flows
      expected to be generated by the asset. If such assets are considered to be
      impaired, the impairment to be recognized is measured by the amount by which
      the
      carrying amount of the assets exceeds the fair value of the assets. Assets
      to be
      disposed of are reported at the lower of the carrying amount or fair value
      less
      costs to sell.




***(i)***
            ***Gain
                or Loss on Sale of Loans and Servicing
                Rights***




Retained
      interests in loans sold are measured by allocating the previous carrying amount
      of the transferred assets between the loans sold and retained interests, if
      any,
      based on their relative fair value at the date of transfer. Fair values are
      estimated using discounted cash flows based on a current market interest
      rate.





A
      sale is
      recognized when the transaction closes and the proceeds are other than
      beneficial interests in the assets sold. A gain or loss is recognized to the
      extent that the sales proceeds and the fair value of the servicing asset exceed
      or are less than the book value of the loan. Additionally, a normal cost for
      servicing the loan is considered in the determination of the gain or
      loss.




When
      servicing rights are sold, a gain or loss is recognized at the closing date
      to
      the extent that the sales proceeds, less costs to complete the sale, exceed
      or
      are less than the carrying value of the servicing rights held.




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





The
      Company recognizes a gain and a related asset for the fair value of the rights
      to service loans for others when loans are sold. The Company sold substantially
      all of its conforming long-term residential mortgage loans originated during
      the
      years ended December 31, 2006, 2005 and 2004 for cash proceeds equal to the
      fair
      value of the loans.





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





The
      Company had mortgage loans held-for-sale of $4,460 and $4,440 at December 31,
      2006 and 2005, respectively. At December 31, 2006 and 2005, the Company serviced
      real estate mortgage loans for others of $112,742 and $112,743, respectively.





Mortgage
      servicing rights as of December 31, 2006 were $945. The balance as of December
      31, 2005 was $973.





***(j)***
            ***Income
                Taxes***




The
      Company accounts for income taxes under the asset and liability method. Under
      the asset and liability method, deferred tax assets and liabilities are
      recognized for the future tax consequences attributable to differences between
      the financial statement carrying amounts of existing assets and liabilities
      and
      their respective tax bases and operating loss and tax credit carry forwards.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized in income in
      the
      period that includes the enactment date.




On
      July
      15, 2002, the Bank made a $2,355 equity investment in a partnership, which
      owns
      low-income affordable housing projects that generate tax benefits in the form
      of
      federal and state housing tax credits. On December 31, 2004, the Bank
      transferred the amortized cost of the equity investment to a similar equity
      investment partnership which owns low income affordable housing projects that
      generate tax benefits in the form of federal and state tax credits. As a limited
      partner investor in this partnership, the Company receives tax benefits in
      the
      form of tax deductions from partnership operating losses and federal and state
      income tax credits. The federal and state income tax credits are earned over
      a
      10-year period as a result of the investment property meeting certain criteria
      and are subject to recapture for non-compliance with such criteria over a
      15-year period. The expected benefit resulting from the low-income housing
      tax
      credits is recognized in the period for which the tax benefit is recognized
      in
      the Company’s consolidated tax returns. This investment is accounted for using
      the effective yield method and is recorded in other assets on the balance sheet.
      Under the effective yield method, the Company recognizes tax credits as they
      are
      allocated and amortizes the initial cost of the investment to provide a constant
      effective yield over the period that tax credits are allocated to the Company.
      The effective yield is the internal rate of return on the investment, based
      on
      the cost of the investment and the guaranteed tax credits allocated to the
      Company. Any expected residual value of the investment was excluded from the
      effective yield calculation. Cash received from operations of the limited
      partnership or sale of the property, if any, will be included in earnings when
      realized or realizable.





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***(k)***
            ***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.
      See Note 12 of Notes to Consolidated Financial Statements (page
      68).




***(l)***
            ***Earnings
                Per Share (EPS)***




Basic
      EPS
      includes no dilution and is computed by dividing income available to common
      stockholders by the weighted-average number of common shares outstanding for
      the
      period. Diluted EPS reflects the potential dilution of securities that could
      share in the earnings of an entity. *See* Note 9 of
      Notes to Consolidated Financial Statements (page 67).




***(m)***
            ***Comprehensive
                Income***




Accounting
      principles generally accepted in the United States require that recognized
      revenue, expenses, gains and losses be included in net income. Although certain
      changes in assets and liabilities, such as unrealized gain and losses on
      available-for-sale securities, are reported as a separate component of the
      equity section of the balance sheet, such items, along with net income, are
      components of comprehensive income.




***(n)***
            ***Fiduciary
                Powers***




On
      July
      1, 2002, the Bank received trust powers from applicable regulatory agencies
      and
      on that date began to offer fiduciary services for individuals, businesses,
      governments and charitable organizations in the Solano, Yolo, Sacramento, Placer
      and El Dorado County areas. The Bank’s full-service asset management and trust
      department, which offers and manages such fiduciary services, is located in
      downtown Sacramento.





***(o)***
            ***Impact
                of Recently Issued Accounting
                Standards***




In
      September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements (“SAB 108”), which is effective for fiscal
      years ending on or after November 15, 2006. SAB 108 provides guidance on how
      the
      effects of prior-year uncorrected financial statement misstatements should
      be
      considered in quantifying a current year misstatement. SAB 108 requires public
      companies to quantify misstatements using both an income statement (rollover)
      and balance sheet (iron curtain) approach and evaluate whether either approach
      results in a misstatement that, when all relevant quantitative and qualitative
      factors are considered, is material. If prior year errors that had been
      previously considered immaterial now are considered material based on either
      approach, no restatement is required so long as management properly applied
      its
      previous approach and all relevant facts and circumstances were considered.
      Adjustments considered immaterial in prior years under the method previously
      used, but now considered material under the dual approach required by SAB 108,
      are to be recorded upon initial adoption of SAB 108. Management has completed
      its review and adopted the new guidance effective January 1, 2006. The impact
      of
      the adoption was a decrease in beginning retained earnings of $84, related
      to
      accrued vacation pay and accrued hourly compensation.





55
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            of Contents*





In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
      No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires the Company to (a)
      recognize in its statement of financial position an asset for a plan’s
      overfunded status or a liability for a plan’s underfunded status, (b) measure a
      plan’s assets and its obligations that determine its funded status as of the end
      of the fiscal year, (c) recognize changes in the funded status of a defined
      postretirement plan in the year in which the changes occur (reported in
      comprehensive income) and (d) provide additional disclosure. The requirement
      to
      recognize the funded status of a benefit plan and the disclosure requirements
      are effective as of the end of the fiscal year ending after December 15, 2006.
      The requirement to measure the plan assets and benefit obligations as of the
      date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008.





As
      of
      December 31, 2006, the Company adopted SFAS No. 158. In accordance with this
      standard, the Company recorded the funded status of each of its defined benefit
      pension and postretirement plans as an asset or liability on its Consolidated
      Balance Sheet with a corresponding offset, net of taxes, recorded in Accumulated
      other comprehensive (loss) income within Stockholders’ Equity, resulting in an
      after-tax decrease in equity of $549. See Note 7 of Notes to Consolidated
      Financial Statements (page 60).





***(p)***
            ***Reclassifications***




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





**(2)**
            **Cash
                and Due from Banks**




The
      Bank
      is required to maintain reserves with the Federal Reserve Bank based on a
      percentage of deposit liabilities. No aggregate reserves were required at
      December 31, 2006 and 2005. The Bank has met its average reserve requirements
      during 2006 and 2005 and the minimum required balance at December 31, 2006
      and
      2005.




56
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**(3)**
            **Investment
                Securities**




The
      amortized cost, unrealized gains and losses and estimated market values of
      investments in debt and other securities at December 31, 2006 are summarized
      as
      follows:




**Amortized**
              **cost**
            
            **Unrealized**
              **gains**
            
            **Unrealized**
              **losses**
            
            **Estimated**
              **market**
              **value**Investment
                securities available for sale:U.S.
                Treasury securities
            
            $
            249
            
            $
            4
            
            $
            —
            
            $
            253Securities
                of U.S. government agencies and corporations
            
            
            31,887
            
            
            82
            
            
            (266
            )
            
            31,703Obligations
                of states and political subdivisions
            
            
            29,836
            
            
            382
            
            
            (25
            )
            
            30,193Mortgage
                backed securities
            
            
            12,084
            
            
            23
            
            
            (76
            )
            
            12,031Total
                debt securities
            
            
            74,056
            
            
            491
            
            
            (367
            )
            
            74,180Other
                securities
            
            
            2,093
            
            
            —
            
            
            —
            
            
            2,093$
            76,149
            
            $
            491
            
            $
            (367
            )
            $
            76,273





The
      amortized cost, unrealized gains and losses and estimated market values of
      investments in debt and other securities at December 31, 2005 are
      summarized as follows:




**Amortized**
              **cost**
            
            **Unrealized**
              **gains**
            
            **Unrealized**
              **losses**
            
            **Estimated**
              **market**
              **value**Investment
                securities available for sale:U.S.
                Treasury securities
            
            $
            250
            
            $
            —
            
            $
            —
            
            $
            250Securities
                of U.S. government agencies and corporations
            
            
            21,924
            
            
            16
            
            
            (384
            )
            
            21,556Obligations
                of states and political subdivisions
            
            
            22,377
            
            
            678
            
            
            (8
            )
            
            23,047Mortgage
                backed securities
            
            
            1,795
            
            
            8
            
            
            —
            
            
            1,803Total
                debt securities
            
            
            46,346
            
            
            702
            
            
            (392
            )
            
            46,656Other
                securities
            
            
            2,132
            
            
            —
            
            
            —
            
            
            2,132$
            48,478
            
            $
            702
            
            $
            (392
            )
            $
            48,788





Gross
      realized gains from sales of available-for-sales securities were $0, $15 and
      $3
      for the years ended December 31, 2006, 2005 and 2004, respectively. Gross
      realized losses from sales of available-for-sale securities were $-0- for each
      of the years ended December 31, 2006, 2005 and 2004.





57
 *Table
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The
      amortized cost and estimated market value of debt and other securities at
      December 31, 2006, by contractual maturity, are shown in the following table:




**Amortized**
              **cost**
            
            **Estimated**
              **market**
              **value**Due
                in one year or less
            
            $
            12,345
            
            
            12,298Due
                after one year through five years
            
            
            41,556
            
            
            41,491Due
                after five years through ten years
            
            
            9,640
            
            
            9,800Due
                after ten years
            
            
            10,515
            
            
            10,591Other
            
            
            2,093
            
            
            2,093$
            76,149
            
            
            76,273




Expected
      maturities may differ from contractual maturities because borrowers may have
      the
      right to call or prepay obligations with or without call or prepayment
      penalties. Securities
      due after one year through five years included mortgage-backed securities
      totaling $11,996. The maturities on these securities were based on the average
      lives of the securities.




An
      analysis of gross unrealized losses of the available-for-sale investment
      securities portfolio as of December 31, 2006, follows:




**Less
                than 12 months**
            
            **12
                months or more**
            
            **Total****Fair**
              **Value**
            
            **Unrealized**
              **losses**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **losses**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **losses**Securities
                of U.S. government agencies and corporations
            
            $
            8,867
            
            $
            (59
            )
            $
            14,740
            
            $
            (207
            )
            $
            23,607
            
            $
            (266
            )Obligations
                of states and political subdivisions
            
            
            3,929
            
            
            (20
            )
            
            225
            
            
            (5
            )
            
            4,154
            
            
            (25
            )Mortgage
                backed securities
            
            
            8,156
            
            
            (76
            )
            
            —
            
            
            —
            
            
            8,156
            
            
            (76
            )Total
            
            $
            20,952
            
            $
            (155
            )
            $
            14,965
            
            $
            (212
            )
            $
            35,917
            
            $
            (367
            )




No
      decline in value was considered “other than temporary” during 2006. The
      unrealized losses on investments in U.S. government agency securities were
      caused by market interest rate increases that occurred after these securities
      were purchased. Thirty-one securities that had a fair market value of $20,952
      and a total unrealized loss of $155 have been in an unrealized loss position
      for
      less than twelve months as of December 31, 2006. In addition, sixteen securities
      with a fair market value of $14,965 and a total unrealized loss of $212 that
      have been in an unrealized loss position for more than twelve months as of
      December 31, 2006. Due to the fact the Company has the ability and intent to
      hold these investments until a market price recovery or maturity, these
      investments are not considered other-than-temporarily impaired.





Investment
      securities carried at $26,675 and $22,042 at December 31, 2006 and 2005,
      respectively, were pledged to secure public deposits or for other purposes
      as
      required or permitted by law.




The
      Bank
      is a member of the Federal Home Loan Bank (“FHLB”) and holds stock, which is
      included in securities, carried at cost which approximates fair value of $1,983
      and $2,022 at December 31, 2006 and 2005, respectively.





58
 *Table
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**(4)**
            **Loans**




The
      composition of the Bank’s loan portfolio at December 31, is as follows:




**2006**
            
            **2005**Commercial
            
            $
            99,138
            
            
            88,816Agriculture
            
            
            39,346
            
            
            33,458Real
                estate:Mortgage
            
            
            231,920
            
            
            233,049Commercial
                and Construction
            
            
            108,795
            
            
            105,472Installment
                and other loans
            
            
            5,470
            
            
            4,297484,669
            
            
            465,092Allowance
                for loan losses
            
            
            (8,361
            )
            
            (7,917
            )Net
                deferred origination fees and costs
            
            
            (759
            )
            
            (1,114
            )Loans,
                net
            
            $
            475,549
            
            
            456,061





As
      of
      December 31, 2006, approximately 22% of the Bank’s loans are for real estate
      construction. Additionally approximately 48% of the Bank’s loans are mortgage
      type loans which are secured by residential real estate. Approximately 29%
      of
      the Bank’s loans are for general commercial uses including professional, retail,
      agricultural and small businesses. Generally, real estate loans are secured
      by
      real property and other loans are secured by funds on deposit, business or
      personal assets. Repayment is generally expected from the proceeds of the sales
      of property for real estate construction loans, and from cash flows of the
      borrower for other loans. The Bank’s access to this collateral is through
      foreclosure and/or judicial procedures. The Bank’s exposure to credit loss if
      the real estate or other security proved to be of no value is the outstanding
      loan balance.




Loans
      that were sold and were being serviced by the Bank totaled approximately
      $112,742 and $112,743 at December 31, 2006 and 2005, respectively.




Non-accrual
      loans totaled approximately $3,399 and $2,073 at December 31, 2006 and 2005,
      respectively. If interest on these non-accrual loans had been accrued, such
      income would have approximated $280 and $101 during the years ended December
      31,
      2006 and 2005, respectively.




Loans
      90
      days past due and still accruing totaled approximately $37 and $178 at December
      31, 2006 and 2005, respectively.




The
      Bank
      did not restructure any loans in 2006 or 2005.




Impaired
      loans are loans for which it is probable that the Bank will not be able to
      collect all amounts due. Impaired loans totaled approximately $3,399 and $2,073
      at December 31, 2006 and 2005, respectively, and had related valuation
      allowances of approximately $122, and $201 at December 31, 2006 and 2005,
      respectively. The average outstanding balance of impaired loans was
      approximately $2,710, $3,221, and $2,108, on which $113, $100, and $64 of
      interest income was recognized for the years ended December 31, 2006, 2005
      and
      2004, respectively.





Loans
      in
      the amount of $161,222 and $163,385 at December 31, 2006 and 2005, respectively,
      were pledged under a blanket collateral lien to secure actual and potential
      borrowings from the Federal Home Loan Bank.




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


**2006**
            
            **2005**
            
            **2004**Balance,
                beginning of year
            
            $
            7,917
            
            
            7,445
            
            
            7,006Provision
                for loan losses
            
            
            735
            
            
            600
            
            
            207Loans
                charged-off
            
            
            (1,060
            )
            
            (855
            )
            
            (382
            )Recoveries
                of loans previously charged-off
            
            
            769
            
            
            727
            
            
            614Balance,
                end of year
            
            $
            8,361
            
            
            7,917
            
            
            7,445




59
 *Table
            of Contents*





**(5)**
            **Premises
                and Equipment**




Premises
      and equipment consist of the following at December 31 of the indicated
      years:




**2006**
            
            **2005**Land
            
            $
            2,718
            
            $
            2,718Buildings
            
            
            4,484
            
            
            4,454Furniture
                and equipment
            
            
            10,325
            
            
            9,639Leasehold
                improvements
            
            
            1,539
            
            
            1,46519,066
            
            
            18,276Less
                accumulated depreciation
            
            
            11,006
            
            
            9,965$
            8,060
            
            $
            8,311




Depreciation
      and amortization expense, included in occupancy and equipment expense, is
      $1,041, $1,016 and $1,016 for the years ended December 31, 2006, 2005 and 2004,
      respectively.




**(6)**
            **Other
                Assets**




Other
      assets consisted of the following at December 31 of the indicated
      years:




**2006**
            
            **2005**Accrued
                interest
            
            $
            3,832
            
            $
            3,119Software,
                net of amortization
            
            
            346
            
            
            421Officer’s
                Life Insurance
            
            
            9,995
            
            
            9,159Prepaid
                and other
            
            
            2,900
            
            
            2,872Investment
                in Limited Partnerships
            
            
            1,747
            
            
            1,875Deferred
                tax assets, net (see note 8)
            
            
            3,687
            
            
            2,641$
            22,507
            
            $
            20,087




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




Software
      amortization expense, included in other operating expense, is $243, $248 and
      $267 for the years ended December 31, 2006, 2005 and 2004,
      respectively.




The
      Bank
      held other real estate owned (OREO) in the amount of $375 and $268 as of
      December 31, 2006 and 2005, respectively. The Bank had no allowance for losses
      on OREO recorded for these years.




**(7)**
            **Supplemental
                Compensation Plans**




**EXECUTIVE
      SALARY CONTINUATION PLAN**




**Pension
      Benefit Plans**





On
      July
      19, 2001, the Company and the Bank approved an unfunded non-contributory defined
      benefit pension plan (“Salary Continuation Plan”) and related split dollar plan
      for a select group of highly compensated employees. The plan provides defined
      benefit levels between $50 and $125 depending on responsibilities at the Bank.
      The retirement benefits are paid for 10 years following retirement at age 65.
      Reduced retirement benefits are available after age 55 and 10 years of service.





60
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            of Contents*





Additionally,
      the Company and the Bank adopted a new supplemental executive retirement plan
      (“SERP”) in 2006. The new plan is intended to integrate the various forms of
      retirement payments offered to executives. There are currently two participants
      in the plan.





The
      plan
      benefit is calculated using 3-year average salary plus 7-year average bonus
      (average compensation). For each year of service the benefit formula credits
      2%
      of average compensation (2.5% for the CEO) up to a maximum of 50%. Therefore,
      for an executive serving 25 years (20 for the CEO), the target benefit is 50%
      of
      average compensation.





The
      target benefit is reduced for other forms of retirement income provided by
      the
      bank. Reductions are made for 50% of the social security benefit expected at
      age
      65 and for the accumulated value of contributions the bank makes to the
      executive’s profit sharing plan. For purposes of this reduction, contributions
      to the profit sharing plan are accumulated each year at a 3-year average of
      the
      yields on 10-year treasury securities. Retirement benefits are paid monthly
      for
      120 months plus 6 months for each full year of service over 10 years, up to
      a
      maximum of 180 months.





Reduced
      benefits are payable for retirement prior to age 65. Should retirement occur
      prior to age 65, the benefit determined by the formula described above is
      reduced 5% for each year payments commence prior to age 65. Therefore, the
      new
      SERP benefit is reduced 50% for retirement at age 55. No benefit is payable
      for
      voluntary terminations prior to age 55.





Eligibility
      to participate in the Plan is limited to a select group of management or highly
      compensated employees of the bank that are designated by the
      Board.





The
      Bank
      uses a December 31 measurement date for these plans.





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004****Change
                in benefit obligation**Benefit
                obligation at beginning of year
            
            $
            1,079
            
            $
            885
            
            $
            596Service
                cost
            
            
            183
            
            
            160
            
            
            156Interest
                cost
            
            
            65
            
            
            53
            
            
            47Amendments
            
            
            798
            
            
            —
            
            
            —Plan
                loss (gain)
            
            
            (40
            )
            
            (19
            )
            
            86Benefits
                Paid
            
            
            (45
            )
            
            —
            
            
            —Benefit
                obligation at end of year
            
            $
            2,040
            
            $
            1,079
            
            $
            885**Change
                in plan assets**Employer
                Contribution
            
            $
            45
            
            $
            —
            
            $
            —Benefits
                Paid
            
            
            (45
            )
            
            —
            
            
            —Fair
                value of plan assets at end of year
            
            $
            —
            
            $
            —
            
            $
            —**Reconciliation
                of funded status**Funded
                status
            
            $
            (2,040
            )
            $
            (1,079
            )
            $
            (885
            )Unrecognized
                net plan loss (gain)
            
            
            (19
            )
            
            21
            
            
            40Unrecognized
                prior service cost
            
            
            933
            
            
            148
            
            
            161Net
                amount recognized
            
            $
            (1,126
            )
            $
            (910
            )
            $
            (684
            )**Amounts
                recognized in the consolidated balance sheets consist
                of:**Accrued
                benefit liability
            
            $
            (2,040
            )
            $
            (1,079
            )
            $
            (885
            )Intangible
                asset
            
            
            —
            
            
            148
            
            
            161Accumulated
                other comprehensive income
            
            
            914
            
            
            21
            
            
            40Net
                amount recognized
            
            $
            (1,126
            )
            $
            (910
            )
            $
            (684
            )


61
 *Table
            of Contents*




**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004****Components
                of net periodic benefit cost**Service
                cost
            
            $
            183
            
            $
            160
            
            $
            156Interest
                cost
            
            
            65
            
            
            54
            
            
            47Amortization
                of prior service cost
            
            
            13
            
            
            13
            
            
            13Net
                periodic benefit cost
            
            
            261
            
            
            227
            
            
            216Additional
                amounts recognized
            
            
            —
            
            
            —
            
            
            —Total
                benefit cost
            
            $
            261
            
            $
            227
            
            $
            216**Additional
                Information**Minimum
                benefit obligation at year end
            
            $
            2,040
            
            $
            1,079
            
            $
            885Increase
                (decrease) in minimum liability included in other comprehensive
                income
            
            $
            893
            
            $
            (19
            )
            $
            40





**Assumptions
                used to determine benefit obligations at December
                31**
            
            **2006**
            
            **2005**
            
            **2004**Discount
                rate used to determine net periodic benefit cost for years ended
                December
                31
            
            
            5.30
            %
            
            5.10
            %
            
            6.25
            %Discount
                rate used to determine benefit obligations at December 31
            
            
            5.40
            %
            
            5.30
            %
            
            5.10
            %Future
                salary increases
            
            
            6.00
            %
            
            —
            
            
            —





**Plan
      Assets**





The
      Bank
      informally funds the liabilities of this plan through life insurance purchased
      on the lives of plan participants. This informal funding does not meet the
      definition of plan assets within the meaning of pension accounting standards.
      Therefore, assets held for this purpose are not disclosed as part of the Salary
      Continuation Plan.





**Cash
      Flows**





**Contributions
      and Estimated Benefit Payments**





For
      unfunded plans, contributions to the plan are the benefit payments made to
      participants. The Bank paid $45,120 benefit payments during fiscal 2006. The
      following benefit payments, which reflect expected future service, are expected
      to be paid in future fiscal years:





Year
                ending December 31,
            Pension
                Benefits2007
            $542008
            542009
            542010
            1972011
            1972012-2016
            1,151





***Disclosure
      of settlements and curtailments:***





There
      were no events during fiscal 2006 that would constitute a curtailment or
      settlement within the meaning of SFAS No. 88.





62
 *Table
            of Contents*





**Impact
      of Adopting SFAS No. 158 at December 31, 2006:**





**Reconciliation
                of funded status**Before
              Adoption
            
            Impact
            
            After
              AdoptionFunded
                Status
            
            $
            (2,040
            )
            $
            —
            
            $
            (2,040
            )Unrecognized
                net plan loss (gain)
            
            
            (19
            )
            
            —
            
            
            (19
            )Unrecognized
                prior service cost
            
            
            933
            
            
            —
            
            
            933Net
                amount recognized
            
            $
            (1,126
            )
            $
            —
            
            $
            (1,126
            )**Amounts
                recognized in the statement of financial position consist
                of:**Accrued
                benefit liability
            
            $
            (1,725
            )
            $
            (315
            )
            $
            (2,040
            )Intangible
                asset
            
            
            599
            
            
            (599
            )
            
            —Accumulated
                other comprehensive income
            
            
            —
            
            
            914
            
            
            914Fair
                value of plan assets at end of year
            
            $
            (1,126
            )
            $
            —
            
            $
            (1,126
            )





**DIRECTORS’
      RETIREMENT PLAN**




**Pension
      Benefit Plans**





On
      July
      19, 2001, the Company and the Bank approved an unfunded non-contributory defined
      benefit pension plan ("Directors’ Retirement Plan") and related split dollar
      plan for the directors of the bank. The plan provides a retirement benefit
      equal
      to $1 per year of service as a director, up to a maximum benefit amount of
      $15.
      The retirement benefit is payable for 10 years following retirement at age
      65.
      Reduced retirement benefits are available after age 55 and 10 years of service.





The
      Bank
      uses a December 31 measurement date for this plan.





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004****Change
                in benefit obligation**Benefit
                obligation at beginning of year
            
            $
            402
            
            $
            347
            
            $
            244Service
                cost
            
            
            54
            
            
            73
            
            
            71Interest
                cost
            
            
            24
            
            
            21
            
            
            19Plan
                loss (gain)
            
            
            4
            
            
            (23
            )
            
            28Benefits
                paid
            
            
            (15
            )
            
            (15
            )
            
            (15
            )Benefit
                obligation at end of year
            
            $
            469
            
            $
            403
            
            $
            347**Change
                in plan assets**Employer
                contribution
            
            $
            15
            
            $
            15
            
            $
            15Benefits
                paid
            
            
            (15
            )
            
            (15
            )
            
            (15
            )Fair
                value of plan assets at end of year
            
            $
            —
            
            $
            —
            
            $
            —**Reconciliation
                of funded status**Funded
                status
            
            $
            (469
            )
            $
            (403
            )
            $
            (347
            )Unrecognized
                net plan loss
            
            
            50
            
            
            47
            
            
            76Net
                amount recognized
            
            $
            (419
            )
            $
            (356
            )
            $
            (271
            )**Amounts
                recognized in the statement of financial position consist
                of:**Accrued
                benefit liability
            
            $
            (469
            )
            $
            (403
            )
            $
            (347
            )Accumulated
                other comprehensive income
            
            
            50
            
            
            47
            
            
            76Net
                amount recognized
            
            $
            (419
            )
            $
            (356
            )
            $
            (271
            )


63
 *Table
            of Contents*





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004****Components
                of net periodic benefit cost**Service
                cost
            
            $
            54
            
            $
            73
            
            $
            71Interest
                cost
            
            
            24
            
            
            21
            
            
            19Recognized
                actuarial (gain)/loss
            
            
            1
            
            
            5
            
            
            3Net
                periodic benefit cost
            
            
            79
            
            
            99
            
            
            93Additional
                amounts recognized
            
            
            —
            
            
            —
            
            
            —Total
                benefit cost
            
            $
            79
            
            $
            99
            
            $
            93**Additional
                Information**Minimum
                benefit obligation at year end
            
            $
            469
            
            $
            403
            
            $
            347Increase
                (decrease) in minimum liability included in other comprehensive
                loss
            
            $
            3
            
            $
            (
                28
            )
            $
            25





**Assumptions
                used to determine benefit obligations at December
                31**
            
            **2006**
            
            **2005**
            
            **2004**Discount
                rate used to determine net periodic benefit cost for years ended
                December
                31
            
            
            5.30
            %
            
            5.10
            %
            
            6.25
            %Discount
                rate used to determine benefit obligations at December 31
            
            
            5.20
            %
            
            5.30
            %
            
            5.10
            %





**Plan
      Assets**





The
      Bank
      informally funds the liabilities of this plan through life insurance purchased
      on the lives of plan participants. This informal funding does not meet the
      definition of plan assets within the meaning of pension accounting standards.
      Therefore, assets held for this purpose are not disclosed as part of the
      Director’s Retirement Plan.





**Cash
      Flows**





**Contributions
      and Estimated Benefit Payments**





For
      unfunded plans, contributions to the plan are the benefit payments made to
      participants. The Bank paid $15 in benefit payments during fiscal 2006. The
      following benefit payments, which reflect expected future service, are expected
      to be paid in future fiscal years:





Year
                ending December 31,
            Pension
                Benefits2007
            $152008
            212009
            452010
            592011
            702012-2016
            369





***Disclosure
      of settlements and curtailments:***





There
      were no events during fiscal 2006 that would constitute a curtailment or
      settlement within the meaning of SFAS No. 88.





64
 *Table
            of Contents*





**Impact
      of Adopting SFAS No. 158 at December 31, 2006:**





**Reconciliation
                of funded status**Before
              Adoption
            
            Impact
            
            After
              AdoptionFunded
                Status
            
            $
            (469
            )
            $
            —
            
            $
            (469
            )Unrecognized
                net plan loss
            
            
            50
            
            
            —
            
            
            50Net
                amount recognized
            
            $
            (419
            )
            $
            —
            
            $
            (419
            )**Amounts
                recognized in the statement of financial position consist
                of:**Accrued
                benefit liability
            
            $
            (469
            )
            $
            —
            
            $
            (469
            )Accumulated
                other comprehensive income
            
            
            50
            
            
            —
            
            
            50Fair
                value of plan assets at end of year
            
            $
            (419
            )
            $
            —
            
            $
            (419
            )





**EXECUTIVE
      ELECTIVE DEFERRED COMPENSATION PLAN — 2001 EXECUTIVE DEFERRAL
      PLAN.**





On
      July
      19, 2001, the Bank approved a revised Executive Elective Deferred Compensation
      Plan, — the 2001 Executive Deferral Plan previously called “1995 Executive
      Deferral Plan”, for certain officers to provide them the ability to make
      elective deferrals of compensation due to tax-law limitations on benefit levels
      under qualified plans. Deferred amounts earn interest at an annual rate
      determined by the Bank’s Board. The plan is a non-qualified plan funded with
      bank owned life insurance policies taken on the life of the officer. During
      the
      year ended December 31, 2001, the Bank purchased insurance making a
      single-premium payment aggregating $1,125, which is reported in other assets.
      The Bank is the beneficiary and owner of the policies. The cash surrender value
      of the related insurance policies as of December 31, 2006 and 2005 totaled
      $1,758 and $1,699, respectively. The accrued liability for the plan as of
      December 31, 2006 and 2005 totaled $252 and $91, respectively. The expenses
      for
      the plan for the years ended December 31, 2006, 2005 and 2004 totaled $43,
      $30
      and $30, respectively.








**DIRECTOR
      ELECTIVE DEFERRED FEE** **PLAN
      — 2001** **DIRECTOR
      DEFERRAL PLAN.**





On
      July
      19, 2001, the Bank approved a Director Elective Deferred Fee Plan, — the 2001
      Director Deferral Plan for directors to provide them the ability to make
      elective deferrals of fees. Deferred amounts earn interest at annual rate
      determined by the Bank’s Board. The plan is a non-qualified plan funded with
      bank owned life insurance policies taken on the life of the director. The Bank
      is the beneficiary and owner of the policies. The cash surrender value of the
      related insurance policies as of December 31, 2006 and 2005 totaled $93 and
      $90,
      respectively. The accrued liability for the plan as of December 31, 2006 and
      2005 totaled $5 and $4, respectively. The expenses for the plan for the years
      ended December 31, 2006, 2005 and 2004 totaled $1, $1 and $1,
      respectively.





65
 *Table
            of Contents*





**(8)**
            **Income
                Taxes**




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




**2006**
            
            **2005**
            
            **2004**Current:Federal
            
            $
            4,461
            
            $
            4,076
            
            $
            3,193State
            
            
            1,211
            
            
            1,382
            
            
            9825,672
            
            
            5,458
            
            
            4,175Deferred:Federal
            
            
            (112
            )
            
            (488
            )
            
            (495
            )State
            
            
            (391
            )
            
            (178
            )
            
            (130
            )(503
            )
            
            (666
            )
            
            (625
            )$
            5,169
            
            $
            4,792
            
            $
            3,550





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005
      consist of:




**2006**
            
            **2005**Deferred
                tax assets:Allowance
                for loan losses
            
            $
            3,844
            
            $
            3,326Deferred
                compensation
            
            
            336
            
            
            230Retirement
                compensation
            
            
            629
            
            
            521Stock
                option compensation
            
            
            439
            
            
            276Post
                retirement benefits
            
            
            386
            
            
            276Current
                state franchise taxes
            
            
            284
            
            
            454Non-accrual
                interest
            
            
            43
            
            
            13Other
            
            
            6
            
            
            —Deferred
                tax assets
            
            
            5,967
            
            
            4,820Less
                valuation allowance
            
            
            —
            
            
            (83
            )Total
                deferred tax assets
            
            
            5,967
            
            
            4,737Deferred
                tax liabilities:Fixed
                assets
            
            
            1,506
            
            
            1,683FHLB
                dividends
            
            
            170
            
            
            141Tax
                credit - loss on passthrough
            
            
            212
            
            
            42Deferred
                loan costs
            
            
            231
            
            
            —Other
            
            
            111
            
            
            106Investment
                securities unrealized gains
            
            
            50
            
            
            124Total
                deferred tax liabilities
            
            
            2,280
            
            
            2,096Net
                deferred tax assets (see note 6)
            
            $
            3,687
            
            $
            2,641





Based
      upon the level of historical taxable income and projections for future taxable
      income over the periods during which the deferred tax assets are deductible,
      management believes it is more likely than not the Company will realize the
      benefits of these deductible differences.




2006
            
            2005
            
            2004Income
                tax expense at statutory rates
            
            $
            4,753
            
            $
            4,583
            
            $
            3,487Reduction
                for tax exempt interest
            
            
            (213
            )
            
            (205
            )
            
            (207
            )State
                franchise tax, net of federal income tax benefit
            
            
            541
            
            
            750
            
            
            734CSV
                of life insurance
            
            
            (114
            )
            
            (90
            )
            
            (119
            )Other
            
            
            202
            
            
            (246
            )
            
            (345
            )$
            5,169
            
            $
            4,792
            
            $
            3,550




A
      reconciliation of income taxes computed at the federal statutory rate of 34%
      and
      the provision for income taxes as follows:





66
 *Table
            of Contents*





**(9)**
            **Outstanding
                Shares and Earnings Per
                Share**




On
      January 25, 2007, the Board of Directors of the Company declared a 6% stock
      dividend payable as of March 30, 2007 to shareholders of record as of
      February 28, 2007. All income per share amounts have been adjusted to give
      retroactive effect to stock dividends and stock splits.





Earnings
      Per Share (“EPS”)




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




**2006**
            
            **2005**
            
            **2004**Basic
                earnings per share:Net
                income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707Weighted
                average common shares outstanding
            
            
            8,468,643
            
            
            8,531,880
            
            
            8,585,409Basic
                EPS
            
            $
            1.04
            
            $
            1.02
            
            $
            0.78Diluted
                earnings per share:Net
                income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707Weighted
                average common shares outstanding
            
            
            8,468,643
            
            
            8,531,880
            
            
            8,585,409Effect
                of dilutive options
            
            
            414,282
            
            
            349,716
            
            
            224,5078,882,925
            
            
            8,881,596
            
            
            8,809,916Diluted
                EPS
            
            $
            0.99
            
            $
            0.98
            
            $
            0.76




67
 *Table
            of Contents*





**(10)**
            **Related
                Party Transactions**




The
      Bank,
      in the ordinary course of business, has loan and deposit transactions with
      directors and executive officers. In management’s opinion, these transactions
      were on substantially the same terms as comparable transactions with other
      customers of the Bank. The amount of such deposits totaled approximately $2,338
      and $2,339 at December 31, 2006 and 2005, respectively.





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




**2006**
            
            **2005**
            
            **2004**Outstanding
                balance, beginning of year
            
            $
            304
            
            $
            217
            
            $
            1,187Credit
                granted
            
            
            58
            
            
            626
            
            
            578Repayments
            
            
            (89
            )
            
            (539
            )
            
            (1,548
            )Outstanding
                balance, end of year
            
            $
            273
            
            $
            304
            
            $
            217




**(11)**
            **Profit
                Sharing Plan**




The
      Bank
      maintains a profit sharing plan for the benefit of its employees. Employees
      who
      have completed 12 months and 1,000 hours of service are eligible. Under the
      terms of this plan, a portion of the Bank’s profits, as determined by the Board
      of Directors, will be set aside and maintained in a trust fund for the benefit
      of qualified employees. Contributions to the plan, included in salaries and
      employee benefits in the consolidated statements of operations, were $1,607,
      $1,569 and $1,207 in 2006, 2005 and 2004, respectively.




**(12)**
            **Stock
                Compensation Plans**




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.





68
 *Table
            of Contents*





The
      following table presents basic and diluted EPS for the years ended December
      31,
      2005 and 2004.





**2005**
            
            **2004**Net
                income as reported
            
            $
            8,688
            
            $
            6,707Add:
                Stock-based employee compensation included in reported net income,
                net of
                related tax effects
            
            
            286
            
            
            204Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (367
            )
            
            (363
            )Net
                income Pro forma under SFAS No. 123
            
            $
            8,607
            
            $
            6,548Basic
                earnings per share:As
                reported
            
            $
            1.02
            
            $
            0.78Pro
                forma under SFAS No. 123
            
            $
            1.01
            
            $
            0.76Diluted
                earnings per share:As
                reported
            
            $
            0.98
            
            $
            0.76Pro
                forma under SFAS No. 123
            
            $
            0.97
            
            $
            0.74




As
      of
      December 31, 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.




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




**Employee
                stock**
              **option
                plan**
            
            **Outside
                directors**
              **stock
                option plan****Number
                of**
              **shares**
            
            **Weighted**
              **average**
              **exercise
                price**
            
            **Number
                of**
              **shares**
            
            **Weighted**
              **average**
              **exercise
                price**Balance
                at December 31, 2005
            
            
            602,696
            
            
            8.84
            
            
            —
            
            
            —Granted
            
            
            57,790
            
            
            24.98
            
            
            —
            
            
            —Exercised
            
            
            (132,108
            )
            
            7.52
            
            
            —
            
            
            —Cancelled
            
            
            (10,425
            )
            
            10.48
            
            
            —
            
            
            —Balance
                at December 31, 2006
            
            
            517,953
            
            $
            10.94
            
            
            —
            
            $
            —





The
      2000
      Employee Stock Option Plan permits stock-for-stock exercises of shares. During
      2006, employees tendered 29,959 (adjusted for stock options exercised before
      stock dividend) mature shares in stock-for-stock exercises. Matured shares
      are
      those held by employees longer than six months.





69
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            of Contents*





The
      following table presents information on stock options for the year ended
      December 31, 2006:




**Number**
              **of
                Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Aggregate**
              **Intrinsic**
              **Value**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term**Options
                exercised
            
            
            132,108
            
            $
            7.52
            
            $
            2,427Stock
                options fully vested and expected to vest:
            
            
            517,953
            
            $
            10.94
            
            $
            6,246
            
            
            5.90Stock
                options vested and currently exercisable:
            
            
            334,849
            
            $
            8.12
            
            $
            4,899
            
            
            4.78





The
      weighted average fair value per share of options granted during the years ended
      December 31 was $7.75 in 2006, $3.98 in 2005 and $3.33 in 2004.





At
      December 31, 2006, the range of exercise prices for all outstanding options
      ranged from $4.27 to $27.75.





The
      following table provides certain information with respect to stock options
      outstanding at December 31, 2006:





**Range
                of exercise prices**
            
            **Stock
                options**
              **outstanding**
            
            **Weighted
                average**
              **exercise
                price**
            
            **Weighted
                average**
              **remaining**
              **contractual
                life**Under $ 11.10
            
            373,972
            
            $   
                8.19
            
            4.90$
                11.10 to $ 16.65
            
            80,891
            
            12.89
            
            8.02$
                16.65 to $ 24.97
            
            54,590
            
            24.30
            
            9.04$
                24.97 to $ 27.75
            
            8,500
            
            27.57
            
            9.41517,953
            
            $ 
                10.94
            
            5.90







The
      following table provides certain information with respect to stock options
      exercisable at December 31, 2006:




**Range
                of exercise prices**
            
            **Stock
                options**
              **exercisable**
            
            **Weighted
                average**
              **exercise
                pric****e**Under $ 11.10
            
            313,298
            
            $  
                8.19$
                11.10 to $ 16.65
            
            20,226
            
            12.89$
                16.65 to $ 24.97
            
            1,325
            
            22.17334,849
            
            $ 
                 8.12





As
      of
      December 31, 2006, there was $646 of total unrecognized compensation related
      to
      non-vested stock options. This cost is expected to be recognized over a weighted
      average period of approximately 1.6 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.





70
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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 for 2006, based on
      historical forfeiture experience, is approximately 0.0%.




The
      following table shows our weighted average assumptions used in valuing stock
      options granted for the years ended December 31:




**2006**
            
            **2005**
            
            **2004**Risk
                Free Interest Rate
            
            
            4.57
            %
            
            3.73
            %
            
            3.76
            %Expected
                DividendYield
            
            
            0.00
            %
            
            0.00
            %
            
            0.00
            %Expected
                Life in Years
            
            
            4.67
            
            
            6.00
            
            
            6.00Expected
                Price Volatility
            
            
            26.39
            %
            
            26.04
            %
            
            23.80
            %




***Employee
      Stock Purchase Plan***




Under
      the
      First Northern Community Bancorp 2006 Amended Employee Stock Purchase Plan
      (the
“Plan”), the Company is authorized to issue to an eligible employee shares of
      common stock. There are 250,000 shares authorized under the Plan. The Plan
      will
      terminate March 15, 2016. The Plan is implemented by participation periods
      of
      not more than twenty-seven months each. The Board of Directors determines the
      commencement date and duration of each participation period. An eligible
      employee is one who has been continually employed for at least ninety (90)
      days
      prior to commencement of a participation period. Under the terms of the Plan,
      employees can choose to have up to 10 percent of their compensation withheld
      to
      purchase the Company’s common stock each participation period. The purchase
      price of the stock is 85 percent of the lower of the fair market value on the
      last trading day before the Date of Participation or the fair market value
      on
      the last trading day during the participation period. Approximately 73 percent
      of eligible employees are participating in the Plan in the current participation
      period, which began November 24, 2006 and will end November 23,
      2007.




The
      First
      Northern Community Bancorp 2006 Amended Employee Stock Purchase Plan replaced
      the 2000 Employee Stock Purchase Plan. Under the 2000 Plan, at the annual stock
      purchase date of November 23, 2006, there were $250 in contributions, and
      22,784 shares were purchased at an average price of $10.95, totaling $249.





71
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**(13)**
            **Short-Term
                and Long-Term Borrowings**




Short-term
      borrowings at December 31, 2006 and 2005 consisted of secured borrowings from
      the U.S. Treasury in the amounts of $858 and $1,476, respectively. The funds
      are
      placed at the discretion of the U.S. Treasury and are callable on demand by
      the
      U.S. Treasury.





Additional
      short-term borrowings available to the Company consist of a line of credit
      and
      advances with the Federal Home Loan Bank (“FHLB”) secured under terms of a
      blanket collateral agreement by a pledge of FHLB stock and certain other
      qualifying collateral such as commercial and mortgage loans. At December 31,
      2006, the Company had a current collateral borrowing capacity with the FHLB
      of
      $93,832. The Company also has unsecured formal lines of credit totaling $25,700
      with correspondent banks and borrowing capacity of $2,000 with the Federal
      Reserve Bank (loans and discounts), which is fully collateralized, with a pledge
      of U.S. Agency Notes.





Long-term
      borrowings consisted of Federal Home Loan Bank advances, totaling $10,124 and
      $13,493, respectively, at December 31, 2006 and 2005. Such advances ranged
      in
      maturity from 1.4 years to 2.3 years at a weighted average interest rate of
      2.91% at December 31, 2006. Maturity ranged from 0.3 years to 3.3 years at
      a
      weighted average interest rate of 3.48% at December 31, 2005. Average
      outstanding balances were $10,776 and $13,628, respectively, during 2006 and
      2005. The weighted average interest rate paid was 3.15% in 2006 and 3.48% in
      2005.





**(14)**
            **Commitments
                and Contingencies**




The
      Company is obligated for rental payments under certain operating lease
      agreements, some of which contain renewal options. Total rental expense for
      all
      leases included in net occupancy and equipment expense amounted to approximately
      $1,294, $1,058, and $921 for the years ended December 31, 2006, 2005 and 2004,
      respectively. At December 31, 2006, the future minimum payments under
      non-cancelable operating leases with initial or remaining terms in excess of
      one
      year are as follows:




**Year
                ending December 31:**2007
            
            $
            1,2122008
            
            
            1,3122009
            
            
            1,0212010
            
            
            7532011
            
            
            512Thereafter
            
            
            1,735$
            6,545




At
      December 31, 2006, the aggregate maturities for time deposits are as
      follows:




**Year
                ending December 31:**2007
            
            $
            104,6752008
            
            
            4,2562009
            
            
            1,2782010
            
            
            2,9532011
            
            
            274Thereafter
            
            
            —$
            113,436




The
      Company is subject to various legal proceedings in the normal course of its
      business. In the opinion of management, after having consulted with legal
      counsel, the outcome of the legal proceedings should not have a material effect
      on the consolidated financial condition or results of operations of the
      Company.





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**(15)**
            **Financial
                Instruments with Off-Balance Sheet
                Risk**




The
      Company is a party to financial instruments with off-balance sheet risk in
      the
      normal course of business to meet the financing needs of its customers. These
      financial instruments include commitments to extend credit in the form of loans
      or through standby letters of credit. These instruments involve, to varying
      degrees, elements of credit and interest rate risk in excess of the amounts
      recognized in the balance sheet. The contract amounts of those instruments
      reflect the extent of involvement the Company has in particular classes of
      financial instruments.




The
      Bank’s exposure to credit loss in the event of non-performance by the other
      party to the financial instrument for commitments to extend credit and standby
      letters of credit is represented by the contractual notional amount of those
      instruments. The Bank uses the same credit policies in making commitments and
      conditional obligations as it does for on-balance sheet
      instruments.




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




**2006**
            
            **2005**Undisbursed
                loan commitments
            
            $
            198,200
            
            
            203,101Standby
                letters of credit
            
            
            12,222
            
            
            14,077$
            210,422
            
            
            217,178




Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since many of the commitments are expected to expire without being
      drawn upon the total commitment amounts do not necessarily represent future
      cash
      requirements. The Bank evaluates each customer’s creditworthiness on a
      case-by-case basis. The amount of collateral obtained, if deemed necessary
      by
      the Bank upon extension of credit, is based on management’s credit evaluation.
      Collateral held varies but may include accounts receivable, inventory, property,
      plant and equipment, and income-producing commercial properties.




The
      Bank
      issues both financial and performance standby letters of credit. The financial
      standby letters of credit are primarily to guarantee payment to third parties.
      At December 31, 2006 there were no financial standby letters of credit
      outstanding. The performance standby letters of credit are typically issued
      to
      municipalities as specific performance bonds. At December 31, 2006, there was
      $12,222 issued in performance standby letters of credit and the Bank carried
      no
      liability. The terms of the guarantees will expire primarily in 2007. The Bank
      has experienced no draws on these letters of credit, and does not expect to
      in
      the future; however, should a triggering event occur, the Bank either has
      collateral in excess of the letter of credit or imbedded agreements of recourse
      from the customer. The Bank has set aside a reserve for unfunded commitments
      in
      the amount of $950, which is recorded in “accrued interest payable and other
      liabilities.”




Standby
      letters of credit are conditional commitments issued by the Bank to guarantee
      the performance of a customer to a third party. The credit risk involved in
      issuing letters of credit is essentially the same as that involved in extending
      loan facilities to customers.




Commitments
      to extend credit and standby letters of credit bear similar credit risk
      characteristics as outstanding loans. As of December 31, 2006, the Company
      has
      no off-balance sheet derivatives requiring additional disclosure.





73
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**(16)**
            **Capital
                Adequacy and Restriction on
                Dividends**




The
      Company is subject to various regulatory capital requirements administered
      by
      the federal banking agencies. Failure to meet minimum capital requirements
      can
      initiate mandatory and possibly additional discretionary actions by regulators
      that, if undertaken, could have a direct material effect on the Company’s
      consolidated financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Company must meet
      specific capital guidelines that involve quantitative measures of the Company’s
      assets, liabilities, and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The Company’s capital amounts and
      classification are also subject to qualitative judgments by the regulators
      about
      components, risk weightings, and other factors.




Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios (set forth in the table
      below).




First,
      a
      bank must meet a minimum Tier I Capital ratio (as defined in the regulations)
      ranging from 3% to 5% based upon the bank’s CAMELS (capital adequacy, asset
      quality, management, earnings, liquidity and sensitivity to market risk)
      rating.




Second,
      a
      bank must meet minimum Total Risk-Based Capital to risk-weighted assets ratio
      of
      8%. Risk-based capital and asset guidelines vary from Tier I capital guidelines
      by redefining the components of capital, categorizing assets into different
      risk
      classes, and including certain off-balance sheet items in the calculation of
      the
      capital ratio. The effect of the risk-based capital guidelines is that banks
      with high exposure will be required to raise additional capital while
      institutions with low risk exposure could, with the concurrence of regulatory
      authorities, be permitted to operate with lower capital ratios. In addition,
      a
      bank must meet minimum Tier I Capital to average assets ratio.




Management
      believes, as of December 31, 2006, that the Bank meets all capital adequacy
      requirements to which it is subject. As of December 31, 2006, the most recent
      notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized
      the Bank as well capitalized under the regulatory framework for prompt
      corrective action. To be categorized as well capitalized the Bank must meet
      the
      minimum ratios as set forth above. There are no conditions or events since
      that
      notification that management believes have changed the institution’s
      category.




The
      Company and the Bank had Tier I, total capital and Tier I leverage above the
      well capitalized levels at December 31, 2006 and 2005, respectively, as set
      forth in the following tables:




**The
                Company****2006**
            
            **2005****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**Total
                Risk-Based Capital (to Risk Weighted Assets)
            
            $
            69,078
            
            
            12.3
            %
            $
            62,824
            
            
            11.8
            %Tier
                I Capital (to Risk Weighted Assets)
            
            
            62,400
            
            
            11.1
            %
            
            56,438
            
            
            10.6
            %Tier
                I Leverage Capital (to Average Assets)
            
            
            62,400
            
            
            9.1
            %
            
            56,438
            
            
            8.5
            %





**The
                Bank****2006**
            
            **2005****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**Total
                Risk-Based Capital (to Risk Weighted Assets)
            
            $
            68,397
            
            
            12.2
            %
            $
            61,672
            
            
            11.6
            %Tier
                I Capital (to Risk Weighted Assets)
            
            
            61,719
            
            
            11.0
            %
            
            55,287
            
            
            10.4
            %Tier
                I Leverage Capital (to Average Assets)
            
            
            61,719
            
            
            9.0
            %
            
            55,287
            
            
            8.3
            %





Cash
      dividends declared by the Bank are restricted under California State banking
      laws to the lesser of the Bank’s retained earnings or the Bank’s net income for
      the latest three fiscal years, less dividends previously declared during that
      period.







74
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**(17)**
            **Fair
                Values of Financial
                Instruments**




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




***Cash
      and Cash Equivalents***




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




***Investment
      Securities***




Fair
      values for investment securities are based on quoted market prices, where
      available. If quoted market prices are not available, fair values are based
      on
      quoted market prices of comparable instruments.




***Loans
      Receivable***




For
      variable-rate loans that reprice frequently and with no significant change
      in
      credit risk, fair values are based on carrying values. The fair values for
      other
      loans (e.g., commercial real estate and rental property mortgage loans,
      commercial and industrial loans, and agricultural loans) are estimated using
      discounted cash flow analyses, using interest rates currently being offered
      for
      loans with similar terms to borrowers of similar credit quality. The carrying
      amount of accrued interest receivable approximates its fair value.




***Commitments
      to Extend Credit and Standby Letters of Credit***




The
      fair
      value of commitments is estimated using the fees currently charged to enter
      into
      similar agreements, taking into account the remaining terms of the agreements
      and the present creditworthiness of the counterparties. For fixed-rate loan
      commitments, fair value also considers the difference between current levels
      of
      interest rates and the committed rates. The fair value of letters of credit
      is
      based on fees currently charged for similar agreements or on the estimated
      cost
      to terminate them or otherwise settle the obligation with the counterparties
      at
      the reporting date.




***Deposit
      Liabilities***




The
      fair
      values disclosed for demand deposits (e.g., interest and non-interest checking,
      passbook savings, and money market accounts) are, by definition, equal to the
      amount payable on demand at the reporting date (i.e., their carrying amounts).
      The fair values for fixed-rate certificates of deposit are estimated using
      a
      discounted cash flow calculation that applies interest rates currently being
      offered on certificates to a schedule of aggregated expected monthly maturities
      on time deposits. The carrying amount of accrued interest payable approximates
      its fair value.




***FHLB
      Advances and Other Borrowings***




The
      fair
      values of borrowed funds were estimated by discounting future cash flows related
      to these financial instruments using current market rates for financial
      instruments with similar characteristics.




***Limitations***




Fair
      value estimates are made at a specific point in time, based on relevant market
      information and information about the financial instrument. These estimates
      do
      not reflect any premium or discount that could result from offering for sale
      at
      one time the Company’s entire holdings of a particular financial instrument.
      Because no market exists for a significant portion of the Company’s financial
      instruments, fair value estimates are based on judgments regarding future
      expected loss experience, current economic conditions, risk characteristics
      of
      various financial instruments, and other factors. These estimates are subjective
      in nature and involve uncertainties and matters of significant judgment and
      therefore cannot be determined with precision. Changes in assumptions could
      significantly affect the estimates.





75
 *Table
            of Contents*





Fair
      value estimates are based on existing on-and off-balance sheet financial
      instruments without attempting to estimate the value of anticipated future
      business and the value of assets and liabilities that are not considered
      financial instruments. Other significant assets and liabilities that are not
      considered financial assets or liabilities include deferred tax liabilities
      and
      premises and equipment. In addition, the tax ramifications related to the
      realization of the unrealized gains and losses can have a significant effect
      on
      fair value estimates and have not been considered in many of the
      estimates.




The
      estimated fair values of the Company’s financial instruments for the years ended
      December 31 are approximately as follows:




**2006**
            
            **2005****Carrying**
              **amount**
            
            **Fair**
              **value**
            
            **Carrying**
              **amount**
            
            **Fair**
              **value**Financial
                assets:Cash
                and federal funds sold
            
            $
            98,001
            
            $
            98,001
            
            $
            122,692
            
            $
            122,692Investment
                securities
            
            
            76,273
            
            
            76,273
            
            
            48,788
            
            
            48,788Loans:Net
                loans
            
            
            475,549
            
            
            475,948
            
            
            456,061
            
            
            457,858Loans
                held-for-sale
            
            
            4,460
            
            
            4,460
            
            
            4,440
            
            
            4,440Financial
                liabilities:Deposits
            
            
            603,682
            
            
            507,688
            
            
            581,781
            
            
            496,881FHLB
                advances and other borrowings
            
            
            10,981
            
            
            10,528
            
            
            14,969
            
            
            14,416




**2006****Contract**
              **amount**
            
            **Carrying**
              **amount**
            
            **Fair**
              **value**Unrecognized
                financial instruments:Commitments
                to extend credit
            
            $
            198,200
            
            $
            951
            
            $
            1,487Standby
                letters of credit
            
            $
            12,222
            
            $
            —
            
            $
            122




**2005****Contract**
              **amount**
            
            **Carrying**
              **amount**
            
            **Fair**
              **value**Unrecognized
                financial instruments:Commitments
                to extend credit
            
            $
            203,101
            
            $
            975
            
            $
            1,523Standby
                letters of credit
            
            $
            14,077
            
            $
            —
            
            $
            141


76
 *Table
            of Contents*




**(18)**
            **Supplemental
                Consolidated Statements of Cash Flows
                Information**




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




**2006**
            
            **2005**
            
            **2004**Supplemental
                disclosure of cash flow information:Cash
                paid during the year for:Interest
            
            $
            9,243
            
            $
            5,641
            
            $
            3,417Income
                taxes
            
            $
            6,165
            
            $
            6,946
            
            $
            3,931Supplemental
                disclosure of non-cash investing and financing activities:Accrued
                compensation
            
            $
            (84
            )
            $
            —
            
            $
            —Stock
                dividend distributed
            
            $
            12,525
            
            $
            6,158
            
            $
            5,537Loans
                held-for-sale transferred to loans
            
            $
            —
            
            $
            —
            
            $
            6,002Loans
                held-for-investment transferred to other real estate owned
            
            $
            375
            
            $
            268
            
            $
            —




**(19)**
            **Quarterly
                Financial Information
                (Unaudited)**




**March 31,**
              
              **June 30,**
              
              **September 30,**
              
              **December 31,**2006:Interest
                  income
              
              $
              11,331
              
              $
              11,896
              
              $
              12,408
              
              $
              12,435Net
                  interest income
              
              
              9,372
              
              
              9,776
              
              
              9,857
              
              
              9,619Provision
                  for loan losses
              
              
              (575
              )
              
              350
              
              
              810
              
              
              150Other
                  operating income
              
              
              1,209
              
              
              1,363
              
              
              1,446
              
              
              1,271Other
                  operating expense
              
              
              7,327
              
              
              7,141
              
              
              7,250
              
              
              7,501Income
                  before taxes
              
              
              3,849
              
              
              3,648
              
              
              3,243
              
              
              3,239Net
                  income
              
              
              2,402
              
              
              2,294
              
              
              2,048
              
              
              2,066Basic
                  earnings per share
              
              
              .28
              
              
              .27
              
              
              .25
              
              
              .24Diluted
                  earnings per share
              
              
              .26
              
              
              .26
              
              
              .24
              
              
              .232005:Interest
                  income
              
              $
              9,154
              
              $
              10,022
              
              $
              10,590
              
              $
              11,136Net
                  interest income
              
              
              8,086
              
              
              8,731
              
              
              9,022
              
              
              9,334Provision
                  for loan losses
              
              
              519
              
              
              (450
              )
              
              (69
              )
              
              600Other
                  operating income
              
              
              1,218
              
              
              1,346
              
              
              1,506
              
              
              1,650Other
                  operating expense
              
              
              6,368
              
              
              6,829
              
              
              6,760
              
              
              6,856Income
                  before taxes
              
              
              2,417
              
              
              3,698
              
              
              3,837
              
              
              3,528Net
                  income
              
              
              1,692
              
              
              2,323
              
              
              2,418
              
              
              2,255Basic
                  earnings per share
              
              
              .20
              
              
              .27
              
              
              .28
              
              
              .27Diluted
                  earnings per share
              
              
              .19
              
              
              .26
              
              
              .27
              
              
              .26
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**(20)**
            **Parent
                Company Financial
                Information**




This
      information should be read in conjunction with the other notes to the
      consolidated financial statements. The following presents summary balance sheets
      and summary statements of operations and cash flows information for the years
      ended December 31:




**Balance
                Sheets**
            
            **2006**
            
            **2005**AssetsCash
            
            $
            681
            
            $
            1,151Investment
                in wholly owned subsidiary
            
            
            61,309
            
            
            55,651Other
                assets
            
            
            —
            
            
            —Total
                assets
            
            $
            61,990
            
            $
            56,802Liabilities
                and stockholders’ equityStockholders’
                equity
            
            
            61,990
            
            
            56,802Total
                liabilities and stockholders’ equity
            
            $
            61,990
            
            $
            56,802







**Statements
                of Operations**
            
            **2006**
            
            **2005**
            
            **2004**Dividends
                from subsidiary
            
            $
            2,500
            
            $
            3,500
            
            $
            1,000Other
                operating expenses
            
            
            (94
            )
            
            (97
            )
            
            (68
            )Income
                tax benefit
            
            
            39
            
            
            40
            
            
            28Income
                before undistributed earnings of subsidiary
            
            
            2,445
            
            
            3,443
            
            
            960Equity
                in undistributed earnings of subsidiary
            
            
            6,365
            
            
            5,245
            
            
            5,747Net
                income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707







**Statements
                of Cash Flows**
            
            **2006**
            
            **2005**
            
            **2004**Net
                income
            
            $
            8,810
            
            $
            8,688
            
            $
            6,707Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDecrease
                (increase) in other assets
            
            
            —
            
            
            11
            
            
            (10
            )Equity
                in undistributed earnings of subsidiary
            
            
            (6,365
            )
            
            (5,245
            )
            
            (5,747
            )Net
                cash provided by operating activities
            
            
            2,445
            
            
            3,454
            
            
            950Cash
                flows from financing activities:Common
                stock issued
            
            
            1,288
            
            
            948
            
            
            758Stock
                repurchases
            
            
            (4,188
            )
            
            (3,854
            )
            
            (1,640
            )Cash
                in lieu of fractional shares
            
            
            (15
            )
            
            (15
            )
            
            (12
            )Net
                cash used in financing activities
            
            
            (2,915
            )
            
            (2,921
            )
            
            (894
            )Net
                change in cash
            
            
            (470
            )
            
            533
            
            
            56Cash
                at beginning of year
            
            
            1,151
            
            
            618
            
            
            562Cash
                at end of year
            
            $
            681
            
            $
            1,151
            
            $
            618





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




None.





**ITEM
      9A - CONTROLS AND PROCEDURES**





**(a)**  **Disclosure
      controls and procedures**





The
      Company maintains “disclosure controls and procedures,” as such term is defined
      in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934
      (the “Exchange Act”), that are designed to ensure that information required to
      be disclosed in reports that the Company files or submits under the Exchange
      Act
      is recorded, processed, summarized, and reported within the time periods
      specified in Securities and Exchange Commission rules and forms, and that such
      information is accumulated and communicated to management, including the
      Company’s chief executive officer and chief financial officer, as appropriate,
      to allow timely decisions regarding required disclosure. The Company’s
      disclosure controls and procedures have been designed to meet and management
      believes that they meet reasonable assurance standards. Based on their
      evaluation as of the end of the period covered by this Annual Report on Form
      10-K, the chief executive officer and chief financial officer have concluded
      that the Company’s disclosure controls and procedures were effective to ensure
      that material information relating to the Company, including its consolidated
      subsidiary, is made known to them by others within those entities.




**(b)
      Internal controls over financial reporting**





The
      management of the Company is responsible for the preparation, integrity and
      fair
      presentation of its published financial statements and all other information
      presented in the Company’s consolidated financial statements. The Company’s
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America (“US
      GAAP”) and, as such, include amounts based on informed judgments and estimates
      made by management.





Management
      maintains a system of internal accounting controls to provide reasonable
      assurance that assets are safeguarded and transactions are executed in
      accordance with management’s authorization and recorded properly to permit the
      preparation of consolidated financial statements in accordance with US GAAP.
      Management recognizes that even a highly effective internal control system
      has
      inherent risks, including the possibility of human error and the circumvention
      or overriding of controls, and that the effectiveness of an internal control
      system can change with circumstances. Management has assessed the effectiveness
      of the Company’s internal control over financial reporting as of December 31,
      2006. In making this assessment, management used the following criteria:
      criteria established in Internal Control - Integrated Framework issued by
      Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based
      on Management’s assessment, they believe that, as of December 31, 2006, the
      Company’s internal control system over financial reporting is effective based on
      those criteria. “Management’s Report on Internal Control over Financial
      Reporting” is presented on page 44.





The
      Audit
      Committee of the Board of Directors is comprised entirely of directors who
      are
      independent of the Company’s Management. It includes an audit committee
      technical expert and members with banking or related financial management
      expertise and who are not large customers of the Bank. The Audit Committee
      has
      access to outside counsel. The Audit Committee is responsible for selecting
      the
      independent registered public accounting firm subject to ratification by the
      shareholders. It meets periodically with management, the independent registered
      public accounting firm, and the internal auditors to provide a reasonable basis
      for concluding that the Audit Committee is carrying out its responsibilities.
      The Audit Committee is also responsible for performing an oversight role by
      reviewing and monitoring Management’s financial, accounting, and auditing
      procedures in addition to reviewing Management’s financial reports. The
      independent registered public accounting firm and internal auditors have full
      and free access to the Audit Committee, with or without the presence of
      management; to discuss the adequacy of internal controls for financial reporting
      and any other matters which they believe should be brought to the attention
      of
      the Audit Committee.





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The
      Company’s assessment of the effectiveness of internal control over financial
      reporting and the Company’s consolidated financial statements have been audited
      by MOSS ADAMS LLP, an independent registered public accounting firm, which
      was
      given unrestricted access to all financial records and related data, including
      minutes of all meetings of shareholders, the Board of Directors and committees
      of the Board. Management believes that all representations made to the
      independent registered public accounting firm during their audit were valid
      and
      appropriate. The independent registered public accounting firm’s report is
      presented on page 45.





During
      the quarter ended December 31, 2006, there were no changes in the Company's
      internal controls over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal controls over
      financial reporting.





**ITEM
      9B - OTHER INFORMATION**





None.








**PART
      III**





**ITEM
      10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
      CORPORATE GOVERNANCE**





The
      information called for by this item with respect to director and executive
      officer information is incorporated by reference herein from the sections of
      the
      Company’s proxy statement for the 2007 Annual Meeting of Shareholders entitled
“Executive Officers,” “Security Ownership of Certain Beneficial Owners and
      Management,” “Executive Compensation” “Report of Audit Committee,” “Section
      16(a) Beneficial Ownership Compliance” and “Nomination and Election of
      Directors.”





The
      Company has adopted a Code of Conduct, which complies with the Code of Ethics
      requirements of the Securities and Exchange Commission. A copy of the Code
      of
      Conduct is posted on the “Investor Relations” page of the Company’s website, or
      is available, without charge, upon the written request of any shareholder
      directed to Lynn Campbell, Corporate Secretary, First Northern Community
      Bancorp, 195 North First Street, Dixon, California 95620. The Company intends
      to
      disclose promptly any amendment to, or waiver from any provision of, the Code
      of
      Conduct applicable to senior financial officers, and any waiver from any
      provision of the Code of Conduct applicable to directors, on the “Investor
      Relations” page of its website.




The
      Company’s website address is www.thatsmybank.com .




**ITEM
      11 - EXECUTIVE COMPENSATION**





The
      information called for by this item is incorporated by reference herein from
      the
      sections of the Company’s proxy statement for the 2007 Annual Meeting of
      Shareholders entitled “Compensation Committee Interlocks and Insider
      Participation,” “Nomination and Election of Directors,” “Compensation Discussion
      and Analysis,” “Compensation Committee Report,” “Transactions with Related
      Persons,” “Director Compensation,” and “Executive Compensation.”





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            of Contents*





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





Information
      concerning ownership of the equity stock of the Company by certain beneficial
      owners and management is incorporated herein by reference from the sections
      of
      the Company’s proxy statement for the 2007 Annual Meeting of Shareholders
      entitled “Security Ownership of Management” and “Nomination and Election of
      Directors.”





**Stock
      Purchase Equity Compensation Plan Information**




The
      following table shows the Company’s equity compensation plans approved by
      security holders. The table also indicates the number of securities to be issued
      upon exercise of outstanding options, weighted average exercise price of
      outstanding options and the number of securities remaining available for future
      issuance under the Company’s equity compensation plans as of December 31, 2006.
      The plans included in this table are the Company’s 2000 Stock Option Plan, the
      Company’s Outside Director 2000 Non-statutory Stock Option Plan and the
      Company’s 2006 Amended Employee Stock Purchase Plan. *See* “Stock
      Compensation Plans” Note 12 of Notes to Consolidated Financial Statements (page
      68) included in this report.




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights (a)
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
                (b)
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            
            519,656
            
            $10.97
            
            1,012,452Equity
                compensation plans not approved by security holders
            
            —
            
            —
            
            —Total
            
            519,656
            
            $10.97
            
            1,012,452





**ITEM
      13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**





The
      information called for by this item is incorporated herein by reference from
      the
      sections of the Company’s proxy statement for the 2007 Annual Meeting of
      Shareholders entitled “Director Independence” and “Transactions with Related
      Persons.”





**ITEM
      14 -** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      information called for by this item is incorporated herein by reference from
      the
      section of the Company’s proxy statement for the 2007 Annual Meeting of
      Shareholders entitled “Audit and Non-Audit Fees.”





81
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            of Contents*





**PART
      IV**





**ITEM
      15 - EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES**





(a)(1)
            Financial
                Statements:





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





(a)(2)
            Financial
                Statement Schedules:





All
      schedules to the Company’s Consolidated Financial Statements are omitted because
      of the absence of the conditions under which they are required or because the
      required information is included in the Consolidated Financial Statements or
      accompanying notes.





(a)(3)
            Exhibits:





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





**Exhibit****Number**
            
            **Exhibit**3.1
            
            Amended
                Articles of Incorporation of the Company - provided
                herewith3.3
            
            Amended
                and Restated Bylaws of the Company - incorporated by reference to
                Exhibit
                3.1 of the Registrant’s Current Report on Form 8-K on September 15,
                200510.1
            
            First
                Northern Community Bancorp 2000 Stock Option Plan - incorporated
                herein by
                reference to Exhibit 4.1 of Registrant’s Registration Statement on Form
                S-8 on May 25, 2000 *10.2
            
            First
                Northern Community Bancorp Outside Directors 2000 Non-statutory Stock
                Option Plan - incorporated herein by reference to Exhibit 4.3 of
                Registrant’s Registration Statement on Form S-8 on May 25, 2000
                *10.3
            
            Amended
                First Northern Community Bancorp Employee Stock Purchase Plan -
                incorporated by reference to Appendix B of the Company’s Definitive Proxy
                Statement on Schedule 14A for its 2006 Annual Meeting of Shareholders10.4
            
            First
                Northern Community Bancorp 2000 Stock Option Plan Forms “Incentive Stock
                Option Agreement” and “Notice of Exercise of Stock Option” - incorporated
                herein by reference to Exhibit 4.2 of Registration Statement on Form
                S-8
                on May 25, 2000 *10.5
            
            First
                Northern Community Bancorp 2000 Outside Directors 2000 Non-statutory
                Stock
                Option Plan Forms “Non-statutory Stock Option Agreement” and “Notice of
                Exercise of Stock Option” - incorporated herein by reference to Exhibit
                4.4 of Registrant’s Registration Statement on Form S-8 May 25, 2000
                *10.6
            
            First
                Northern Community Bancorp 2000 Employee Stock Purchase Plan Forms
                “Participation Agreement” and “Notice of Withdrawal” - incorporated herein
                by reference to Exhibit 4.6 of Registration Statement on Form S-8
                on May
                25, 2000 *10.7
            
            Amended
                and Restated Employment Agreement entered into as of July 23, 2001
                by and
                between First Northern Bank of Dixon and Don Fish - incorporated
                herein by
                reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
                quarter
                ended September 30, 2001 *




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10.8
            
            Employment
                Agreement entered into as of July 23, 2001 by and between First Northern
                Bank of Dixon and Owen J. Onsum - incorporated herein by reference
                to
                Exhibit 10.2 of Registrant’s Quarterly Report on Form 10-Q for the quarter
                ended September 30, 2001 *10.9
            
            Employment
                Agreement entered into as of July 23, 2001 by and between First Northern
                Bank of Dixon and Louise Walker - incorporated herein by reference
                to
                Exhibit 10.3 of Registrant’s Quarterly Report on Form 10-Q for the quarter
                ended September 30, 2001 *10.10
            
            Employment
                Agreement entered into as of July 23, 2001 by and between First Northern
                Bank of Dixon and Robert Walker - incorporated herein by reference
                to
                Exhibit 10.4 of Registrant’s Quarterly Report on Form 10-Q for the quarter
                ended September 30, 2001 *10.11
            
            Form
                of Director Retirement and Split Dollar Agreements between First
                Northern
                Bank of Dixon and Lori J. Aldrete, Frank J. Andrews Jr., John M.
                Carbahal,
                Gregory DuPratt, John F. Hamel, Diane P. Hamlyn, Foy S. McNaughton,
                William Jones, Jr. and David Schulze - incorporated herein by reference
                to
                Exhibit 10.11 to Registrant’s Annual Report on Form 10-K for the year
                ended December 31, 2001 *10.12
            
            Form
                of Salary Continuation and Split Dollar Agreement between First Northern
                Bank of Dixon and Owen J. Onsum, Louise A. Walker, Don Fish, and
                Robert
                Walker - incorporated herein by reference to Exhibit 10.12 to Registrant’s
                Annual Report on Form 10-K for the year ended December 31, 2001
                *10.13
            
            Amended
                Form of Director Retirement and Split Dollar Agreements between First
                Northern Bank of Dixon and Lori J. Aldrete, Frank J. Andrews Jr.,
                John M.
                Carbahal, Gregory DuPratt, John F. Hamel, Diane P. Hamlyn, Foy S.
                McNaughton, William Jones, Jr. and David Schulze - by reference to
                Exhibit
                10.13 to Registrant’s Annual Report on Form 10-K for the year ended
                December 31, 2005 *10.14
            
            Amended
                Form of Salary Continuation and Split Dollar Agreement between First
                Northern Bank of Dixon and Owen J. Onsum, Louise A. Walker, Don Fish,
                and
                Robert Walker - by reference to Exhibit 10.14 to Registrant’s Annual
                Report on Form 10-K for the year ended December 31, 2005
                *10.15
            
            Form
                of Salary Continuation Agreement between Pat Day and First Northern
                Bank
                of Dixon - provided herewith*10.16
            
            Form
                of Supplemental Executive Retirement Plan Agreement between First
                Northern
                Bank of Dixon and Owen J. Onsum and Louise A. Walker - provided
                herewith*10.17
            
            First
                Northern Bancorp 2006 Stock Incentive Plan - incorporated by reference
                to
                Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A for
                its 2006 Annual Meeting of Shareholders *10.18
            
            First
                Northern Bank Annual Incentive Compensation Plan - provided
                herewith11
            
            Statement
                of Computation of Per Share Earnings (*See*Page 55 of this Form 10-K)21
            
            Subsidiaries
                of the Company - provided herewith23.1
            
            Consent
                of independent registered public accounting firm - provided
                herewith23.2
            
            Consent
                of independent registered public accounting firm - provided
                herewith31.1
            
            Rule
                13(a) - 14(a) / 15(d) -14(a) Certification of the Company’s Chief
                Executive Officer - provided herewith31.2
            
            Rule
                13(a) - 14(a) / 15(d) -14(a) Certification of the Company’s Chief
                Financial Officer - provided herewith32.1
            
            Section
                1350 Certification of the Chief Executive Officer - provided
                herewith32.2
            
            Section
                1350 Certification of the Chief Financial Officer - provided
                herewith*
                Management contract or compensatory plan or
                arrangement.




83
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            of Contents*





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, as amended, the registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized, on March 15,
      2007.




FIRST
                NORTHERN COMMUNITY BANCORPBy:
            /s/
                Owen J. OnsumOwen
                J. OnsumPresident/Chief
                Executive Officer/Director(Principal
                Executive Officer)By:
            /s/
                Louise A. WalkerLouise
                A. WalkerSenior
                Executive Vice President/Chief Financial Officer(Principal
                Financial Officer)By:
            /s/
                Stanley R. BeanStanley
                R. BeanSenior
                Vice President/Controller






Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




Name
            
            Title
            
            Date/s/
                LORI J. ALDRETE
            
            Director
            
            March
                15, 2007Lori
                J. Aldrete/s/
                FRANK J. ANDREWS, JR.
            
            Director
                and Chairman of the Board
            
            March
                15, 2007Frank
                J. Andrews, Jr./s/
                JOHN M. CARBAHAL
            
            Director
            
            March
                15, 2007John
                M. Carbahal/s/
                GREGORY DUPRATT
            
            Director
                and Vice Chairman of the Board
            
            March
                15, 2007Gregory
                DuPratt/s/
                JOHN F. HAMEL
            
            Director
            
            March
                15, 2007John
                F. Hamel/s/
                DIANE P. HAMLYN
            
            Director
            
            March
                15, 2007Diane
                P. Hamlyn/s/
                FOY S. MCNAUGHTON
            
            Director
            
            March
                15, 2007Foy
                S. McNaughton/s/
                DAVID W. SCHULZE
            
            Director
            
            March
                15, 2007





84